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Thursday, Dec 7, 2023

Taking Stock

Venture capital investments in local startups fell much faster than the national average last quarter, dragged down by a steep falloff in biotech deals, according to the latest report by accounting firm PricewaterhouseCoopers.

Twenty-two startups received $178 million in funding for the third quarter ending Sept. 30, a 52 percent drop from the previous quarter and 57 percent drop from the third quarter of 2007.

Most of the decline came in life sciences, which received only $26 million compared with $158 million in the second quarter and $211 million in the third quarter of 2007, says the report.

“Although the current quarter investments are down, which can be impacted by the timing of the transactions, San Diego continues to be a leader in the life science community given its prestigious research institutes and rich history of biotechnology successes,” said Vanessa Herbert, senior manager in the life sciences group at PricewaterhouseCoopers.

2008 was a tough year for jittery investors before the recent financial meltdown on Wall Street. VC placements dropped 8 percent nationwide in the third quarter.

“There’s so much uncertainty,” said Kevin Carroll, executive director of the San Diego chapter of AeA, a trade association for companies in the technology sector. “You can’t say, ‘I know things could be horrible in a month.’ It could go back the other way. Uncertainty is a fertile ground for inaction.”

Now, he says, industry watchers are waiting to see how venture capital placements will be impacted in the fourth quarter by Wall Street’s October woes.

“There’s a level of uncertainty in the air I’ve never seen before,” Carroll said. “In 2001, we really felt the telecom downturn. We’re not feeling that yet. I think something is coming, but I do not know what it is.”

He added, “There’s no impending sense of doom, but a lot is in the air.”

Duane Roth, CEO at Connect, a nonprofit organization that supports the region’s technology and life sciences businesses, says investors froze at the end of the third quarter, and he expects the fourth quarter to remain stagnant as funds “keep their powder dry” by holding reserves for portfolio companies that may need additional funding.

Life Sciences Still Big

Roth also says he isn’t too troubled by the drop in life sciences.

“Remember we had a number of back-to-back-to-back good quarters in life science, so certainly some of it could be pulling back investment,” he said. “Nationwide, (the) science numbers are still the biggest. I think people will invest in health care regardless of any other major setback in the economy. People still get sick. They still need treatment.”

While VC investments have declined across the country this year , and venture-backed companies have postponed plans to go public , investors will find less competition and better valuation for companies looking for capital, says Ramsay Battin, a director for Arcapita Ventures in Atlanta, which led a $10 million funding round last quarter for San Diego construction design firm FrameMax.

“Returns for funds that invest the bulk of their money toward the middle to end of a recession far outperform funds that put all their money to work during good economic times,” he said. “Buying when things are low in terms of making new investments, I actually think it’s a fairly reasonable time to do that.”

He says good candidates for investment are companies with strong return on investment, or where external factors such as regulations push customers to make buying decisions.

Other investment candidates are companies with international market reach to diversify risk, or early stage companies about nine to 18 months away from bringing a product to market , enough time to weather the slump, Battin says.

“Early stage businesses focused around product development are not bad from an investment perspective,” he said. “Valuations are much lower. The due diligence time frame is extended because there’s less competition and more time to make a bet.”

Cleaning Up

In San Diego, clean technology and energy led the way last quarter with $58 million or 32 percent of total investments. The semiconductor/electronics sector also increased in activity, grabbing $30 million or 17 percent of total funds, compared with zero investments in the prior quarter and $2 million in the third quarter of 2007.

Sapphire Energy, which uses photosynthesis to convert algae to renewable gasoline, was San Diego’s top recipient, raising $35 million; Peregrine Semiconductor, which makes ultra-thin silicon chipsets for mobile devices, followed with $30 million; PowerGenix, which produces rechargeable nickel-zinc batteries, raised $30 million; Verimatrix, which provides security solutions for next-generation Internet TV, raised $21 million; FrameMax, which designs and fabricates light steel gauge frames for housing projects, received $10 million; and Sequoia Communications, which makes handset chips, also raised $10 million.

Energy deals , specifically alternative energy , hit record highs nationwide last quarter. The renewable energy category accounted for a record $1 billion in investments, with most of the money going to solar companies, according to a third-quarter report by Dow Jones VentureSource, which tracks VC placements.

“For good investments, there will always be people looking, particularly in a downturn,” FrameMax CEO Phil Ellis said. “You can’t invest in stocks, bonds or property these days. Where do you invest your money? A lot of people are looking for good businesses with good growth and strong profitability.”


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