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San Diego Innovation Economy ‘Punching Over its Weight’

FINANCE: Region Ranks 5th in Nation in Venture Capital Raised

Mike Krenn
CEO
Connect

Mike Krenn is President and CEO of Connect, a nonprofit entity dedicated to supporting San Diego’s innovation economy by connecting founders of early-stage companies with venture capital.

At Connect, Krenn leads inflow of VC firms to San Diego through the Cool Companies program, which he launched in 2015. In 2022, he spearheaded the annual Innovation Day event held at Petco Park which showcases San Diego startup companies to interested VCs and the public.

Prior to leading Connect, Krenn was a founder of Tech Coast Angels, one of the first angel investor networks in the county, later rebranded as NuFund. He was also a founder of what is now EvoNexus and founder of the Venture Pipeline Group, the first venture business unit inside a law firm. Krenn’s latest venture is the TL Foundation and the TL Fund, a unique nonprofit fund that invests in startups and returns all profits back into the fund to be redistributed to more startups in San Diego.

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Here are some excerpts from Krenn’s remarks:

Raising More Money

I’m with Connect. We sit in the middle of the tech and life sciences industry, and things are going relatively well in that space. So that’s good news. Over the last 10 or 15 years or so, San Diego used to just sort of sit at a billion dollars – our companies raised about a billion dollars in venture per year. And now it just keeps ticking up and up and up. There was a big anomaly obviously in 2021, but we raised $4 billion last year – which is really strong – across multiple industries. It’s trending really well and San Diego’s really holding its own. And this kind of goes unnoticed a lot.

In terms of markets that raise the most venture, it’s Silicon Valley, Boston, New York, Los Angeles and little old tiny San Diego comes in at the fifth spot, ahead of all those places like Austin and Miami and Denver and Seattle, and for some reason they get all the press.

The takeaway is that San Diego – when we look at comparable markets like those Austin, Seattle markets – we’re raising more money. And what’s really interesting is, there’s not a lot of VCs here. So San Diego’s punching over its weight in a big way. And a simple example of that is Seattle, I think, has three times the number of venture capital firms in their market and 11 times the amount of resident capital to deploy in their market. And we’re still, our companies, are still raising more money than them. And that’s the same in Denver and all these other markets. We’re doing a really great job of attracting the VCs to come to town to fund our companies, whether they’re coming from Los Angeles or Silicon Valley or the East Coast.

It’s a very positive thing because it’s all heading in the right direction. As more VCs get portfolio companies here, they come and it’s easier for them to do their second deal, their third deal, et cetera, et cetera. Again, this gets into the other markets and how we’re doing compared to them and how we’re just outpacing those other places.

‘Good Breadth of Companies’

In the past, VCs always thought San Diego was just a life sciences town. And we’ve spent a lot of time building up the tech side… There’s still more money coming in on the life sciences side, but more tech companies are raising money and that’s super healthy for our economy.

And there’s everything on the life sciences side. You got therapeutics, genomics, devices, diagnostics, and then on the tech side you got software, cyber. It’s really healthy to have that distribution of companies because, as we saw, life sciences kind of took a hit a little bit last year, but the tech side held its own and it’s just that good breadth of companies that makes our macro economy a lot stronger for deals.

We also track the stage of companies that are getting investments, too. And we’re still doing really well on the early-stage side, which is a good thing because that means the pipeline is strong and those companies are going to continue to grow and get access to capital.

One More Thing …

One thing I left off from before:
Los Angeles – which was way above us and two years ago they finished at $18 billion, and we were $4 billion – last year they went down to $6 billion, which is an enormous hit. We actually had to do a double check because I thought it was a misprint and it’s actually accurate. And so we’re only 2 billion behind big old LA. I think they’ll jump back up again in the future, and they’ll be hard to catch, but I think it’s an indication of the kind of companies that grow in San Diego. They’re solving hard problems. They’re strong engineering companies or life science companies and they are staying alive at a better rate than other markets, which is also important.

Let me add just a little plug. On Sept. 24, we are again taking over all of Petco Park. If you’re curious about the innovation economy, [the Connect Innovation Day event is] filled with investors, CEOs, companies, music arts. It’s a really cool microcosm of what’s going on in San Diego with every little piece of the innovation economy there.

The Year Ahead in Tech

Cafferty: What excites you the most in the year ahead when it comes to the tech space in innovation in San Diego?

I look at the overall economy and a lot of people talked about here, and we work closely with the EDC and a lot of different groups – Biocom as an example. And so, you’ve got the defense sector doing its part; you got the tourism sector doing its part; innovations, its own little piece of that overall macro puzzle and it’s responsible for bringing in a lot of cash, a lot of really good jobs. Every job creates two other jobs in the region.

I just think that the diversity of the companies that I talked about, and then you factor in all the assets that San Diego brings to the table from a growth perspective, you know, that we’re one of the top three markets in life sciences, and Boston and San Francisco are more expensive to live in than San Diego, actually, and not as nice. So that’s a really good asset. Then you’ve got, you know, five universities putting out really high-quality talent and working with the EDC on that piece. There’s a lot of near-shoring opportunities in Tijuana. And you got the cross-border airport that’s got access to all Latin America. And the Pacific Ocean that we’re fronting. And all the real estate that’s coming online, that’s a great asset. So assets and it’s all over the place.

And one of the things we want to do is spread those jobs all across the county so they’re not all saturated over there in Sorrento Valley; so the families have better access to higher quality jobs across the regions, which cuts down on the traffic flows. And you give people access to lower cost homes because they’re spread out across the region.

So I think the future’s really bright. We’ve got a lot to execute on, but that’s what gets me excited. That’s awesome.

Venture capital raised (in billions) in comparable markets. Photo courtesy Graph courtesy Connect

Local VC Firms?

Audience question: You mentioned San Diego has fewer VC firms than some of our comparable cities like Seattle and Dallas. I’m curious, what’s the reason for that? And tare you guys working on trying to attract more VCs to be in San Diego?

Why so few VCs in San Diego comparative to other markets, and are we doing anything to attract them here? So I have a hypothesis on the why, and that is that traditionally San Diego has been a market that’s been served by Silicon Valley and Los Angeles and if you think about it, LA’s a two hour drive and San Francisco’s a 90 minute flight, but it’s just enough of a pain in the neck that nobody really wants to do it. And so they don’t really come here, they’re not really embedded into the ecosystem. That’s what Connect’s been doing over the last eight years is just going back and forth to the valley, dragging them here, showing them good deals and building those relationships. We’re going to have a hundred VCs coming into town at the end of April to meet with 30 companies. And so we’re dragging them here physically.

You know, they see a bunch of good companies the first year, the second year they see another batch of good companies. The third year they miss out on a deal and they start getting FOMO (fear of missing out) and they start writing checks. And so that’s been building up.

In terms of getting them here, I’m less concerned about that. That was kind of always the thing, like if we could get two VCs to open an office here, wouldn’t it be great? And in my opinion, there’s 400 firms up in LA, so who gives a crap.

Let’s just go get the money. So they’ve been coming here, they’re investing in deals. Like I said, they do one portfolio company, it’s easier to do the second.

There’s been a bunch of VCs that have actually moved here because they want to live here. It’s kind of funny, they don’t tell anybody they’re here, but they sort of say, “Yes, send me deals, but don’t let anybody know I’m here.” So it’s happening slowly. They’re coming. I talk to some VCs and they’re like, “I need to get to three portfolio companies and then I can let the world know I’m here and buy a house and move there.” So it’s happening.

The life science VCs are pretty much here. They’re well established. The tech folks are on the rise, so everything’s trending really well.

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