State's venture capital investment dives to new low

  • Article by: WENDY LEE , Star Tribune
  • Updated: January 20, 2011 - 11:22 PM

Minnesota companies' venture funding fell 48 percent in 2010, the lowest on record.

Venture capital investment in Minnesota companies plummeted 48 percent to $139.5 million in 2010, according to a report that comes out Friday.

It was the lowest annual investment total in 15 years of record keeping, according to the MoneyTree Report from the National Venture Capital Association and PwC, formerly PricewaterhouseCoopers. The report is based on data from Thomson Reuters.

Minnesota's decline in investment contrasted with the national trend. Nationally, venture capital investments were up 19 percent to $21.8 billion, the report said.

Analysts said the Minnesota figures are worrisome.

"It doesn't look so good," said Jay Hare, a partner at PwC. "Unfortunately, as a geography and state, we've pretty much put all our eggs in the medical device basket, and the medical device basket is hurting."

While medical devices generally receive the greatest share of investment in Minnesota, investors across the nation have shown less interest in the sector, in part due to uncertainty about federal regulations.

In the fourth quarter, venture capital investment in medical devices nationally declined 31 percent, according to the report. That drop dramatically impacted Minnesota, where medical device companies received 64 percent of the state's venture capital investment.

"We've kind of become a one-trick pony," Hare said.

To make matters worse, Minnesota has gotten a smaller slice of the venture capital pie. Minnesota ranked 19th on average in quarterly tallies of venture capital investment last year, Hare said. That compared with ninth in 2007.

Some local venture capitalists were more optimistic. Ed Spencer Jr., founder and chairman of venture capital firm Affinity Capital Management, said it's possible that venture capital in the last couple of years may have been higher in Minnesota due to bigger deals landed, and 2010 may not necessarily reflect a downward trend.

"I hate to measure one year of down fundraising in Minnesota and make a judgment that things are not in good shape," Spencer said. "I don't think one year sets a longer-term trend."

Nationwide, it was the first time annual venture investments have risen since 2007. Analysts noted that there were more opportunities than in recent years for venture capital firms to exit later-stage companies, freeing up money for new investments.

"The venture capital community found itself in a better position in the end of 2010," said Mark Heesen, the association's president. "We were clearly in recovery mode with investment levels reflecting the economic reality of our business."

Whether this will translate into a better 2011 for venture capital investments in Minnesota remains to be seen.

"I don't think there's a lot of evidence on the horizon that we're going to break out a second strong suit," Hare said. "How Minnesota does as a state in attracting venture capital is going to be highly dependent on how medical device goes in the next year or two."

Wendy Lee • 612-673-1712

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