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May 14, 2021

VCs Upbeat Over San Diego

From the blog post of San Diego Business Journal:

Both local and non-local venture capitalists remain bullish on San Diego’s startup venture scene, after fast-growing companies raised a record $6.1 billion in venture capital in 2020.

This was the sixth year in a row that the region has seen an increase in venture capital, with roughly $3.35 billion raised in 2019, according to the National Venture Capital Association and PitchBook, a research firm that tracks venture capital.

While San Diego’s tech ecosystem isn’t as robust as San Francisco’s, for example, startup founders continue to boost the area’s tech scene.

Growing Investor Interest

In 2021, high-profile investors including PeakSpan Capital managing partner Phil Dur and HLM Ventures partner Steve Tolle said they’re closely following the startup activity bubbling in the San Diego ecosystem.

Based in San Mateo, PeakSpan is one of the most active VCs investing in the region. They’ve provided funding for some of the most well-known upstarts in San Diego, including CloudBeds, Cordial, Ecwid, PetDesk and two others, with ambitions to fund more in the future.

“The San Diego entrepreneurial ecosystem continues to make excellent progress, and it has its own distinct San Diego way of working,”Phil Dur, Co-founder & Managing Partner of PeakSpan

Dur, who co-founded PeakSpan in 2015, said what he finds most refreshing about San Diego compared to other tech hubs is the incredible “entrepreneurial talent,” adding that the city is a hidden gem. However, he doesn’t think it will continue to be hidden for much longer.

“The San Diego entrepreneurial ecosystem continues to make excellent progress, and it has its own distinct San Diego way of working,” said Dur.

“There’s a reason that a ton of entrepreneurs are actually leaving the valley and going to San Diego to relocate their business. I feel like we’re in the early innings of a wonderful story. If we can be fortunate enough to be part of that, we are thrilled.”

Attracting Healthcare Investors

Tolle, who is a partner at HLM Ventures, one of the oldest venture capital firms in Boston, said San Diego offers a unique mix of companies ranging from biotech to healthcare to software.

“San Diego has a pedigree of expertise around tech and healthcare,” said Tolle. “The market has both the life sciences, diagnostics, and the pure tech corridor there.”

“It also has incredible innovation, a prime workforce, with people coming out of some of the bigger companies that are entrepreneurs. They’ve been trained by some of the biggest companies in the world,” he added.

To date, the Boston firm has funneled money into two local startups such as San Diego-based DermTech, a AI skin cancer detection company and Equip, a company focused on providing treatments for eating disorders. HLM was also an early investor in New York-based Teladoc (NYSE: TDOC), which went public in 2015.

Significant ROI

San Diego is one of the largest life sciences markets in the country alongside San Francisco and Boston.

Rob Lake, who was tapped last year to help Runway Growth Capital grow its footprint in life sciences in San Diego, said people continue to invest in the region because they’re finding significant return on investment (ROI).

“San Diego’s microeconomy is populated with successful life sciences entrepreneurs, scientists, Nobel laureates that are skilled at value creation specifically related to R&D projects. Once achieving a certain inflection point, many of these projects are monetized representing great returns from investors,” said Lake.

“An example of a recent exit of a San Diego based biotech: In January 2020, Sanofi bought Synthorx (Nasdaq: THOR) for $2.5 billion. The technology was originally spun out of Scripps Research Institute and monetized by a local investor, Avalon Ventures. The company raised a total of $210 million of equity and was valued at $333 million before the acquisition representing a 7.5x multiple,” he added.

Founded in 2015, Runway Growth has offices in New York City, Silicon Valley, Chicago and San Diego.

Changing Tides

Last year, New York-based growth fund Left Lane Capital was the lead investor in one of the most competitive tech deals in San Diego, leading GoSite’s $40 million Series B in December 2020.

GoSite, a software company which built a global platform for small businesses, has become one of the most promising young companies to start in the region in the recent years.

Vinny Pujji, a partner at Left Lane and a San Diego native, said that San Diego is more than just a biotech town, adding that it’s now at a turning point.

“Historically, San Diego was primarily biotech-focused and Los Angeles was Hollywood-focused companies, but that’s now changing,” said Pujji. “There’s a growing pipeline in Southern California including Los Angeles, Orange County and San Diego.”

“What we’re seeing today is that, those [technology] companies have given way to amazing e-commerce companies, which are now making way for the software companies, that help e-commerce companies scale,” he added.

Remaining Optimistic

Once known as a ghost town for local tech investors, San Diego has become home to several relatively new VC groups including Torrent Ventures, Blueprint Equity and Longley Capital.

Solana Beach-based Blueprint Equity is led by managing partners Sheldon Lewis and Bobby Ocampo. It operates a $70 million fund based focusing on early-stage deals.

Ocampo said the local tech scene is growing quickly, adding that he predicts that the pandemic will cause more talent to migrate to San Diego, as founders can now build a great business practically anywhere with an internet signal.

“In the next couple of years, we’re going to see more and more investors and entrepreneurs move away and migrate to other hubs that are a great place to live, but also where the cost of living and the tax burden isn’t as high either,” said Ocampo.

“In regards to San Diego, it has been a good market overall. Unfortunately there’s not 1,000 SaaS [Software as a Service] companies here that we can invest in, but we’re confident one day it will be,” he added.

Looking forward, San Diego’s tech scene still has a long way to go, as it does not rival powerhouse cities like San Francisco or New York, nor is the local tech scene growing as rapidly as fledgling tech hubs like Austin and Miami.

However for San Diego, the traction in tech is a big leap from where the startup scene has been in previous years.

Source: VCs Upbeat Over San Diego