San Diego’s life sciences companies led the way with $96 million in total venture capital received during the second quarter. Those firms with products in late-stage development and nearingcommercialization will have the best chance to continue to attract investors, said an Ernst & Young venture capital adviser.

Venture capital investments nationwide rose in the second quarter over the first quarter for the first time in three years. San Diego reflected that trend with medical device and biotechnology firms leading the way, according to two recent surveys.

In San Diego, investors funneled $156 million into 23 companies in the second quarter – just a 2 percent rise from $153 million invested in the prior quarter, but still a major decline from the $366 million invested and 35 deals closed during the second quarter of 2002, according to the latest Moneytree Survey from PriceWaterhouse Coopers, Venture Economics and the National Venture Capital

Association, which was released on July 29.

Local companies faired much better according to the Ernst & Young/ VentureOne U.S. Venture Capital survey, released July 28.

According to their figures, venture investing rose to $294.83 million with 23 transactions closed during the quarter, with the lion share of $96.73 million going to eight biotech firms.

That compares to $121 million raised and 12 deals closed in the first quarter, said Don Williams, Ernst & Young’s venture capital advisory group leader for the Pacific Southwest area and based in San Diego.

Williams also found that the decline in venture funding is drastic when compared to the second quarter of 2002, where investors funneled $310 million into 27 local firms.

He found that in 2002 investors were much more willing to fund risky ventures and thinking long-term. Not any more.

Now investors look for safer bets, later-stage firms with products nearing the market place.

Jesse Reyes, vice president at Thomson Venture Economics shares that view.

“VCs continue to seek safer ground by investing in more established companies,” Reyes said in the survey. Mature life science firms Santarus Inc. and CryoCor topped the list for local life science investments.

Santarus, which has an experimental gastrointestinal drug in the last stage of clinical testing, received $55.1 million in funding CryoCor, a medical device maker with laterstage heart technology, garnered $27.5 million from investors.

Incode Telecom Group, a wireless and consulting firm, led local high technology investment with $25 million in funding raised, said Williams.

Other high-tech winners included BroadBand Innovations with $8 million and Staccato Communications, Inc. and Inasoft Inc. with $7.6 million and $7 million raised respectively.

Biotechnology firms Favrille Inc. and NuVasive Inc. raised $10.6 million and $9.8 million respectively, which put them on the list of the more significant investments in San Diego according to the Moneytree survey.

Williams said that based on his discussions with VCs the outlook for local biotech investment remains good.

“I see an increase of closures of new financings and follow-on financings,” he said.

But not until the fourth quarter.

Based on the sharp rise of second-quarter biotech and medical device financings, new

and later-stage financing will likely remain flat in the third quarter before it picks up again in the fourth, he speculated.

Asked about the most active VC groups in Southern California, Williams said Enterprise Partners and Domain Associates led the way with four transactions in the second quarter.

Hamilton Apex Technology Ventures had three and Sanderling Ventures had two.

He pointed out transactions don’t necessarily correlate to investments.

For the rest of the year, venture capitalists will focus on building up companies and creating profitable operations with a merger or acquisition as an exit strategy rather than eyeing initial public offerings, Williams said.

“Many of them (venture financiers) believe that an IPO is a possibility, but I see a continued trend of mergers and acquisitions which is a very viable liquidity event for many companies,” he said.

A lot will depend on the overall economy.

“A strong economy certainly provides more enthusiasm for venture funds and makes for a lot better venture investment economy as well,” he said.

Copyright San Diego Business Journal Aug 04, 2003