Southern California (SoCal) might be overshadowed in venture capital by its northerly neighbour around the San Francisco Bay area in the same state but it is the second-most populous region in the US.
With 22.4 million people and large cities in Los Angeles and San Diego as well as universities and research centres, SoCal would be one of the world’s most important countries if it were a separate nation.
But it has struggled to gain prominence even at a national level for its innovation. Nagraj Kashrup, vice-president of Qualcomm’s corporate venturing unit, Qualcomm Ventures, which is head-quartered in SoCal, said: "There are lots of entrepreneurs in SoCal but not as many as in the [San Francisco] Bay area. However, there has been a sharp drop in the number and activity of VCs [venture capital firms]in IT [information technology] but it still relatively good for biotech and medical devices.
"The drop in investment activity is because in the past few years SoCal VCs have shut or not been able to fundraise.
"There is top-notch research here and organisa-tions such as Connect to help, but the hurdle is at the series A round. Bay and Boston VCs do not spend as much time in SoCal, which is why it is critical to have VC and early-stage money."
But the VCs are becoming less parochial. The August 2010 Pepperdine Capital Markets Survey said Silicon Valley-based VCs around the Bay found the number one location, with 17.4% of the votes, they expected to invest in the next year was Southern California. San Diego-based Qualcomm is active in the SoCal region but has a global corporate venturing programme and sponsors its QPrize as well as the local seed competition with non-profit organisation Connect.
The Southern California Venture Capital and Private Equity Directory says there are nearly 275 VCs, private equity firms, angels and incubators with officesin Southern California, the country’s third-biggest region for VC investing. Two of the three most active venture investors in technology and based in SoCal are Qualcomm and Disney’s Steamboat corporate venturing unit, with the third regarded as VC firm Rustic Canyon.
In health, however, SoCal’s main rival is in the north-east around Boston rather than in the Bay area.There about 550 biotechnology, pharmaceutical and medical device and diagnostic companies throughout Southern California, according to regional trade body Biocom. These companies include Synthetic Genomics, based on the work by Craig Ventner on human DNA and backed by strategic investors including BP.
Connect’s Third Quarter 2010 Innovation Report found 94 technology start-ups were formed in San Diego in July, August and September, which was an increase of almost 50% from the second quarter of last year and an increase of more than 20% year-on-year and led by healthcare.
In April, VC Thomas McNerney & Partners also boosted SoCal’s healthcare investment sector by relocating its west coast officefrom San Francisco to San Diego. Pratik Shah, Thomas McNerney partner, said: "Southern California is home to many top-tier scientificand medical centres; it has long been a fertile breed-ing ground for successful medical technology companies, and it is populated by some of the smartest, most capable people in the country."
Thomas McNerney has 10 investments on the west coast, six of which are in Southern California, and it has also hired Larry Fritz as an entrepreneur in residence after he founded or co-founded Athena Neurosciences, Idun, Conforma, Cabrel-lis and Covella.
Yet even in healthcare, there are concerns for SoCal. The 2011 California Biomedical Industry (CBI) report found the state lost 6,000 biomedical jobs in 2009, 2% of the sector’s workforce. The CBI said workforce training was the issue of greatest concern, followed by controlling taxes and developing economic incentives for growing companies, according to its survey of life science chief executives.
For San Diego, MoneyTree reported a 7% dip in VC funding last year to nearly $415m from $445.6m in 2009, although the number of deals rose to 51 from 48 in this period.
However, in the finalthree months of last year, VC funding totalled $96m in 12 deals compared with $178m in 14 portfolio companies in the fourth quarter of 2009, according to MoneyTree. Overall, 8.4% of 2009’s VC deals occurred in SoCal.