FINANCE: VC Investment in the S.D. Tech Sector Sees Slight Decline

By Fred Grier

SAN DIEGO COUNTY – The number of venture capital dollars flowing to Greater San Diego technology companies is becoming less frequent in 2024, a trend mirroring national investment activity that appears to favor bigger bets at the expense of more frequent ones.

It’s estimated that local tech companies and startups have done a total 43 venture capital deals between January and July, according to data provided by Connect. That number is down from 60 tech deals during that same period last year.

While the region saw fewer tech deals in the first half of 2024, the rounds are still sizable.

The two largest technology venture deals this year include Platform Science a late- stage company helping modernize the trucking industry raised $125 million led by several strategic investors. Defense-tech company Firestorm Labs, which develops 3-D printed drones for the government, raised $12.5 million seed round led by Lockheed Martin Ventures in March.

M&A Picks Up

In January, senior lawyers and investment bankers based in the San Diego region were “cautiously optimistic,” that venture capital activity would be higher than the year prior.

“The year started off with some hope that the IPO market would pick up. We did see a few IPOs in the first quarter but few of them performed well in the aftermarket,” said Jeremy Glaser, Member and Co-chair of the Venture Capital & Emerging Companies Practice at Mintz.

“That pretty much shut down the IPO market for the last two quarters. On the positive side though we saw a pick up in new investments in new portfolio companies by VC funds and a return to the market by PE shops in the M&A market,” said Glaser.

Now more than halfway through 2024, fewer early-stage startups are raising funds, largely due to an unpredictable economic environment, election year and high interest rates.

Sectors with robust talent in AI, biotech, health-tech, and fintech appear to be weathering the downturn better than others.

Challenging Venture, IPO Market

While the general sentiment remains that the tech industry and its financial climate have cooled, that observation is not shared by all; others believe the San Diego’s tech ecosystem is slowly coming back from the downturn.

“Last year, from a venture capital perspective, it was terrible for everybody, but it’s finally starting to come back,” said Eric Otterson, managing director of Silicon Valley Bank. Otterson noted that local entrepreneurs still have plentiful opportunities to have their innovation rewarded with investment. While raising capital is much harder than three years ago, capital efficient operators are still finding a way forward.

“We’re starting to see an uptick in seed activity. For example, Alvys raised $20 million in July, as well as two other tech startups that I can’t disclose yet,” said Otterson. “Overall, the recent momentum in tech financing deals has brought excitement back into the startup ecosystem.”

San Diego’s most recent tech IPOs have struggled too. For example, UTC- based TuSimple, which began trading publicly in 2021, laid off 25% of its workers in December last year as it confronted executive shakeups, a terminated deal with Navistar, and declining stock price.

Resetting in Expectations

Looking ahead, there’s silver lining amid the venture slowdown, including growth in aerospace startups, which may bring a potential rebound for SD’s tech ecosystem.

Some local investors are also hopeful that San Diego will bounce back.

“We’ve got a variety of different industries here that are healthy and all support innovation,” said Neal Bloom, managing partner at Interlock Capital, an early-stage venture capital firm.

Bloom noted that one major challenge is that the region still lacks late-stage financiers who help companies grow to the next level after the startup phase.

For example, San Diego has about 38 venture

capital funds located within its region, but it still manages to pull more venture dollars than its peer cities, which typically have “three times” more local funds.

Another shift in the market, is that local investors are starting to see more reasonable valuations and investor-friendly deal terms across the board, according to Bloom.

“Tech valuations are finally coming back to reality,” said Bloom. “Three years ago, entrepreneurs would typically set the valuation, but today we’re seeing a handful of founders struggle to raise at a higher valuation, and as a result, investors are now setting the terms.”