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Local Entrepreneurs, Venture Capitalists ‘Partying Like It’s 1999’

David Titus was in a great mood when he delivered the opening remarks for the recent San Diego Venture Summit.

Titus, president of the San Diego Venture Group, told the audience of 700 attendees that venture capital is again starting to flow into the region, thanks to a robust IPO market on Wall Street.

That was due in part to 13 San Diego-based life science and health care companies that floated successful stock offerings in the last 12 months.

And Titus was quick to note that some of the profits raised from the sale of that stock will flow back into the region in the form of new investments for the next generation of companies.

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“We’re partying like it’s 1999,” he said, referring to the hit song that was popular in the late 1990s before the arrival of the new millennium.

“We have a vibrant and active venture community here,” said Titus. “Those IPOs are an important part of our ecosystem. We should not be shocked by that.”

‘Closer to the Action’

Brandon Zeuner and Ryan Swagar, co-founders of early stage focused Venture51, moved their firm to San Diego from Scottsdale, Ariz., after the firm’s limited partners said they wanted the founders to be closer to the deals, and suggested Silicon Valley, Los Angeles or New York.

“Our limited partners wanted us to be a little closer to the action,” said Zeuner. “We weren’t willing to move to LA, but we were willing to commute to LA from San Diego. It’s the only place to be.”

He said one of the reasons why he chose Encinitas is because his two children are avid skateboarders, and the region has a half dozen skateboarding ramps within a 10-square mile radius.

Zeuner said the firm recently closed a second $25 million fund, and the firm is focused on doing deals in the IT sector, with an eye on companies developing products in the smart-home space and the mobile ecosystem, as well as emerging companies in the enterprise space.

He said that he and his partner will also do deals in “highly regulated markets,” such as financial services.

“We want our fund to be on the small size. We want to be able to deploy the capital within 18 months to 24 months, and see what’s occurring in the market,” Zeuner said.

He said the focus is on quality post-seed, but pre-Series A rounds, or what he calls “traction rounds.”

Zeuner said those deals are done “when a startup has gotten a product to market, and there is strong evidence of market demand, or traction. But the company doesn’t want to go out and raise the Series A fund just yet.”

“The founder doesn’t want to be tied to raising that Series A round, and dealing with the economics of that in the future” he said. “They can take the traction round, and then go out and shop for a better deal for the Series A round because they have a better story.”

He wasn’t expecting to find new companies that match up with the firm’s focus when he first moved to San Diego, but that opinion has changed.

‘Pleasantly Surprised’

“I am pleasantly surprised by what I am running into in San Diego,” said Zeuner. “It’s a lot more active than I anticipated. We’re going to keep our eyes open for future deals. That’s for sure.”

He said the firm will soon announce its first deal with a San Diego company, along with a number of new deals in Los Angeles and Orange counties.

Jeremy Glaser, an attorney in the San Diego office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo P.C. who co-chairs the firm’s venture capital and emerging companies practice, said the venture capital industry was strong in the region before the economy collapsed in 2008.

“We had a very high failure rate of local venture capital firms,” said Glaser. “Previously, we had a good blend of VCs involved in the life sciences, IT, mobile technologies, and the like. After 2008 everything got very, very tight.”

Many More Deals Now

But Glaser said that the climate has improved, so that much more capital is available, and many more deals are getting done in the post-recession climate.

He noted that a larger and larger share of the money is going into the life sciences, since San Diego has the third largest cluster of life science companies in the country behind Boston and the San Francisco Bay Area.

He said 75 percent of the venture capital deals done in the last quarter took place in the biotech, health care and medical device sectors.

According to one source, local startups raised $243 million in the first quarter, with more than $160 million raised by life science firms and an additional $20 million raised by health care service companies.

To be sure, said Glaser, many of those startups, even those in the life sciences, have had to go out of the area, but he said that could change as new VC firms arrive to open offices here.

He said such organizations like the San Diego Venture Group, Connect and Biocom are working to ease the shortage of capital.

“There are lots and lots of great companies in San Diego, and we have a lot of well-trained entrepreneurs, a strong engineer history, so we have a lot of positives,” said Glaser. “Now we have to be more focused on getting the message out to the Bay Area, as well as Boston and New York so the venture capitalists and the seed investors know who we are.”

Titus said the venture summit attracted scores of VCs from at least 75 firms that had registered to attend the 12th annual half-day event.

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