San Diego County startups raised a record amount of venture capital in 2021, led by the region’s ascending technology companies that have begun to keep pace with powerhouse biotech firms locally in attracting investment dollars.
Seven of the top 10 largest startup fundraising deals in the region last year went to tech outfits in software, fleet logistics, sensors, drones and trucking safety systems, according to data from Connect/San Diego Venture Group. Only two of the top 10 largest deals last year involved life science companies.
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That’s not how it usually works. San Diego is known as life sciences town from a venture capital perspective — with biotech and medical device companies typically corralling two-thirds or more of the investment dollars during any given year.
But that changed during the pandemic. Digital transformation and cloud services have made it relatively inexpensive to launch a tech startup. Remote work allows young firms to find talent anywhere.
Meanwhile, pension funds, endowments, private equity and other big investors —starved for yields in today’s low-interest rate landscape — have funneled a larger percentage of their funds toward alternative investments such as venture capital.
The result: Record amounts of money flowing into a growing number of startups nationwide, particularly in the hot sectors like subscription software, fintech, logistics, enhanced driving and the Internet of Things.
And San Diego — along with Los Angeles, Austin, Seattle, Denver and many other cities — has managed to carve out a piece of the pie.
“I think it is foundational,” said Mike Krenn, head of Connect/San Diego Venture Group. “San Diego is unique in that it has both tech and life sciences — and add on defense, which is still in its infancy. So, there is just a breadth of talent here. You factor in all the universities, the infrastructure with the law firms and the banks. I look at it from the perspective of let’s not plateau. Let’s figure out how to scale it.”
Local startups raised a record $9.6 billion last year, up 55 percent from 2020 levels, which was the previous record, according to the Venture Monitor report released Friday from PitchBook/the National Venture Capital Association.
Some 370 San Diego County firms raised money, compared with 287 in 2020.
“San Diego had a record 26 deals over $100 million in size,” said Krenn. “That’s what drove the numbers.”
Nationwide, nearly $330 billion was invested in more than 17,000 startup deals, roughly double the amount of venture capital plowed into young companies in 2020, according to Venture Monitor.
“By all metrics, 2021 was a banner year for the U.S. VC ecosystem,” said John Gabbert, chief executive of PitchBook. “A fair portion of the new investment records can be attributed to the record levels of capital washing through the system. VC dry powder at an all-time high and a rapidly growing number of crossover investors are participating in, or even leading, VC deals.
“With VC returns outpacing every other private capital asset class, we expect limited partners to continue to allocate capital toward venture at unprecedented rates in the coming year,” said Gabbert.
In the early 2000s, Nagraj Kashyap ran Qualcomm Ventures, the San Diego wireless firm’s corporate venture capital arm. During 13 years at Qualcomm, Kashyap said he and “the whole team struggled to find local companies to back. Biotech and med devices were strong always in San Diego. But from a pure tech perspective, we just didn’t have a critical mass of startups.”
The region suffered from having few locally based venture capital firms. A handful of those that were active wound down following the dot.com bust. To seek funding, local startups had to travel to the Bay Area or other far-flung venture capital hubs, where investors often had plenty of other opportunities in their own back yards.
Now things have begun to change. Three San Diego tech companies — Netradyne, Flock Freight and Cloudbeds — each raised more than $100 million last year from VC giant Softbank Vision Fund, where Kashyap is now a managing partner.
“I’ve been very impressed as I see more and more companies here that were under the radar and not yet discovered,” said Kashyap, a San Diego resident. “A number of the companies that were founded five or six years back are scaling really well.”
A fourth local company — lifestyle apparel brand Vuori of Encinitas — raked in $400 million from Softbank in 2021. And ClickUp, which makes productivity software, landed $400 million from top-tier venture firms Andreessen Horowitz and Tiger Global.
What’s helping local tech firms? Remote work has removed traditional geographic fences around hiring talent, which sometimes hurt San Diego relative to the Bay Area and other tech towns.
And recently, more partners of brand-name venture capital firms have set up shop in San Diego, which speaks to the growing awareness of the local tech scene.
“Funds don’t have to be based anywhere at this point in time,” said Kashyap. “It’s the people that matter more, and I think we are seeing more people being based here.”
Although San Diego has benefited from this latest venture capital funding boom, it’s not happening in isolation. Big-picture economic trends have played a major role in startup growth locally and across the country.
In the past 14 years, the number of ventured backed startups nationwide has tripled, said Jeff Grabow, Ernst & Young’s U.S. Venture Capital leader.
“So, the asset class has grown 3x,” he said. “It has never been cheaper to start a company, but it’s also never been more expensive to scale. So, the cost cycle has flipped.”
Meanwhile, there’s more money chasing this larger pipeline of startup firms that needs to be fed to continue to compete and grow, said Grabow. A record $128 billion in new money was raised by 730 venture funds last year, up 47 percent from the amount raised in 2020, according to Venture Monitor.
Investors that have traditionally stayed out of venture capital, such as private equity and even some stock investment funds, are getting in the game. Grabow said he knows of a stock fund with roughly $100 billion under management that’s looking to divest $3 billion to $5 billion in public equity and re-direct the funds into late-stage venture capital.
“The venture business seems to have COVID immunity: The two biggest years have been during the pandemic, which is counterintuitive on its face,” said Grabow. “Do I predict another $300 billion year in 2022? I have a hard time making that call. But I think we are still going to see substantial capital flows based on companies that are still trying to execute and need (capital) to grow and be competitive.”
The stock market always looms over the startup ecosystem. While the window for going public has been open for the past couple of years — giving venture investors opportunities to exit — skyrocketing startup valuations and some weakness in new public company performance have raised questions about whether it will continue.
But with the amount of money earmarked for venture capital investment that still needs to be put to work, startups should be able to receive financial support even if the stock market cools, said Neal Bloom, managing partner of angel investment syndicate Interlock Capital and founder of the Fresh Brewed Tech blog in San Diego.
“There is a lot of dry powder,” he said. “It’s got to deploy. So I think that will sustain startups for quite a few more years.”
Bloom would like to see some of San Diego’s 10 or so technology unicorns — startups with valuations of $1 billion or more — go public this year. Large local startups such as software outfits Seismic, Tealium and Kyriba have been expected to file for initial public stock offerings for a while now but have yet to pull the trigger.
When, or if, they do, it could help increase San Diego’s footprint of locally based investors willing to back technology startups in the very early stages — which remains a challenge for many young companies, said Bloom.
“We need domain experts,” he said. “People who built tech companies should be funding tech companies. And because we haven’t had those tech exits yet, those people are still not investing in the early stages. Yes, these pre-Series A companies are finding capital, but it may not be local. So we need to do some work there.”