Looking For Signs of Life in San Diego’s VC Deals

Xconomy San Diego — 

The evaporation of venture deals involving San Diego’s software, wireless, and related IT startups was probably the most surprising revelation that jumped out of the regional first-quarter venture data released Friday.

The survey by Dow Jones VentureSource reported that 15 startups in the San Diego region got a total of $194.6 million during the first three months of 2009, with life sciences companies getting $190.6 million of that. The survey reported only one non-healthcare investment during the quarter, a $4 million in an unnamed startup. That represents a 72 percent drop from the $14.5 million invested in four San Diego IT startups during the first three months of 2008.

In comparison, nationwide VC investments in the information technology category, which includes both software and hardware startups, fell to $1.58 billion, a 52 percent decline from the same quarter last year.

Overall venture investments tend to be lower during the first quarter. Still, Robert Kibble of San Diego’s Mission Ventures says he was surprised at San Diego’s showing, in part because he knows some IT deals were done. “Most have probably been inside rounds, and maybe even recaps, and they tend not to get reported,” Kibble says. (The VC surveys also are not definitive, and at Xconomy we usually find a few inconsistencies and omitted deals.)

“There’s no exit market right now, and when there’s no exit, people just don’t feel comfortable funding new companies,” says Jeb Spencer of TVC Capital, a small private equity software specialist. “We really do feel like we’re in a holding pattern right now, and we’ve asked all seven companies in our portfolio to do everything they can to get to breakeven as soon as possible.”

“There are very few venture capital firms in San Diego with dollars to invest,” Kibble told me. “Some are done.”

Kibble adds: “The consensus wisdom in the VC community is that the industry will contract significantly both from number of venture firms out there as well as amount of capital being deployed. This is not necessarily a bad thing, since overall industry returns have been somewhat anemic in recent years.”

On the other hand, venture investments in San Diego’s life sciences sector remained relatively active, even though funding fell by a third compared to the year-ago quarter. “Although the overall numbers are down, and down significantly, the biopharma and medical devices space is doing well—tremendously well, considering what’s happening,” says Michael Schoenfeld, a a partner in the venture capital advisory group at Ernst & Young.

Stan Fleming of San Diego’s Forward Ventures, which specializes in healthcare, sounded less upbeat.

“The venture markets appear to have taken significantly longer that the public markets to feel the impact of the melt-down,” Fleming wrote in an email Friday. “The market for later-stage is simply broken. No outside deals are getting done. There are no ‘comps’ that people have relied on in the past to price their next deal and as a result there is very little new late-stage money available. The rounds that are getting done are inside rounds. The big question is how and when the market will restart. I would guess that if you measured the amount of money flowing into venture funds you would see even a greater drop. As long as the institutional money is not flowing into the industry, the life sciences VCs will remain very cautious and the late-stage market dead.”