STARTUPS RAKE IN $933M IN CAPITAL

Local life sciences sector continuing to thrive; funding tougher for others

San Diego startups pulled in a hefty amount of venture capital in the third quarter, thanks to the region’s cluster of biotech/life sciences companies that continue to thrive during the COVID-19 pandemic.

Sixty-three young local companies raised $933 million in the quarter, according to the PitchBook-National Venture Capital Association Venture Monitor report. While that’s below the $1 billion corralled by 73 startups during the same quarter last year, it’s still better than some industry observers expected given the state of the economy.

Biotech and life sciences startups made up 68 percent of the companies that received funding and 80 percent of the dollars taken in, said Tim Holl, an audit partner with Ernst & Young in San Diego.

“Certainly our life sciences industry is very robust right now,” said Holl. Five years ago, if a life sciences company raised $50 million in a funding round, it was considered a big deal.

“Now we’ve had 17 deals over $50 million just this year,” said Holl.

Startups working on software, semiconductors and other nonhealth care technologies are having a tougher time raising money during the pandemic.

Still, a few local tech companies lured in investment, including productivity software unicorn Seismic, which raised $92 million; and consumer technology firm Ostendo Technologies, which raised $19 million. It recently launched new display technology for augmented re

ality glasses.

“On the tech side, I would have liked to see a few more deals, but I don’t think it was unexpected by any means,” said Mike Krenn, head of Connect/San Diego Venture Group. “What I do like on the tech side, which is not in the numbers, is we are not seeing a lot of casualties.

“We are seeing companies that have raised money in the past that are doing the right things,” he continued. “They look like they have enough runway to come out of this thing as we get into the middle of next year.”

For younger startup technology firms, earlystage funding remains the most difficult to come by, as venture capital firms shun making new investments to focus on keeping companies that are already in their portfolios well capitalized. Just eight local tech startups received early-stage funding in the quarter.

Life sciences firms were the exception. They were able to raise both early-stage and late-stage capital.

“The health care market is super strong right now in general,” said Krenn. “A lot of money needs to be put to work and a lot of it is making its way to San Diego. There is a lot of good science here. There are a lot of repeat entrepreneurs, and there’s just a lot of momentum.”

Public markets also remain receptive to life sciences’ initial public stock offerings, which tends to help fuel investment in the sector. The latest local IPO is Carlsbad’s Acutus Medical, which is working on treatments for heart arrhythmia.

“We’ve had six companies in San Diego go public so far this year on U.S. exchanges,” said Holl. “All of them have been life sciences companies.”

The most local life sciences IPOs in any given year in the past decade is eight, said Holl. “I think we will get over eight by the time we get to the end of the year.”

Special purpose acquisition companies, or SPACs, also have given life sciences investors another avenue to tap public markets. These shell corporations are designed as vehicles to take companies public without going through the traditional IPO process. Nationwide, some 125 SPAC entities are teed up and looking for companies to acquire, said Holl.

So far this year, 188 San Diego startups have raised $3.4 billion despite the pandemic, according to PitchBook-NVCA Venture Monitor. That compares with 218 companies raising $2.5 billion for the first three quarters of last year.

Nationwide, venture capital investment has remained resilient despite the pandemic and economic volatility. While biotech and pharmaceutical startups have fared well, fintech, ed-tech and telemedicine firms also have been able to raise capital.

In all, $37.8 billion in venture capital was invested during the third quarter nationwide, which was on par with the same quarter last year, according to PitchBookNVCA Venture Monitor.