San Diego’s Avalon Ventures is among a handful of homegrown VC firms that remains an active investor in early stage companies in the region, even though overall venture funding is anemic right now. But Avalon founder Kevin Kinsella sees a healthy resurgence of venture activities—and even some IPOs on the horizon. “The situation is what it is,” Kinsella tells me, “but we continue to see opportunities in venture capital.”
The situation for the first three months of 2009 in the San Diego region was shockingly low, with the local office of PricewaterhouseCoopers counting just $87.4 million in 15 venture deals—a level unseen in this area since the first quarter of 1997.
Kinsella says the recession has generally forced many of San Diego’s venture capital community into a ruthless process that requires each firm to evaluate, prioritize, and amputate portfolio companies without the Judgment of Solomon. “Rather than cutting the baby in half, they have to give a full amount to one baby and get rid of another baby, as opposed to giving half to one baby and half to another, which is just not going to work. A lot of agony is spent on triaging existing portfolio companies, and a number of new investments are taking a backseat.”
In this respect, Avalon has been fortunate in its timing. The firm raised more than $150 million for its eighth venture fund, which closed in February 2008—before the declining economy slid off the cliff. In an announcement at that time, Avalon said it planned to make between 20 and 24 investments in early-stage startups specializing in the life sciences, wireless technologies, and “Web 3.0 services.” The firm’s web site currently lists eight investments so far.
After funding over 60 early-stage companies since 1983, Kinsella has a great perspective on the cycle of good times and bad. “Knock on wood, but hopefully we will see some M&A activity and maybe even see some IPO activity within next 6-9 months. I don’t want to be Pollyannish but I also recognize that when the U.S. gets rid of all those diabolically clever derivative instruments people will start to think ahead and will be willing to take baby steps toward a little more risk with a little more return.”
Asked to point out some companies to watch in Avalon’s portfolio, Kinsella says they are: aFraxis, a biotech focused on developing a treatment for Fragile X syndrome and autism; Otonomy, a biotech specializing in treating diseases of the ear; Sirion Therapeutics has been developing an oral drug to treat macular degeneration; and Chumby, which makes small Internet devices that resemble a stuffed toy. Social gaming site and Facebook application leader Zynga already has become a star.
Kinsella says some of the best-performing technology IPOs typically occur at the beginning of an IPO cycle. “Only high-quality companies are brought out first. And I think you now have this perfect storm emerging,” he says. “American investing is all about real businesses and understanding what a company does. That’s a good thing to be in. It’s not about investing in hedge funds or completely-not-understandable market manipulations.”
He recalls that San Diego’s real estate market hit bottom in 1996, but “after that San Diego biotech came roaring back.” Nevertheless, Kinsella thinks the economy will go down again, and he expects next week’s economic indicatotrs will be bad. “All these reported earnings from the financial companies are bogus. Another deep dive is coming. But when that dive is over, we’ll eventually see some technology IPOs announced.”