An Xconomy Analysis: Five Ideas to Boost San Diego’s Software Sector
Like a lot of cities, San Diego is jealous of Silicon Valley.
Not jealous of Silicon Valley as a place, but jealous of the tech innovation and startup activity that happens there. As ServiceNow (NYSE: NOW) CEO Frank Slootman said earlier this year, the Bay Area is “one beehive of talent that is constantly reconstituting itself into new generations of companies.”
In explaining why he moved ServiceNow’s headquarters from San Diego to Santa Clara, Slootman also showed how the Bay Area exerts a kind of gravitational pull on innovative technologies and companies outside Northern California. At ServiceNow, Slootman said, “We have had a ferocious appetite for talent and we felt constrained on talent quantity, diversity, and quality in Southern California.”
So San Diego, like a lot of other places, has been working in recent years to cultivate some of that Silicon Valley magic—or rather, to develop some magic of its own. San Diego has most of the important ingredients, including great universities and research centers, talented innovators, and educated workers. There is far more startup activity here nowadays than there was in 2012, when Techstars David Cohen told San Diego tech leaders, “I don’t know anything about San Diego, but I will tell you, I can’t hear you. I don’t know what your successes are.”
Since then, local entrepreneurs stepped up their grassroots efforts to strengthen the tech ecosystem, especially in downtown San Diego. It takes a village to raise a startup. So density is important. Proximity is important, and community interaction, ideas, and cross-pollination are important. Yet the startup community in San Diego still remains fragmented and disorganized. Much of this is due to a bandwagon phenomenon: As entrepreneurship gained its current cachet, a multiplicity of startup programs have arisen throughout the region, sometimes working at cross-purposes by competing for the same financial resources and trying to recruit the same entrepreneurs.
At the San Diego Regional Economic Development Corp. (EDC), staffers have sought to bring these different elements together and to create a more cohesive message about San Diego’s innovation economy. One solution is a social media campaign that encourages local entrepreneurs to act as “digital ambassadors,” and use the hashtag #GoSanDiego as a way to unify the startup community through an “open-source dialog” about innovation and entrepreneurship. Work also is underway to create a website that can serve as a resource for local entrepreneurs and to show people outside San Diego that the startup community here is more than an inch deep.
As one EDC staffer puts it, “We don’t want to be exactly like Silicon Valley. We love our beaches, but we’re more than that. We want to solve different problems. We want to be known for solving hard problems.”
San Diego has been solving a lot of hard problems in the life sciences, which is reflected in the success of companies (both large and small) that are focused on genome sequencing, diagnostics, RNA therapeutics, stem cell therapeutics, and various other biomedical breakthroughs.
But getting to the hard problems in high tech is another matter, especially with the ascendance of software as the crucial ingredient in a far-reaching technological and economic shift. As Marc Andreesen put it, “Software is eating the world”—and the depth of San Diego’s bench—or rather, the lack of depth—is problematic.
The importance of software to the innovation economy cannot be overstated, yet the nonprofit software industry group in San Diego is adrift and unfocused. Software is everywhere. It is critical to innovation across a range of industries—as important in analyzing whole genome sequencing at Illumina (NASDAQ: ILMN) as it is for next-generation wireless technologies at Qualcomm (NASDAQ: [[TICKER:QCOM]]). Yet San Diego’s industry has fragmented into groups interested only in specific areas like cybersecurity and analytics.
Meanwhile, economic forces and rival interests have been undermining San Diego’s software sector.
Exhibit No. 1 is the departure of three of San Diego’s biggest software-dependant companies over the past year. The Active Network, Websense, and Omnitracs have all relocated most, if not all, of their operations to Texas. Local news coverage has focused chiefly on the economic impact, which includes the loss of about 1,200 jobs. But a more subtle factor may be even more important.
According to a private equity investor who oversees a $1 billion fund focused solely on software deals, the most critical deficiency in San Diego’s software sector is the dearth of 40-year-old executives who spent their previous 15 years at Web companies like PayPal and Salesforce.com. These are the people with the experience and credibility that investors look for in startup CEOs.
In this way, executives like Bruce Hansen, Russ Mann, and Krishna Gopinathan, who all earned their stripes at San Diego’s HNC Software, went on to help found ID Analytics, Covario, and Global Analytics, respectively. Fred Luddy, who was the chief technology officer at San Diego’s Peregrine Systems (now part of HP), went on to start ServiceNow.
Of course, many new software startups are springing up in San Diego, and incubators like EvoNexus play a vital role in helping them get established. But there are fewer big companies left to re-seed the ecosystem, and experienced software executives are becoming a limited resource. There are drains on other regional resources as well.
For example, venture capital funding for San Diego startups has declined substantially over the past decade, especially for tech startups. A five-year average of quarterly venture investments in San Diego from 2010-14 (according to MoneyTree Data) ranges from $223 million to $247 million a quarter, with about 80 percent now going to life sciences startups. A decade ago, the five-year average (2000-04) ranged from $316 million to almost $387 million, according to MoneyTree data—and investments were divided more evenly between tech and life sciences startups.
Of course, launching a software company can cost far less today than it did a decade ago, but the total number of deals also has declined over the past decade by about 25 percent, from a yearly average of 154 from 2000-04 to roughly 114 from 2010 to 2014 (with incomplete data for this year).
San Diego’s freshly minted software engineers are also being lured out of town. More than 400 students graduated from UC San Diego this year with undergraduate degrees in computer science engineering and electrical and computer engineering. Hundreds more graduated with degrees in other engineering fields (and another 406 undergrad engineers graduated from San Diego State University), which means San Diego has an abundant supply of skilled candidates for IT jobs, at least at the entry-level.
But according to the alumni office at UCSD, a surprising number of recent graduates who find a job in San Diego leave the area within five years of graduation. The obvious reason is that tech companies pay substantially higher entry-level salaries in the Bay Area ($80,000-$100,000) than in San Diego ($50,000 to $70,000, with only Qualcomm in the $80,000 range).
Aside from the disparity in compensation, new computer science grads want to work for “hot” companies like Google, Facebook, and Twitter, and they don’t mind that the cost of living is substantially higher in the Bay Area. It’s hard to overcome that mindset, but they simply may not be aware of the opportunities for startup CTOs and CIOs in San Diego, the extent of startup activity here, or the potential long-term rewards. Perhaps an internship with the EvoNexus incubator could help address that.
Such problems are hardly unique to San Diego. Most U.S. cities with major universities and technology clusters are trying to emulate Silicon Valley’s innovation ecosystem. Still, it seems only prudent for San Diego to find new ways to bolster its local software sector. With that goal in mind, I spent months talking with local tech leaders and investors about the software sector’s needs in San Diego, and specific steps that could be taken to bolster the startup community. Here are some suggestions:
Incentive Prize Contests: The X-Prize Foundation has more or less perfected the business of inducing technology innovations by offering multi-million-dollar prizes to achieve something that has never been done. So what about using an incentive prize to advance local economic development in a particular technology sector like software? Why not offer a prize to accelerate advances in software that solves an intractable problem, or addresses an important public concern in San Diego? Organizing a programming competition in a particular field, for example, could serve two purposes—-by identifying new technologies or technical approaches to known problems, and as a technique for identifying and recruiting talented-but-unknown software developers.
CIO Network: Establish an organization for San Diego CIOs modeled on the CIO network that Menlo Park, CA-based Sierra Ventures has created for its portfolio companies (which are all software-focused startups). The Sierra Ventures CIO Network meets regularly to address issues of common concern and emerging technology trends. The network also holds an annual summit to showcase industry leaders and CIOs from the Fortune 1000 list of biggest U.S. companies.
About 10 months ago, a San Diego Web developer, Etienne de Bruin, created an organization called 7CTOs “to positively impact the global competitiveness of the USA by being more innovative, creating more jobs and world-class technology education.” He says 7CTOs requires its members to be CTOs who lead at least five software engineers at San Diego companies with at least $500,000 in annual revenue. There are 21 members so far, and de Bruin writes: “We ask ourselves, what happens when we take technology leaders who are all building their own companies, building their own technologies and put them into communities of practice? Well, after a short 10 months I am pleased to say that we are seeing wonderful relationships forming, more creativity and innovative thought surfacing capped with a genuine desire among CTOs to see each other succeed.”
Are you wondering why you’ve never heard of 7CTOs? De Bruin is the CTO for San Diego-based Monk Development, which specializes in using technology to help churches broaden their reach and deepen their faith-based community.
A Startup Leadership Council: There are at least 16 startup incubators and accelerator programs in San Diego, each with its own entrepreneurship program, advisers, supporters, investors, and methods for funding their operations. They compete for mentors and investors, and to recruit entrepreneurs for their respective programs. Even if they don’t get along, forming a non-denominational leadership council might enable these groups to better coordinate their activities and avoid duplicated efforts.
Software Center of Excellence: Creating a software center of excellence could help bring San Diego’s academic and corporate leaders together to address problems of mutual interest—such as issues that are preventing the industry from growing here. The San Diego Regional Economic Development Corp. gained experience in this area earlier this year, after working with local cybersecurity companies like Eset, Sentek Global, and iboss Network Security to create the San Diego Cybersecurity Center of Excellence.
A software center of excellence would take a broader approach, serving as both a centralized resource for software companies and organizations looking for help—as well as a way to draw local companies together.
A Coders Academy for San Diego: Programmers are getting good-paying jobs whether or not they have a college degree. In other tech hubs, online classes and schools that teach coding as a skilled trade are proliferating to meet a soaring demand for programmers—with names like Codeacademy, Code Fellows, Treehouse, AcademyX, Dev BootCamp, Hack Reactor, App Academy, and even the Google Developers Academy.
Notch8, a San Diego consulting firm that specializes in Ruby on Rails software development, plans to soon begin coding classes in North Park. But with thousands of IT-related job openings going unfilled in San Diego, I’m trying to understand why there aren’t more courses in coding offered here.
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