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Saturday, Dec 10, 2022

Startup Field Getting Crowded, Outlook for Funding Is Murky

Stanley Kim proudly calls himself a serial entrepreneur.

The former Salk Institute for Biological Studies attorney made a tidy but undisclosed profit when he and his two partners sold Softmax, an audio software business, to Qualcomm Inc. in 2007.

Instead of retiring (he’s only 43), Kim took the money he made and pumped it into new companies here. To date, he says the number is about a dozen, but he’s not exactly sure.

His latest business, called Azzembly Inc., was launched last year and piggybacks on the Groupon business model. Instead of sales of various discounted merchandise going to a corporation, a percentage goes to schools, he says.

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“I can’t tell you a lot about it now because we aren’t live yet,” Kim said of the Internet site in development.

Kim said he’s pumped $40,000 into the business to get it going, but he plans to raise about $250,000 in a seed round that should happen later this year.

Today the business has 10 employees, making it one of the larger new high-tech entities founded last year, said Steve Hoey, associate director of Connect, the local nonprofit that helps startups.

Three Quarters, 237 Startups

Earlier this month, Connect released a report showing 237 new startups were launched here last year — through the end of September. “We’re still collecting data from the fourth quarter, but we’re on track for 2011 to be the biggest startup year since before the recession began,” Hoey said.

The report states those new tech businesses have nearly 500 employees. Software firms make up the biggest share of the startups with 27, followed by 22 new biotech/medical companies.

Software has dominated in recent years simply because it is the most economical to launch, Hoey said.

Brian Dear, chief executive at Nettle Inc., is another repeat entrepreneur, having launched Eventful, a search engine for events, in 2004. Dear is developing an iPhone application called Moviegoer that would foster group attendance at cinemas.

Last year, Nettle closed a seed round of financing for $500,100 with investors from Google Ventures, Advancit Capital and 500Startups. Today, Nettle has six employees, primarily software engineers. Dear said he’s currently raising an add-on round of funding, but plans a series A round this summer that should raise “at least several million dollars.”

Both Kim and Dear said the investment landscape has dramatically changed for startups. There’s less sources to tap, and much fewer dollars aimed at startups. More venture firms are going dormant, and active ones are focused more on later stage companies, both men said.

Kim said many venture funds are constrained because the institutional investors of those funds aren’t allocating as much.

One Bright Spot

The bright spot is angel funds, where some investors have money to invest but are being more cautious about where they put their money, Kim said.

According to the 2011 third quarter report from PricewaterhouseCoopers and the National Venture Capital Association, during the first three quarters of the year, venture firms pumped $568 million into San Diego companies, compared with $653 million for the like period of 2010.

Despite declining VC support and the lousy economy, the area’s high-tech industry continues to grow here, said Kelly Cunningham, an economist with National University System Institute for Policy Research. The most recent analysis of state data (based on 2011 first quarter) showed San Diego was home to about 6,050 high-tech companies that employed more than 140,000 people. That compared to 2010 when Cunningham tabulated local high-tech companies at just over 6,000 and total employment at nearly 139,000.

Among the fastest growing segments within the high-tech sector is software, which ranked third largest among eight groups in high-tech. The largest group was biotech/pharma/biomedical with 28,900; followed by communication equipment manufacturing at 28,700.

The latter group includes the city’s biggest private employer, Qualcomm Inc., which reported having 21,200 employees worldwide including 10,500 working in San Diego.

Based on the same data provided last year, Cunningham said average wages paid in the tech sector are more than double the average for the rest of the industries: $97,715 compared with $45,619.

“These are some great jobs if you can get them,” he said.

The downside is these jobs are highly skilled and require advanced education. The problem here is that while the economy is producing a fair number of jobs at the top and a growing number at the bottom of the wage scale, those in the middle, including manufacturing and construction, have been decimated by the recession, and continue to shrink, Cunningham said.


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