Record number of tech start-ups launched in San Diego last year

By Mike Freeman, San Diego Union Tribune

San Diego entrepreneurs launched a record number of new start-ups last year, powered by solid venture capital investment and diverse technology clusters.

But federal research dollars that the region’s universities and institutes rely on to pay for fundamental new technology development fell in 2016, taking some luster off an otherwise good year for the tech economy.

The San Diego Innovation Report, released Thursday by local start-up accelerator Connect, found that 477 start-ups came to life in San Diego County last year, up from 405 a year earlier.

Software companies led the way with 280 new firms. Biotechnology followed with 95 start-ups, and 63 new computer/electronics firms launched. 

Aerospace/marine technology, recreation/sports equipment and environmental technology rounded out the top five.

“We are lot bigger software town than people realize,” said Greg McKee, chief executive of Connect. “And we have a lot of diversity with clean tech and blue tech, sports equipment, drones, cyber. The diversity here is not well known.”

An example of the variety of technologies sprouting locally is Fabric8Labs. Founded in 2015, the start-up has developed 3D printing technology that produces metal parts at dramatically lower costs.

Jeff Herman, co-founder and chief executive of Fabric8Labs, said the upside of 3D printing with metal is it enables very intricate designs that are delivered faster than traditional manufacturing. The downside is its expensive – requiring lasers, vacuum chambers and metal powders, which are heated to make parts.

Fabric8Labs’ patent-pending technology doesn’t rely on heat to manipulate metals. It uses a non-thermal electroplating process, which improves surface finish on a part at lower costs.

In February, the company raised an undisclosed amount from Asimov Ventures, an early stage 3D printing and robotics investor. Fabric8Labs is refining its technology at EvoNexus, a San Diego start-up incubator.

“San Diego is a city of talented people and groundbreaking companies who are creating jobs and attracting new investment to the regions,” said Mayor Kevin Faulconer in a statement. “The numbers make it clear that San Diego’s innovation sector is stronger than ever and will continue to be a vital part of our economy.”

According to the report, 118 San Diego County start-ups raised $1.5 billion in venture capital last year – up from 104 firms that raised $1.2 billion a year earlier.

Angel investors also were more active, kicking in $134 million to get start-ups off the ground compared with $74 million in 2015.

But government funding flowing into the region for fundamental research fell last year. National Institutes of Health grants declined 1 percent to $925 million. National Science Foundation awards plunged 17 percent to $234 million.

The region’s universities and research centers such as the Salk Institute for Biological Studies rely on this funding to develop new drugs and technologies. The Trump administration has proposed further cuts in research funding.

“It’s an acute problem for us,” said McKee.

Statewide, San Diego ranked fourth in number of new companies created, trailing Los Angeles, Santa Clara and San Francisco.

The region ranked second in California for patent applications and patents granted statewide, behind Santa Clara County.

New tech firm creation in San Diego County has topped 400 for four straight years, said McKee. Local start-ups created 1,729 jobs in 2016 – up 5 percent from the prior year.

“This year we did an analysis looking at Northern California versus Southern California,” said McKee. “If you include LA, San Diego and all of Southern California, we are on par with the Bay Area — at least in terms of the number of start-ups.”

New tech start-ups in Northern California – Santa Clara, San Francisco, Alameda and other counties – reached 2,550 last year. The top Southern California counties launched 2,504 new firms.

“That is something we should be proud of,” said McKee.

But the Bay Area overpowers Southern California in the amount of venture capital feed into start-ups each year – with $27 billion invested in young Northern California firms in 2016 compared with $6.3 billion in Southern California start-ups, according to data from the PricewaterhouseCoopers/CB Insights MoneyTree survey.

Raising money is always a sore subject for San Diego start-ups. Not only does San Diego/Southern California have fewer venture capital firms based here, the region lacks the billion dollar, home run exits that get venture capitalists’ attention.

That’s particularly true in the software sector.

“The last (software firm) that really scaled to become a significant company was ServiceNow,” said Rory Moore, chief executive of EvoNexus. “They grew and then moved to Santa Clara, though they still employ hundreds of people here.”

Other highlights in the Innovation report:

  • $154 million was raised by the three San Diego companies that went public last year – wireless antenna maker Airgain, cannabis facility owner Innovative Industrial Properties and biotech Obalon Therapeutics.
  • 6,794 patent applications from local companies were filed last year, and 6,252 patents were granted. That ranks second statewide, behind Santa Clara County.
  • In 2016, San Diego’s tech economy included 6,630 companies that directly employed more than 150,000 people. That’s up from 135,500 in 2015.
  • The average tech job paid an annual salary of $110,700 in 2016 — 2.1 times the overall average annual salary of $51,500.
  • But in 2015, the average innovation economy job paid $116,300, according to the Innovation Report.