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Local Cos. Cash In on VC Funding in 2015

Venture capital investors pumped more than $1 billion into San Diego companies last year, the region’s best funding period in at least three years, buoyed by an especially diverse distribution of capital across industries.

The findings come from two reports using different methodologies: the Money Tree report from PricewaterhouseCoopers and the National Venture Capital Association, using data from Thomson Reuters, and the Dow Jones VentureSource report.

The analyses diverged on how well San Diego did in the fourth quarter. Dow Jones, which reported $597 million in VCfunding, said it was the best quarter since 2009, when the report began. PwC said funding dropped from $434 million in the third quarter to $334 million in the fourth.

But they agreed San Diego had a banner year. San Diego companies got $1.17 billion in VC money last year, according to PwC, the most funding since 2012. Dow Jones found the region received $1.48 billion, the best year on record.

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Suja’s Success

Ryan Spencer, a PwC partner in San Diego, said Suja Life’s $149.4 million deal with Coca-Cola Co. was the largest deal of the year and the first deal above $100 million for San Diego since biofuel company Sapphire Energy Inc. raked in $139 million in 2012. Sapphire was back on the top rankings this year, with a $92 million deal in the fourth quarter that was the year’s second-biggest funding round.

“Even if I remove those two deals, this would be the best six-month window since mid-2012,” Spencer said.

Dow Jones said the biggest deal in the fourth quarter was the $100 million spin-off of Grail Bio from Illumina Inc.

Venture funding nationwide dipped slightly from the third quarter, but surged to near-record levels for the full year. PwC said it was the best year since 2000, amid the dot-com boom, and the second best year overall, with $58.8 billion in funding.

Dow Jones said it was the best year since it began tracking the industry in 2009, with $69.9 billion.

Bigger Deals

Investors are also focusing on higher value deals than in the recent past, with the number of San Diego deals roughly the same as last year at around 100, but with average deal size growing considerably. The average deal was worth $11.5 million in San Diego last year, up from $8.2 million the year before and the highest average over the past 20 years. Dow Jones saw the figure rise from $11.9 million to $17 million.

“You’re seeing a larger amount of dollars targeted towards a smaller group of companies,” Spencer said. “It tells me that not only do we have a lot of good companies starting up, but showing they can execute on their milestones.”

Tim Holl, an audit partner for Ernst & Young in San Diego, said the decline in funding from the third to fourth quarter could be a sign VCs were hesitant as global economic indicators grew dire at the end of the year. That could drive investors to seek out higher value deals that appear to be better bets.

“You’ve got China slowing down, market uncertainty, volatility and the VCs have started to pull back a little bit,” Holl said. “There’s been a flight to quality.”

If uncertain conditions continue, he added, it may be harder for early-stage companies to attract funding this year.

Software’s Take

The region’s tech sector got a noticeable boost in PwC’s report, as a much greater share of investments went to software companies than the past few years. Life science companies got 52 percent of all the money invested in San Diego last year, while software companies got 20 percent. In 2014, life sciences received 67 percent while software got 12 percent.

Mike Krenn, president of San Diego Venture Group, said the news was heartening because it has been historically difficult to attract attention from VCs in Silicon Valley to tech companies in San Diego.

“The life sciences side in San Diego is on auto-pilot,” Krenn said. “The VCs are coming down regularly. But the tech side could use some help.”

Investors from the Bay Area are sometimes cautious about investing in a San Diego tech company because it requires them to come here regularly for board meetings, whereas local software investments are plentiful. But every time a San Diego software firm completes a successful round, it’s easier to get investors into more deals because they are already planning to be in San Diego once a quarter.

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