How Many San Diego Startups Have Legs?

SAN DIEGO—Most startups fail to become long-term viable companies, but the Kaufmann Index estimates that around half of San Diego startups remained active five years after starting, CBRE's manager of research Michael Combs tells GlobeSt.com. The firm reports that, according to the index, the five metro areas with the highest startup activity were—in this order—the metropolitan areas centered on the cities of Miami, Austin, Los Angeles, San Diego and Las Vegas.

The foundation shares that the Kauffman Index measures entrepreneurial output activity nationwide, such as new companies, business density and growth rates. Three studies, which present a more mature measure of startup activity in metropolitan areas, make up the Kauffman Index: the rate of new entrepreneurs, the opportunity share of new entrepreneurs and the startup density.

According to the index, San Diego climbed seven spots year-over-year and now ranks fourth in the US in startup activity. Notable metropolitan areas San Diego outranked are Las Vegas (fifth), New York/New Jersey (seventh), Phoenix (eighth), Dallas (12th), San Francisco (14th) and Boston (21st). Overall startup activity slightly increased in 2016, but slowed relative to the past three years of aggressive growth.

We spoke with Combs about San Diego's startup companies, how quickly they grow and the real estate progression for these users.

GlobeSt.com: How many of San Diego's startups grow to become viable companies and remain in San Diego? How quickly do they generally grow?

Combs: It is relatively well-known that most startups fail to become long-term viable companies, and many others remain small businesses, but for the small share that take off, the economic impacts are immense.

The Kaufmann Index estimates that around half of San Diego startups remained active five years after starting. The average startup grew from 5.4 to 9.3 employees over five years (73%), which is high growth compared to the overall economy, but demonstrates that the businesses remained mostly small. Only about 1.6% of startups grew to 50 or more employees within a 10-year period. While this number is small, the impact can be large when considering this adds of several hundred medium-to-large-sized firms to the region.

It is important to note that this definition of startup includes new businesses of all kinds, including small retailers, restauranteurs and “mom-and-pops” that represent most new businesses and generally do not scale at a rapid pace. When thinking more specifically about higher-growth, venture-backed tech and life-science startups, the oft-cited figure nationally is that around 75% of these types of companies fail within the first few years, but the survivors tend to grow at a very rapid pace, sometimes as much as 500% in a short period.

GlobeSt.com: What's the real estate progression for users of startup space?

Combs: For tech-related startups, real estate costs start out as a major factor, but as these companies expand, they need to attract and retain more high-level talent, so the cost of space becomes less important to the balance sheet. For instance, a five-person tech startup may have low labor costs at inception, since most of the employees are likely co-founders or working for equity shares in the company, so the main overhead is in their IT and office space. As the company scales, the talent costs become massive, often accounting for 80% to 90% of overhead. A hypothetical 50-person tech company in San Diego will spend per year roughly $250,000 to $350,000 on office space, compared to $4 million to $5 million on salary. Higher-cost space can help these growing companies compete for talent, and it will generally be offset by lower replacement and recruitment costs, as well as better employee productivity.

GlobeSt.com: In which submarkets do they look for space as they're growing?

Combs: It varies quite a bit depending on the stage of the company, their workforce and their industry. Companies in the life sciences often need to be near the Torrey Pines Mesa, as their growth depends on partnerships and licensing agreements with UC San Diego, research institutes or major companies. This makes nearby markets like UTC, Sorrento Mesa and Del Mar Heights attractive submarkets. If they need lab space, these may be the only submarkets in which they can expand. In other technology sectors, Downtown has been gaining traction for small-to-medium-sized companies due to lower asking rates and proximity to talent and nearby amenities. While Downtown has been receiving a lot of attention, it is not always the best fit for every tech tenant. Central submarkets like UTC and Sorrento Mesa offer attractive campus environments with generally better parking, spacious shared amenities and proximity to large peers like Qualcomm, Mitchell and others.