SAN DIEGO--- CONNECT Innovation Quarterly Report Reveals Spike in San Diego Federal Research Funding, Venture Capital Funding Do

CONNECT, San Diego’s technology and life sciences accelerator, today released its third quarter CONNECT Innovation Quarterly Report (CIQR). The report, developed in partnership with the San Diego Institute for Policy Research, UCSD Extension, PricewaterhouseCoopers, and Procopio, tracks and measures the state of San Diego’s and the state’s innovation economy. The data reports federal research funding to San Diego region has sharply increased, start-ups remained stable and venture capital funding has taken a fall from Q3 2007 to Q4 2008.

Third quarter data indicate that despite the financial turmoil that descended upon the nation’s credit markets at the end of the quarter, new technology company creation in San Diego has maintained the pace established in previous quarters. Biotechnology accounted for the largest portion of new businesses, with 30 new companies created, followed by new software, with 25 new companies created.

“Despite the financial turmoil, San Diego has, so far, been able to maintain the pace of innovation.”

Grant Funding Awards Dramatically Up and Patent Applications Downs

Grants awarded to San Diego companies and research institutions saw a sharp increase in the third quarter of 2008. The National Institutes of Health granted $192 million in Q3 of 2007 and $244 million in Q3 of 2008, an increase of 27 percent. Similarly, the National Science Foundation increased its grant funding to the region from $44 million in Q3 2007 to $82 million in 2008, an increase of 86 percent.

The third quarter of 2008 saw 1388 patent applications, an insignificant 4 percent decrease from the 1346 applications in the third quarter of 2007. Patents granted dropped from 745 in Q3 2007 to 629 this quarter.

Patent applications and patents granted are a valuable indicator of the vitality of the San Diego knowledge economy because they are concrete evidence of the number of new ideas and novel innovation created in the San Diego region. Grant funding is an indicator of the amount of high quality research in the region qualifying for government agency funding.

Although third quarter numbers give San Diego reason for hope, the fourth quarter may indicate that a downturn has begun. The meltdown of the financial services industry occurred at the end of the third quarter. Since that time lending conditions have radically changed. Large banks for the most part are not lending at all and the majority of regional and local institutions have significantly tightened credit requirements to such a degree that most borrowers cannot qualify. Especially for small businesses like startups, it is all but impossible to receive financing. This impact may become more evident in the fourth quarter and beyond.

Yet often, downsizing and corporate “circling of the wagons” spurs even more innovation. Kelly Cunningham, Economist & Senior Fellow at the San Diego Institute for Policy Research commented, “Despite these challenging times, new business creation may actually gain momentum in months ahead as more workers become unemployed. Established firms tend to cut back on their own growth investments during a downturn and abandon promising growth opportunities too fast, focusing instead on defending their own established core activities. As technically and talented workers lose their jobs and cannot find other employment, they may be compelled to start working for themselves and start their own business. The list of significant technology companies established in difficult economic downturns is quite impressive, including Microsoft, Hewlett-Packard, Oracle and Cisco. It will be no surprise if some of the talented workers unable to find work with established technology companies direct their energies toward creating a new generation of successful start-ups.”

Venture Capital Investment Down

During the third quarter of 2008, 22 local companies received a total of $178 million in venture capital. This was a decrease of $196 million, or 52 percent, from the second quarter, when $374 million was invested in 38 companies, according to the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report released in October 2008. The third quarter of 2008 results compared to the third quarter of 2007 results showed a similar trend as $7.8 billion was invested in 983 companies in 2007.

The Industrial/Energy sector received the largest chunk of investment during the third quarter with $58 million, or 32 percent of the total funds invested, reflecting a strengthening focus on clean and green technologies. This compares to $70 million, or 19 percent, of the total funds invested in the prior quarter.

“The increase in local Cleantech investment is consistent with investment trends on a national level. It indicates that San Diego companies are well-poised to be national players in this important sector,” said Christopher Stephens, Senior Manager at PricewaterhouseCoopers.

Investment in other sectors included $26 million in the Life Sciences sector (Biotech, Medical Devices, and Healthcare Services) and $30 million in both Electronics/Instruments and Semiconductors.

“San Diego companies are well-poised to be national players in Cleantech.”

The CONNECT Innovation Quarterly Report (CIQR) measures new business creation in the life science and technology-based sectors both statewide and in the San Diego region. Results provide a valuable indicator of the economic strength and impact of the knowledge economy in San Diego and across the state for business leaders, policy makers, and researchers. The full report, including all data, is available at http://www.connect.org/programs/connect-track/.

About CONNECT

CONNECT is a non-profit organization dedicated to creating and sustaining the growth of innovative technology and life science businesses in San Diego. Each year CONNECT delivers more than 300 programs and services that benefit more than 2,000 CEOs and companies. CONNECT is widely regarded as the nation’s most successful regional program linking inventors and entrepreneurs with the resources they need for success. Its programs include: Springboard, Venture Round Table, Frontiers in Science and Technology, FrameWorks, CEO Strategy Forum and Connect with CONNECT; new industry cluster development; affiliate programs with The Center for Commercialization of Advanced Technology (CCAT), Tech Coast Angels (TCA), and MIT Enterprise Forum (MITEF); and its awards and recognition programs, Hall of Fame, and The Most Innovative Products (MIP) Awards.