Venture investors like to talk about transformative change. But it’s becoming increasingly evident that San Diego’s venture capital community is itself in a period of transformative change.
The figures we reported this week on local venture investments for the first three months of 2009 were gloomy enough, with $194.6 million going into 15 deals, according to Dow Jones VentureSource. But local data released this week from another survey done by the National Venture Capital Association and Thomson Reuters are shocking: it counts just $87.4 million invested in that same number of deals.
While the deal count is identical, the disparity of dollars invested is so enormous that I called Brian Caisman at PricewaterhouseCoopers’ San Diego office, who helped compile the NVCA’s regional data.
“Obviously we’re aware of it,” Caisman told me by telephone last night. “I can’t tell you the reason for the difference, but we think we do more data validation.”
While the difference is huge, both numbers reflect anemic levels of venture funding unseen in San Diego since the 1990s. Whichever survey proves to be more accurate, though, it’s clear that San Diego’s homegrown venture community is ailing.
One person who has been monitoring the vital signs is Hans Swildens, a principal and founder of Industry Ventures, a San Francisco firm that specializes in acquiring the distressed assets of venture firms and their investors. Swildens says Industry Ventures buys out VC investments in startups, angels’ stakes, and even founders’ shares. It also acquires the limited partners’ interests in venture funds—the stakes held by wealthy individuals, pensions, and college endowments who turn over their money to venture capitalists to invest.
Investments in venture capital funds tend to be high-risk, long-term plays for buy-and-hold investors. But a burgeoning secondary market has emerged for firms like Industry Ventures that acquire stakes throughout the spectrum of VC activity, from VC funds and their portfolio companies to the LPs, including any remaining unfunded commitments such investors might have. Other firms active in the secondary market include Paul Capital Partners, Pantheon Ventures, and Saints Capital, which all have offices in San Francisco.
Swildens wouldn’t discuss any specific deals involving San Diego VCs, but he says the nature of Industry Ventures’ business “gives us a unique vantage point on the market.”
In general, Swildens says, “What’s happening is the venture funds are triaging their portfolios, shutting down about a third of their portfolio companies so they can preserve some funds for the remaining companies.”
As Swildens put it, “The market in San Diego is actually kind of interesting, because it’s going through a transition.” While the region remains strong for entrepreneurs and technology companies—and out-of-town VC firms remain active here—he says only a handful of San Diego-based VCs have raised capital for new funds and that once-dominant players such as Enterprise Partners Venture Capital and Forward Ventures are not doing much investing anymore. “It represents an opportunity for some other funds,” Swildens says. “I think it will all play out in the next five years.”
While many of San Diego’s homegrown VCs are not doing much investing, Swildens says Industry Ventures has been doing lots of deals—buying out general partnerships, for example, at discounts ranging from 30 cents to 70 cents on the dollar. But even if he’s acquiring a VC’s stake for less than 50 cents on the dollar, Swildens says market conditions have eroded the worth of many portfolios to the point it’s not particularly meaningful to compare them to their original valuations.
“Even if we’re paying 50 cents on the dollar, those account values may be down 30 percent from the end of December,” Swildens says. As a result, he contends the discount his firm is paying is actually less than it might appear to be.
“I suspect the discounts to be huge,” says Peter Shaw, board president of the San Diego Venture Group. He agreed that many San Diego-based VCs are no longer making new investments, but he said quantifying the numbers could be difficult. “The VCs don’t want you to know the numbers, because it reflects the ill health of their industry,” he said.
In the meantime, Swildens has seen his business boom over the past year, as credit markets dried up and the global financial crisis dramatically increased the pressure on institutional investors. Last month, Industry Ventures announced fundraising for its fifth fund was oversubscribed at $265 million. When the firm set out to raise the fund, its original target was $200 million.
