San Diego startups continue to be swept up in the turmoil of global financial markets, with the amount of venture capital flowing to young local companies falling more than 60 percent compared with the same quarter last year.
Even so, it actually wasn’t a bad result. While startup funding has dropped throughout 2022 from last year’s record highs, young San Diego firms still managed to raise $1.04 billion in overall funding in the third quarter, according to Venture Monitor, a snapshot of fund raising by the National Venture Capital Association and PitchBook, an industry research firm.
Big funding rounds by RayzeBio, Capstan Therapeutics, software firm Drata and battery materials outfit Wildcat Discovery helped prop up the region’s total venture capital haul during tough times for financial markets. This year’s third quarter ranks as the 10th highest quarterly total for San Diego venture capital investment since Venture Monitor began publishing data in 2014.
“Across the board (companies) are getting a haircut on valuations,” said Rory Moore, head of startup incubator EvoNexus. “The good news is the high-quality startups are being funded. They may be getting less money. They may be getting lower valuations. But they are getting funded.”
The San Diego region ranked eighth nationwide for venture capital raised in the third quarter, trailing San Francisco, Los Angeles, New York, Boston, San Jose, Seattle and Miami, according to Venture Monitor. The region historically lands around the top 10 metropolitan areas for startup funding, thanks to dual pillars of life science firms and technology companies.
Coming out of the pandemic, roaring financial markets helped drive record investment in startups in 2020 and 2021, particularly in hot sectors like subscription software, health care, fintech and logistics.
In San Diego, entrepreneurs pulled in a record $9.6 billion in 2021 — up 55 percent from a year earlier.
But 2022 has been a tougher slog. A declining stock market has sidelined most initial public stock offerings —the key vehicle for venture capitalists to cash in on their investments in young companies.
Last year, some 416 companies went public. So far this year, just 83 have been able to IPO, said Tim Holl, an audit partner with EY in San Diego, formerly Ernst & Young.
Meanwhile, mergers — the other avenue for venture capitalists to book a return — have been lethargic, according to Venture Monitor. Exit values this year are on pace nationally to reach their lowest levels since 2016.
“The venture capital market, they are in defense mode right now,” said Holl. “They are protecting their winners, and they are being very valuation sensitive, which is not surprising given the market volatility that’s out there.”
Through the first nine months of this year, San Diego startups have raised $3.7 billion, which is down from $8.1 billion for the same period last year.
“We are going to see another difficult quarter in Q4,” said Holl. “I think we are at least one quarter away” from conditions beginning to improve.
The picture is similar nationwide. Venture capital investment totaled $43 billion in the third quarter, compared with $90 billion for the same quarter a year earlier.
Despite current doldrums, venture capital funds managed to raise an additional $151 billion from limited partner investors in the third quarter, according to Venture Monitor. At some point, that money is going to have to be deployed.
“The venture capital ecosystem has shown remarkable resiliency in the face of continued economic headwinds, raising record levels of capital and closing an unexpectedly high number of deals,” said John Gabbert, founder and CEO of PitchBook. “In many ways, 2021 was an outlier year, and the venture capital market is now returning to pre-pandemic levels and long-term trends of steady growth.”
