Survey finds national outlook is brighter, but long timelines to an exit strategy may hold back med-tech investments.
A majority of U.S. venture capitalists are talking more optimistically about 2011, a sign of hope for companies that struggled to raise funds during the recession.
"In the past year, we have moved beyond the financial crisis and returned to doing what we do best -- building great companies," said Mark Heesen, president of the National Venture Capital Association. "While the venture industry will continue to evolve, and likely contract, the companies we fund will continue to grow, innovate and drive the U.S. economy."
Indeed, some Minnesota venture capital firms said they hope to invest beyond their existing portfolios in 2011, as the climate for mergers and acquisitions has improved.
One national survey involving more than 330 venture capitalists reaffirmed a growing enthusiasm for investment. But the survey, released Dec. 21 by the National Venture Capital Association and Dow Jones VentureSource, didn't produce a clear consensus on the level of investment in medical device companies, where Minnesota gets the bulk of its venture capital.
"I think the capital markets are certainly improving," said Pete McNerney, a partner at Thomas, McNerney & Partners in Minneapolis. "The caution and concern surrounds extending timelines to get these companies to the point where there are exit opportunities, and it's driven largely by a more cautious FDA. The financing system is changing and that has yet to shake out."
Meanwhile, San Francisco-based Burrill & Co., which has financially supported Minnesota companies, said it plans to double its investment in bioenergy and biofuels in 2011, due to capital from newer funds. Those areas will represent 25 to 35 percent of the firm's investments.
The top three areas of growth identified by the survey were consumer Internet and digital media, cloud computing, and health care information technology. Many of these companies can be spun out for much less venture capital than a medical device or pharmaceutical company.
StarTec Investments, a local private venture capital fund, invested in two companies in 2010: field service technician provider Field Solutions and Magnet 360, which provides a network of marketing agencies to clients. Investments made by StarTec are generally $100,000 to $500,000 per company. President Joy Lindsay said she expects to invest in the same number of companies in 2011, although it's possible her firm could invest in more.
"We're optimistic," Lindsay said. "The technology space is a good place to be."
But it is unclear whether the nation's venture capital dollars will trickle back to Minnesota. The state is on track to reach its lowest annual amount in 15 years of record keeping in 2010, according to PricewaterhouseCoopers. Part of the issue is the majority of the state's venture capital investments goes into medical devices and equipment. Venture capitalists are more reluctant to invest in early-stage medical-device companies because the timeline for devices to reach market has become more uncertain.
There is also the issue of whether venture capital firms can raise enough money to start new funds. Venture capitalists surveyed nationwide said they believe limited partners have an advantage in fundraising negotiations.
"They have a limited amount of capital and a lot more [firms] competing for it," said G. Steven Burrill, CEO of Burrill & Co.
Burrill told the Star Tribune in 2009 that he planned to raise a $1 billion fund to help bring biotech companies to Pine Island's Elk Run biobusiness park. He's still working on closing the deal with a sovereign wealth fund.
"We're making reasonably good progress on it," Burrill said Friday. "We're in very serious dialogue with a single investor. We thought it would be done at year's end."
Wendy Lee • 612-673-1712