business

Leading Minnesota venture capital firms acknowledged Thursday that their industry is in transition to a new level of investment, where there's less money to go around and the criteria for selecting companies is set higher.

"The issue is fairly simple," Pete McNerney, a partner and co-founder of Thomas, McNerney and Partners, said at an annual conference. "There is a capital shortage."

Nationally, venture capitalists invested $4.8 billion in the third quarter, a 31 percent decrease compared with the second quarter, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. The number of deals in the third quarter -- 780 -- decreased 19 percent over the second quarter.

Analysts attributed the decline to a severe drop in funding in the once-hot clean technology sector, which drove the previous quarter's totals.

The medical device and equipment sector saw investment levels of $573 million, a decline of 27 percent nationally. Many investors are fearful of government uncertainty in the medical device sector as the Food and Drug Administration considers changes in regulations. Uncertainty also remains regarding the effect of health care reform on the sector.

The timeline for the regulatory and reimbursement phase are "dramatically longer" than 10 years ago and there's been a shift in the balance between safety and innovation, McNerney said at the Minnesota Venture and Finance Conference in Minneapolis. He acknowledged that "med-tech has been in the dumps a little bit," but he was hopeful that in the future, things would get better.

Minnesota saw six venture capital deals in the quarter totaling $43 million, compared with nine deals totaling $53 million in the second quarter. Five of the deals in the third quarter were in the medical device and health care sectors.

"The trouble in the lack of diversity means we have only one strong sector, although there is some strength in having a focus in med-tech," said Jay Hare, a partner at PricewaterhouseCoopers, who characterized the quarter as "fairly quiet."

One local winner in the medical device sector this past quarter was Cardiac Concepts Inc., a Minnetonka company developing an implantable stimulation device to treat central sleep apnea that raised $27 million. The condition is quite common in heart failure patients, according to CEO Bonnie Labosky.

Labosky said her company was able to raise funds in a difficult funding climate and economy because clinical results from studies testing the device have been good.

"Nothing speaks louder than good data," she said. In addition, the company has met all its financial milestones, and its device could potentially target a very large pool of prospective patients.

Still, venture capital firms said to expect a continuation of less capital available to invest in the market for a while. Part of the problem is the main exit strategy for venture-funded firms by merger or acquisitions, because the market for public stock offerings is still very weak, analysts said. That has caused some firms to use their funds to help companies in their existing portfolios rather than use that money to invest in new businesses.

"The bar is higher than a few years ago," said Michael Gorman, founding managing director of Split Rock Partners. "That doesn't mean the bar isn't set appropriately."

Janet Moore • 612-673-7752 Wendy Lee • 612-673-1712