The importance of diversifying the local economy became obvious in San Diego during the 1980s, as the ebb in defense spending exposed the area’s collective dependence on Atlas rockets and cruise missiles, along with the payroll for the Navy’s Pacific Fleet. But the path forward also was obvious—especially after Ely Lilly acquired San Diego’s Hybritech for $480 million in 1986. San Diego’s biotech cluster was born in a confluence of opportunity and necessity.
Since then, San Diego has prided itself on its innovations in life sciences, wireless communications, and other technology clusters. But these days, there is a pervasive sense that San Diego’s innovation economy is flagging—and might even be faltering. The hometown venture capital firms that helped fuel this area’s extraordinary expansion during the booming 1990s have largely evaporated—and this time the path forward is far from obvious.
So Xconomy asked some of San Diego’s best business minds to participate in an “on the record” dinner discussion on December 8, as a way to generate ideas for boosting San Diego’s innovation economy.
In attendance at the dinner—which was hosted by National University and sponsored by Ernst & Young, Latham & Watkins, and Silicon Valley Bank—were Linden Blue, vice-chairman at General Atomics; Hui Cai, vice president of business development at WuXi AppTec; C.J. Warner, chief operating officer at Sapphire Energy; Erik Bruvold, president of the National University System Institute for Policy Research; Miles Kirby, a senior director of business development at Qualcomm; Andy Pelletier of Silicon Valley Bank; Hiep Pham, CEO of TipCity; Bill Rastetter, a partner at venture firm Venrock; Faye Russell of Latham & Watkins; David Titus of Windward Ventures and the San Diego Regional Economic Development Corp.; Jim Waring, board chairman at Cleantech San Diego; Claudio Arriola, regional president of Canieti Noroeste in Tijuana, Mexico; Doug Regnier, partner at Ernst & Young; Katy Frankel, tax partner at Ernst & Young; and Bob Watkins of R.J. Watkins & Co. Executive Recruiting Consultants (and the San Diego Regional Economic Development Corporation). Xconomy publisher Steve Woit, business development associate Michele Gerus, San Diego editor Bruce V. Bigelow, and San Francisco editor Wade Roush also attended. Our conversation circled several areas of concern:
—Access to capital remains the single biggest issue for seed-stage startups in San Diego. Venture funding is down 67 percent from its peak of $541 million in the first quarter of 2009, descending to $173 million in the third quarter of 2010, according to Bruvold. Innovators and entrepreneurs continue to launch promising startups, but they are wanting for venture capital.
—Hand in hand with the decline in local venture investing has been the shrinking size of the area’s indigenous venture industry. In 1996, according to Titus, there were three general partners with investing authority residing in San Diego. “Then we had this huge explosion so that by 2001, there were roughly 30 general partners who lived and worked in San Diego who had the ability to write checks, so you had this explosion of deals,” said Titus. “That has shrunk back now to where, arguably, there are maybe 10 partners resident in San Diego who can write checks.”
—In Titus’s view, the shortage of local venture partners in San Diego “has a huge impact on how many companies get funded.” But Venrock’s Rastetter disagreed, arguing