Investment in San Diego County startups slowed in the first quarter of the year with fundings falling 46% compared to a year ago.
Venture capitalists invested about $993 million in the first three months of the year ending March 31, according to a report by PitchBook, an industry research firm, and the National Venture Capital Association. That level, though, is still about 15% more than the first quarter of the boom year 2020.
San Diego County’s first quarter follows a strong year for investments in 2024. Last year, $5.2 billion was raised. That’s about a 40% increase versus 2023. Prior to that, capital investment fell 20% in 2023 and almost 60% in 2022 versus 2021, which was a record year since PitchBook began tracking the data in 2015.
“The reality of a VC market rebound has likely faded as the effects of new tariffs and policy shifts take hold,” said Nizar Tarhuni, executive vice president of research and market intelligence at PitchBook. “These impacts amplify economic uncertainty and could further disrupt the private markets by complicating investment decisions, supply chains, exit windows and portfolio strategies. While this may eventually lead to new domestic investment and create opportunities, the overall environment is facing volatility, hesitation and structural change.”
The county saw 65 venture capital deals inked, compared to 70 in the same quarter last year.
“Seeing 65 deals get done in a tough market indicates that the pipeline is healthy,” said Mike Krenn, who manages the newly launched $50 million Prebys Ventures Impact Fund that targets San Diego-based companies in high-growth sectors such as tech and life sciences.
However, Krenn said the reduction in science grants could negatively impact the life sciences industry for years. The local startup scene is often tied to the University of California San Diego.
The top local deal in the quarter was a $240 million Series F investment for San Diego-based Shield AI, which develops a software called Hivemind that powers artificial intelligence pilots for military aircraft. The latest investment will help Shield AI, which was founded in 2015, hire specialized talent, such as engineers, to help scale Hivemind.
Bobby Franklin, president and CEO of the National Venture Capital Association, pointed out that AI investments dominated 71% of total deal value in the first quarter. San Francisco-based OpenAI received a $40 billion investment, which alone represented almost half of the total $91.5 billion in national deal value for the first quarter.
“The market remains bifurcated, leaving many companies struggling for capital,” Franklin said.
Furthermore, the IPO scene across the nation continues to remain soft. Only 12 companies completed public listings during the first quarter of this year, according to PitchBook. One of them is a local firm founded in 2017. San Diego-based Aardvark Therapeutics is a clinical-stage biopharmaceutical company developing small-molecule therapies designed to alleviate hunger and treat metabolic diseases. It expected gross proceeds of about $94.2 million with its opening stock priced at $16 per share. Its exit size at the time was $248 million, according to PitchBook.
Two other local exits cited by PitchBook include acquisitions involving San Diego-based Gretel and Vista-based Qubitekk.
Gretel, founded in 2019 by data scientists with links to Amazon Web Services, RedHat and Netscout, builds software algorithms that deploy machine learning to categorize and label customer data. It then applies techniques to anonymize that data — stripping out things like names, addresses and other specific identifiers — so it is no longer linked to real customers.
Gretel was purchased this past March for an undisclosed amount by Nvidia, a publicly traded AI company that recently reported fiscal first-quarter revenue of $44 billion. PitchBook reported Gretel’s exit size at the time of the sale at $320 million.
In the first quarter, Gretel and Aardvark were listed as the sixth and seventh largest exit deals, respectively, in California.
IonQ, a publicly traded quantum computing and networking firm, reported in January that it completed the acquisition of substantially all of the assets of Qubitekk, a quantum networking company founded in 2013, for an undisclosed sum. IonQ highlighted that its quantum networking hardware and security patent portfolio expanded to more than 600 issued and pending patents with Qubitekk’s 118 U.S. and international patents. PitchBook reported Qubitekk’s exit size at $22 million.
Going forward, what do experts expect to see for second-quarter local funding?
“It’s already tough,” Krenn said. “Investment dollars are harder to come by across all verticals. That is a national reality, not just regional. I think it’s going to be that way for a while. But given San Diego’s past performance, I continue to believe San Diego will continue to outperform and attract its share of capital across the tech and life-sciences markets.”
Hang Nguyen is a freelance writer for the U-T.