Venture capitalists see a lot of value in San Diego and its life sciences companies.
The region has become one of the largest recipients of venture funding in recent years. Last year, 126 local companies obtained more than $1.2 billion in seed money, the fifth-largest infusion in the nation.
That compared with 2003, when 113 San Diego companies obtained about $786 million, the ninth-largest amount of 19 U.S. regions, according to a recent MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association.
San Diego also moved up relative to the rest of the state, placing ahead of Los Angeles/Orange County, which came in eighth with $978 million in venture funding for 149 companies.
In San Diego , as in much of the nation , the biggest influx of venture funding flowed into life sciences companies, which include biotech firms and medical device manufacturers.
Last year, the sector captured $5.6 billion, or 27 percent, of the total $20.9 billion invested by VCs nationally.
“San Diego seems to be getting a good share on the biotech side,” said Stan Fleming, managing partner for San Diego-based Forward Ventures, a $430 million fund that invests exclusively in life sciences, biotech and medical device companies.
There were 55 deals in San Diego’s life sciences sector, with the average deal about $10.5 million, according to Thomson Venture Economics.
California’s Silicon Valley got the biggest chunk of VC money last year, with $7.1 billion, up from $6.3 billion from the prior year.
Local VCs See Positive Trend
Getting venture capitalists to talk about their investments isn’t easy, but it’s much easier when they can point to winners.
Last year was a good one for most local venture funds, reflecting a national trend that showed VCs gaining higher returns.
“We don’t publish our returns, but 2004 was a very good year for us. It was a much better year than 2002 and 2003, which were miserable,” said Naser Partovi, managing director for Enterprise Partners Venture Capital, San Diego’s largest venture fund with more than $1.1 billion under management.
Venture capital firms invest money into early stage or relatively young startup companies with the expectation the company will eventually grow to the point of issuing stock or is acquired by a larger entity, resulting in a “liquidity event,” or big payoff to the early investors.
Enterprise Partners invested some $90 million in 31 deals last year, including 12 brand-new fundings, Partovi said. The rest were additional funding rounds into existing companies.
Among two new San Diego firms in Enterprise Partners’ portfolio are Quorum Systems, a biotech company, and Sky Mobilmedia, a software company. Each firm received about $4 million from Enterprise.
Partovi said two long-standing companies conducted initial public offerings last year, Nuvasive Inc. and Adeza Inc. As a result of the stock offerings, the VCs’ investment in each of the companies resulted in a return of between four to five times the total amount pumped into the companies.
In Adeza’s case, that meant Enterprise’s $10 million total investment returned the VC between $40 million and $50 million, Partovi said.
Not all fundings get such nice returns. On average, of every 10 investments, only two are very big winners. An additional four to five get much smaller profits, and three to four are total casualties, he said.
Robert Kibble, managing partner at Mission Ventures, the area’s second-largest VC with about $450 million under management, said last year was “much better” for the firm.
“We sold two of our companies, and on those two deals alone, we probably made about $40 million,” Kibble said.
Strong Returns For Local Winners
The two winners were Zray Wireless and Widcomm, both telecom manufacturers, sold to Broadcom, an Irvine-based telecom.
Kibble is high on two new San Diego companies in Mission’s portfolio, Alignent, which makes software that helps management determine how to deploy technology resources, and Ortiva, a maker of content delivery software. Each received about $3 million.
Mission Ventures concentrates on semiconductors, enterprise software and Internet software, and doesn’t get involved in firms in the biotech industry.
Life sciences, including firms researching drugs and medical devices, are the focus of Forward Ventures, which has 17 companies in its portfolio, with a total investment value of about $430 million, said Fleming, the managing partner.
Forward was also able to garner some nice returns due to three public offerings that took place within the past year: Dynavax, CancerVax and Favrille. But Fleming isn’t crowing too loudly.
“We’re not seeing that dramatic influx of capital into biotech, and Southern California is facing significant challenges as the market evolves here,” he said.
Kerry Dance, managing partner at Hamilton BioVentures Fund, only did a single investment last year, about $4 million in Ceregene Inc., a San Diego developer of a drug dealing with central nervous system diseases. Participating with Hamilton in the total $32 million investment were MPM Capital and Alta Partners, two of the largest biotech VCs in the nation.
Dance said Hamilton had five exit events, with the majority yielding profits for the five-year fund. Among the biggest winners for Hamilton was Egea Biosciences, a biotech that was acquired by Johnson & Johnson for an undisclosed price, and Q3DM, acquired by Beckman Coulter, a major medical supply company based in Fullerton.
Dance declined to reveal any figures on what Hamilton earned from the transactions, except to say it “did better than double” the firm’s investment.