Why San Diego Missed The First Wave Of Tech ‘Unicorns,’ And What’s Changing Now

By Brittany Meiling The San Diego Union-Tribune

WWR Article Summary (tl;dr) As Brittany Meiling reports, "The support for a startup community in San Diego is mirroring local economies all over the globe, as cities attempt to replicate Silicon Valley's success. Startup Week events, for example, are popping up in every major city. But a series of events in San Diego primed the economy for a sudden uptick in startup growth."

The San Diego Union-Tribune

San Diego is a biotech town, a military town, and a tourism town. It's not a software town, is it?

After years of stagnation, San Diego is seeing a barrage of startup activity in the tech scene. In recent months, two tech startups earned billion-dollar valuations, making them the first software "unicorns" spotted locally in decades. Seismic won the title in late December, while TuSimple -- only 4 years old -- reached unicorn status last month.

The news caps months of unusually high venture capital deals in local tech, with at least $320 million funneling into tech startups in less than three months. For context, tech companies only brought in $164 million combined for the first nine months of 2018. Once a ghost town for tech investors, San Diego just became home to two new VC groups: Blueprint Equity and Torrent Ventures.

The region also piqued the interest of larger investor groups like PeakSpan Capital, which just closed a $265 million fund and has recently invested in six San Diego companies.

The bubbling activity is bewildering to some in the business community, who long ago acclimated to the idea that San Diego is a place where science rules supreme, while software tends to flounder. And it's true the biotech industry still rakes in the lion's share of venture money. But San Diego's tech scene is not what it used to be, and new players are coalescing into a hub with considerable speed. ------ What is a tech 'unicorn'? A privately held startup valued at over $1 billion. Once as rare as a unicorn, sightings are increasingly common. There over 300 unicorns worldwide, roughly half of which are based in the US. ------ Why did San Diego miss the last train of tech unicorns There's no denying that this traction is new. When internet-age software took off in Silicon Valley, San Diego wasn't even trying to catch the train. Fast-moving startups like Uber and Airbnb built empires by merely taking existing businesses -- taxis and hospitality, for example -- and tailoring them for the smartphone age.

Leveraging the explosion of mobile phones and cheap cloud computing, they ballooned from babies to giants in record time. And so a wave of tech startups followed suit, picking off low-hanging fruit by bringing the world's old businesses online. Square tackled point-of-sale systems, Lending Club took banking, and so on.

In this wave of tech, San Diego largely didn't come out to play. Eric Otterson, who's been entrenched in local tech for the past two decades as managing director of Silicon Valley Bank, said the city's culture at the time was likely to blame.

After the dot-com bust left technologists disillusioned, San Diego suffered an additional blow in the early 2000s -- the implosion of Peregrine Systems, one of the city's most successful software companies at the time.

Massive fraud charges crumbled the enterprise, and 1,400 people lost their jobs. Experienced engineers and upper management either ended up in Silicon Valley or at companies like Qualcomm and WebSense, where low-risk culture is king.

"These are companies whose product lead time and criticality required six-sigma processes (no room for errors) and very low-risk cultures," said Otterson, managing director of Silicon Valley Bank. "This was unlike the prevailing high-risk behavior in software companies up north, where the idea was to get the product out, then ask for forgiveness and upload a patch later."

Low-risk culture extends beyond San Diego's tech giants, though. The city's most established industries -- life science and defense -- are anything but fast moving. If Facebook's strategy is "move fast and break things," San Diego's is something like: "slow down, buddy ... and don't break anything."

San Diego's tech culture remained sluggish for a decade after Peregrine's collapse, until the rise of ServiceNow. That company was one of the first to the software-as-a-service trend, and they grew fast as a result. But after raising more than $80 million in growth capital, the startup decided to relocate its headquarters to Silicon Valley.

The departure of ServiceNow's executive team became a sore point among local tech entrepreneurs, who pointed to it as an illustration of San Diego's failure to support a unicorn's growth.

"When successful software companies died or moved, it was a big blow because there weren't a lot of others to take their place," said Doug Winter, CEO of Seismic.

Today, ServiceNow is a public company with a $43 billion valuation. For context, San Diego's lauded tech giant Qualcomm is valued at $64 billion. Such successes are rare, and San Diego missed an opportunity to have a software anchor at home.

What changed in San Diego? Over the past five years, however, the tech scene started to percolate. A group of ragtag software founders -- many of whom were in their 20s and 30s -- started a volunteer-led organization called Startup San Diego to try and rally a community around tech. Their first annual gathering only attracted a couple hundred people in 2012. Last year, however, they'd grown San Diego Startup Week to over 4,400 attendees.

Combine that with waves made by Mike Krenn, the popular president of San Diego Venture Group, since he took the job in 2014. As one of only two employees at the nonprofit, Krenn has launched multiple loud marketing campaigns to boost the technology brand of San Diego. He opened an office in the heart of San Francisco's business district and offered it up as a beachhead for San Diego entrepreneurs pitching VCs in the valley. The effort was backed by the City of San Diego with a $20,000 check.

And in 2016, Krenn launched a campaign to steal talented engineers from Silicon Valley, which included a digital billboard on one of the Bay Area's busiest (and most gridlocked) freeways. The sign baited technology workers with one-liners like "Today's surf report: San Diego is better." There's no way to measure how effective that campaign was at relocating tech talent to the region. However, the young venture capitalists at Blueprint Equity recently cited Krenn's efforts as influential in their decision to locate a new $50 million tech fund in San Diego.

The support for a startup community in San Diego is mirroring local economies all over the globe, as cities attempt to replicate Silicon Valley's success. Startup Week events, for example, are popping up in every major city. But a series of events in San Diego primed the economy for a sudden uptick in startup growth.

Otterson points to a couple of timely layoffs at major companies like Qualcomm during 2015, which unloaded a pool of talent into the ecosystem.

"A younger workforce started to think the risk of jumping out to do your own thing was comparatively more interesting," Otterson said. And with companies like WebSense and Active Network moving jobs out of the city, there was now a ready workforce of engineers to join them. Out of tech giants like Qualcomm and ServiceNow came the founders of some of San Diego's best-known startups: HouseCall, Netradyne, RockMyWorld, Dreamtsoft, Yembo, and many others.

These local catalysts had impeccable timing, however, and there's no doubt that macroeconomic factors played a huge part in San Diego's technology surge.

How macro forces shaped San Diego's tech scene Layoffs at major tech corporations happened during a period of strong economic recovery. Unemployment is at an all-time low and knowledge workers -- especially those working in technology and engineering -- are in high demand. It's not scary to work for an unpredictable tech startup when job offers are piling up on LinkedIn. If the company goes under, workers can jump to the next opportunity.

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