Venture capital funding in the San Diego area has recovered from a three-year plunge that accompanied the U.S. financial crisis, according to a recent analysis of a decade’s worth of VC deals.
But venture investments in San Diego remain heavily concentrated in new drug startups, according to David Coats, the San Diego-based co-founder and managing director of Correlation Ventures. “The San Diego venture ecosystem looks very different than the rest of the industry,” Coats said in a recent presentation to the San Diego Venture Group.
Correlation Ventures, based in San Diego and Palo Alto, CA, has amassed a proprietary database of more than 60,000 venture financing deals, with details on the investors, valuations, companies, and startup team in every deal. The database is central to its investment strategy, which uses predictive analytics to assess the risk of each prospective deal by searching for key variables that correlate with the details of successful outcomes in its database.
Using the database, Coats gleaned some new insights about venture deals from 2004 through 2013—and how San Diego compares with the U.S. venture industry.
“During the recession, we were hit harder in terms of total venture dollars going into the region,” Coats said. “We have recovered since then, but we are not well-diversified.”
In the years leading up to the Great Recession, which officially began in 2007, venture investments in San Diego amounted to about 6 percent of the U.S. total, according to Correlation Ventures’ data. That dropped to just 3 percent of the
nationwide total over the next three years. Venture funding levels began to recover in 2010, and returned to 6 percent of the U.S. pie in 2013.
The data show that venture funding for biopharmaceutical startups accounts for the lion’s share of VC deals in San Diego. In fact, funding for San Diego’s biopharma sector account for 42 percent of venture investments in all U.S. biopharma deals from 2004 through 2013.
That should come as no surprise, as the biotech sector has dominated venture activity in San Diego since Hybritech burst onto the scene in the early 1980s.
Market conditions also have enabled the life sciences sector to flourish in recent years, and venture-backed biopharma companies have led the stampede of IPOs in the past two years.
The biopharma concentration in San Diego “is not necessarily a bad thing,” said Coats, who oversees the firm’s life sciences deals. “Like a company, you want to focus on the areas where you have a competitive advantage.”
Still, he noted that biopharma venture funding has been declining in both San Diego and nationwide. (In 2004, biopharma investments in San Diego were close to 55 percent of the industry total.) Beyond the biopharma sector, though, San Diego doesn’t have much to brag about in terms of venture funding.
While San Diego-based Qualcomm (NASDAQ: QCOM) has emerged as the world’s biggest wireless technology company, the flurry of local telecom and networking startups that followed industry deregulation in 1996 has largely died out. Today, the Correlation data shows that San Diego lags the industry average for VC investments in most sectors of venture-backed innovation, including hardware/communications, software, business and financial technologies, and consumer services.
One pleasant surprise to emerge from the data is that the company valuations in the top 10 percent of venture-backed exits were higher in San Diego in comparison to the overall industry. From 2004 to 2013, San Diego companies in the top tier carried an average valuation of $315 million at exit, compared with an industry-wide average valuation of $240 million for companies in all sectors.
Below the top tier, though, average company valuations over the decade were slightly lower in San Diego—$94 million—than the industry average of $104 million.