Venture Money’s Going South -- to San Diego

During the tech boom, venture capital poured into Los Angeles, spawning glitzy start-ups such as Pop.com, Go.com and Soundbreak.com.

All had snazzy names and high-profile backers.

And nearly all are dead.

Now much of the action is to the south. As the technology sector slowly recovers, San Diego County is emerging as the hot place for start-up companies in Southern California.

San Diego County start-ups got more than 60% of the technology venture capital spending in Los Angeles, Orange and San Diego counties last year, according to the MoneyTree survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Assn.

Back in 2000, more than half of the money went to companies in Los Angeles County.

And though venture capital spending on technology in Southern California overall is well short of the $8.2 billion recorded in 2000, it has bounced back far more quickly in San Diego than in Los Angeles.

“Sometimes there is advantage in being smaller,” said Chris Woolley, president of the San Diego Venture Group, an investors’ trade association. “When you have a smaller business community, it can be more focused, easier to change with the times.”

In 2004, the MoneyTree survey found, 99 San Diego tech companies attracted nearly $1.2 billion in venture capital from 245 investment firms.

The start-ups include Quorum Systems Inc., Ceyx Technologies Inc. and Zyray Wireless Inc. They may have geeky names, but these days, solid results -- not just ideas, celebrity associates and hip monikers -- are needed to get funding.

A big reason for San Diego’s robust recovery is that its leading tech industry -- wireless communications -- is hot right now.

But there are many other factors, including a university that has climbed quickly in stature and played an active role in helping faculty, students and even outsiders start local, tech-oriented ventures.

The area also offers a close-knit entrepreneurial community, a relaxed suburban lifestyle conducive to attracting skilled workers and a healthy mix of biotech and information technology ventures.

The boom can be traced largely to a thought that struck former UC San Diego professor Irwin Jacobs as he was driving home from a meeting in Los Angeles in 1985. Jacobs had just co-founded Qualcomm Inc., a company that was working on a digital transmission technology called code division multiple access.

“I suddenly realized that the use of CDMA in a telephone could be promising,” Jacobs said.

CDMA is now one of the most prominent cellphone technologies. Last year Qualcomm’s sales of wireless chips and other technology totaled $4.9 billion.

Jacobs, who was a professor of computer science and engineering at UCSD from 1966 to 1972, remembered his former employer when he got rich. He and his wife have donated nearly $25 million to the engineering school, which is now named for them, and have earmarked an additional $100 million for the school after they die.

The grants weren’t entirely altruistic, Jacobs said; they also were in the best interest of his industry. “I attended MIT as a graduate student,” Jacobs said, “so I knew the payoff of a strong engineering school in that it could attract the best people to an area.”

The Massachusetts Institute of Technology helped Boston become a hub for high-tech businesses. Likewise, Stanford University, in Palo Alto, helped spark the growth of the most famous tech center, Silicon Valley.

UCSD is relatively young in that it was founded in 1960, but faculty and alumni have spun off nearly 200 firms that have stayed local, according to the university.

The school seeks incubator funding for faculty projects, teaches entrepreneurial skills and provides a clearinghouse to help sort through intellectual property issues.

The university also sponsors entrepreneurial programs for outsiders. They were among the main reasons Carol Fuller, chief executive of Ceyx -- which is developing a control system that enhances and extends the life of liquid crystal display panels for televisions and other devices -- found a home for the business in San Diego. She was living in Colorado Springs when the company was getting off the ground in 2001 but couldn’t find the resources she needed.

“I was accepted into a program where you learn how to put together a presentation for investors and then you actually do it,” Fuller said. Her proposal didn’t get picked by the investors visiting the class, but she made a lot of connections and took heed of the feedback.

Ceyx, with 10 employees, has since attracted $4.5 million in venture funding.

Little of that money has been spent on appearances. A recent visit found cramped offices filled with mismatched furniture mostly bought at auction or hauled from workers’ homes. In the company’s tiny lab, researcher Alicia Sanchez was using a battered computer powered by an outdated Pentium II processor.

“I got it out of my neighbor’s trash can,” Sanchez said sheepishly.

The company has since moved to larger quarters, taking its used furniture along.

Many start-ups ended up in San Diego because of its identification with wireless communications technology.

Quorum, for example, is developing a semiconductor chip that can be used in cellphones to handle voice and data transmissions simultaneously. In the three years since its founding, it has grown to 30 employees and has attracted about $10.3 million in venture capital funding.

Several of its employees came out of UCSD, where there is a group of faculty members and students who specialize in the development of radio frequency integrated circuits, or RFICs, used in cellphones.

“There are maybe 1,000 designers in the world of RFIC chips,” said Bernard Xavier, Quorum’s CEO. “And I’d say that 40% of them are in the San Diego area.”

Quorum is situated in a granite-and-glass building in an office park that is quite upscale compared with the Ceyx digs. But on a recent visit there was no art on the yellow walls of the office suite, and the furniture, though of better quality, was also recycled from failed companies.

“Everyone works 80 to 100 hours a week,” said Lon Christensen, chief technical officer. “The motivation is stock options.”

If the wireless sector plunges in a way that killed numerous Los Angeles-area tech start-ups when the Internet content business went soft, it would undoubtedly be a serious blow to San Diego. But the city has weathered past downturns because of its mix of biotech and information technology companies.

“They’re both cyclical, but not on the same cycle,” the San Diego Venture Group’s Woolley said.

As much as things seem to be coming together for San Diego’s high-tech community, it still lives in the shadow of Silicon Valley, which is recognized worldwide as the epicenter of digital life.

That’s fine with Jordan Greenhall, co-founder of DivXNetworks Inc., a San Diego company that has raised about $20 million since it was founded in 2000.

“The big advantage of San Diego over the Silicon Valley is attitude,” said Greenhall, whose company sells a video compression technology. “Up there it’s a mercenary culture where everyone you hire is always looking out for the next opportunity, the next batch of options.

“Down here, people actually get passionate about a product. It’s not surprising that this is a lot better place to start a company.”