Wednesday, March 18, 2009 | The nationwide recession is manifesting itself in key measurements of San Diego’s technology industry from 2008, which showed much slower growth for the crucial sector of the region’s economy. In one category — venture capital investment — the local decline compared to previous years was significantly larger than those at both the state and national levels.

The fourth quarter of 2008 witnessed 73 tech start-ups in San Diego, less than half the number formed in the fourth quarter of 2007, according to a report by Connect, a local technology industry association. For the year, the number of start-ups decreased by 63, or 17 percent, from 2007.

The number of federal research grants dropped by 46 percent from the third to the fourth quarters in 2008, and the average amount awarded per quarter was down slightly from 2007, according to the Connect report. A bright spot was the number of patent applications, up by 530 region-wide in 2008. But the number of patents granted was down by 11 percent.

“Troubling” was the word University of San Diego economist Alan Gin used to describe the economy that the numbers showed. “With start-ups down, venture capital down and grants down, that does not bode well.”

Over the past two decades the tech industry has become a pillar of the local economy. And the region will need the jobs and investment of a strong tech sector if it is to pull out of the current recession.

Gin and other experts are bothered most by recent data showing a precipitous drop in venture capital investment.

Venture investment into San Diego metro area companies declined by 57 percent from fourth quarter 2007 to fourth quarter 2008, according to Dow Jones VentureSource. And the yearly total of venture funding locally dropped from $1.91 billion in 2007 to $1.44 billion (or 40 percent) in 2008.

Meanwhile, the year-over-year decrease in venture funding statewide was just 1 percent, and nationally it was 8 percent. San Diego’s numbers are worse, say experts, because venture capitalists lost almost all interest in biotechnology companies, which dominate the local tech economy.

“It just dried up,” said Adam Wade, a communications manager for Dow Jones, of investment in biotech. “The last six months of the year was really quiet for San Diego in that area.”

The standard reason given for the waning interest is that initial public stock offerings are no longer happening, and IPOs have traditionally been the way venture firms can cash in their initial investments in a biotech start-up.

“There is no exit,” said Connect CEO Duane Roth, who has said that the days of venture capitalists being able to turn a relatively quick buck by taking a company public are over. “Now you have to take this baby all the way until it reaches profitability, or is acquired. That is a different calculation.”

And one that very few seemed willing to make in 2008. The number of venture financings in San Diego went from 16 in the fourth quarter of 2007 to five in the fourth quarter of 2008, according to the Dow Jones data.

However, Roth said, the harsh realities of the IPO market do not mean that funding innovation is dead in San Diego — it is just being reinvented. He says a new paradigm that spreads the risk of a start-up among more players is already taking shape. “I think the next quarter is going to be better,” Roth said.

Others say venture capitalists will be interested again in biotech start-ups once the financial crisis passes, especially since large pharmaceutical companies are likely to increase their acquisitions of biotech in the coming years to restock their shrinking pipelines of drugs.

Kim Kamdar, of the venture firm Domain Associates, is in that camp. She said that between 2010 and 2013, big pharma companies will lose their patents on drugs with revenues totaling $170 billion. She also said the investment totals in 2008 represent to some degree a “return to normalcy” after things got a “little out of line” in 2006 and 2007.

“There were a lot of dollars chasing few opportunities in 2007,” she said.

As far as the rest of the tech economy, there is a sense that San Diego will hold up better than other regions. The local industry is diverse and strong in research and development, which bode well for the coming year, say both boosters and economists.

Many, for example, are confident that the region will do well in the sweepstakes for a share of the $10-billion boost that President Obama’s stimulus package gave to the National Institutes of Health.

“These are tough times in the regional technology community,” said Kevin Carroll, the executive director of TechAmerica. “But I would much rather be in San Diego weathering this storm out than just about anywhere else in the United States.”

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