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Venture Bankers See a Tech Sector Ready for Possible Takeoff

Bankers at the two most active venture banks in the San Diego area believe a revitalization of the region’s technology sector may be underway.

Silicon Valley Bank Managing Director Eric Otterson, who leads the bank’s San Diego-based technology banking team, said the area’s tech successes in the late 1990s and early 2000s are often forgotten amid San Diego’s reputation as a star in the life sciences ecosystem.

“People might say: do we really have a tech sector here?” he said. “If you look at the number of tech IPOs we had in 1996 to 2004, you’ll see there was a vibrant tech community.”

But the Great Recession affected many tech startups and entrepreneurs, some of whom left the area, resulting in a retrenchment.

That may be changing.

VC Investment

“It’s taken this long to finally have those who stayed around, or who came afterward, and those at Qualcomm Inc. who finally decided to spin out, to start get funding,” said Otterson, who has worked in marketing and business development with high-growth technology and life science companies for 18 years.

In the last 18 months, some San Diego tech startups have gotten investments from venture capitalists, such as software firms MindTouch Inc., which raised $12 million in January 2016; Classy, which raised $30 million in November 2016; and SOCi Inc., which raised $8.5 million in April.

“I think we’re seeing a second renaissance in the technology industry, specifically in the hardware/software technology industry, in San Diego,” Otterson said.

Silicon Valley Bank, which has headquarters in Santa Clara, has been helping fund startups since its first office opened in 1983.

Banking Player

Square 1, a bank founded in 2005 in Durham, N.C., also with a mission of serving entrepreneurs and their investors, is the other major venture banking player in the San Diego area. Square 1 went public in 2014; it was acquired in 2015 by Los Angeles-based Pacific Western Bank, for which it has proved a significant driver of growth.

Scott Foote, who co-founded the bank and is based out of its Carmel Valley office, oversees Square 1’s technology banking practice in the Pacific Southwest and life sciences practice along the Pacific coast and in the Rocky Mountain region.

The growth in San Diego’s startup ecosystem — the city has more incubators and startup accelerators than ever before — is helping to get more companies into investors’ sights, Foote said.

“We’re starting to gather some attention, which is great,” he said. “We just need (VCs) to come down here more and more. It would be great to have one, two or three $100 million, $200 million funds.”

Some local firms that had previously raised a few million dollars in a seed round have recently gotten buy-in from out-of-town VCs, which have invested in the companies’ continued growth. “It feels like in the last 12 to 18 months there has been a little bit of a resurgence,” Foote said. “Still (there are) no local VCs, but it feels like the guys from L.A. and the Valley are starting to come down … There’s been a dozen or more decent Series A’s.”

Getting the Funds

A number of VC firms have a nominal presence in San Diego, with a partner based in the area, but Foote said the region’s startups would get a big boost from the addition of a more traditional tech investor.

Bill Maris, who founded Google Ventures, now called GV, recently raised a $150 million fund called Section 32. Maris, who is based in the San Diego area, was recently announced as the keynote speaker for San Diego Venture Group’s Venture Summit on Aug. 30. (Otterson and Foote are both members of SDVG’s board of directors.)

“If we could get a couple more of those (size funds) that would be great,” Foote said. “We need a lot more of that going and then, I think, we’ll get back to the ‘90s, 2000s tech VC ecosystem here in town.”

At Square 1, the question going around the office is: “Is this a blip on the radar, these fundings, or is this a nice trend that’s going to keep continuing for the next 12 to 24 months?” Foote said. “I’m hoping for the latter.”

‘Paper Rich But Cash Poor’

Otterson said he witnessed other banks that provide services to venture-funded companies pulling back from the San Diego region as its tech sector underwent a dry spell.

That left more business opportunities for tech-focused banks in the area, which often work with companies with little in the bank — a no-go for most traditional banks.

SVB knows how to judge the creditworthiness of a startup that is “paper rich but cash poor,” Otterson said.

“That’s one of those things that we understand in-depth about the whole chain, if you will, of our client base, from the entrepreneur to the venture community that’s backing them to the company itself,” Otterson said. “We’re loaning to companies whose forecast shows they’re losing money. The reason we’re comfortable doing that is because we know that the VCs are backing this company.”

Those relationships, for both SVB and Square 1, are the secret to their successes, Otterson and Foote said.

“We bank the portfolio companies of the VC firms, but we also bank the VC funds themselves,” Foote said. “A few years ago, we also had a fund of funds, so we were also investing into several VC funds themselves as a limited partner, so that helps builds trust … multiple touch points is key.”

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