Continued: Venture capital: Seed money

Tom Ressemann admittedly took a more indirect route to starting Entellus Medical Inc., a Maple Grove start-up that developed a device to treat sinus infections.

Instead of pitching a product to venture capitalists, Ressemann, a former Boston Scientific executive, first asked the VCs which markets to pursue and then developed the technology to suit his investors' interests.

"We looked at areas where they wanted to put their money," Ressemann said. "Was there an opportunity for an idea?"

Ressemann's strategy was ultimately successful: Split Rock Partners of Eden Prairie and SV Life Sciences Advisers of Boston recently invested $4.5 million in Entellus.

Recent data indicate that early-stage start-ups are once again attracting venture capital. But that renewed interest may not necessarily translate into new local medical device companies, experts say. Entellus' story suggests that VCs are as picky as ever and that people -- not ideas or technology -- carry more weight with investors.

"There's still plenty of interest in start-ups," Ressemann said. "But the VC model has been to invest in people ... VCs want the [management] pieces in place a little bit earlier."

Until recently, venture capitalists had favored later-stage companies over start-ups, in part because they were still trying to exit investments they made before the Internet bubble collapse of 2001, said Jay Hare, a partner at accounting firm PricewaterhouseCoopers' technology industry group in Minneapolis.

"VCs didn't have enough time and bandwidth to take on new companies," Hare said.

But thanks to a booming mergers-and-acquisitions market and healthy demand for new stock offerings, venture capitalists have worked through their backlogs and can now focus on early stage start-ups, he said. Last year, VCs invested in 1,267 first-time deals, a 52 percent increase over 2002, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

Med-tech investments

The medical device industry, in particular, enjoyed strong VC interest. Nationally, medical device firms raised $3.9 billion in 2007, a 40 percent gain from the previous year. In the fourth quarter, nearly half of the $140 million that VCs invested in Minnesota went to nine medical device firms, including four companies that received start-up and seed funding.

"I don't think [the medical device] market will ever go bad," said Eric Timko, chief executive of NeuroVasx Inc., a Maple Grove-based start-up that develops technologies to treat stroke victims. "You can't go wrong with it. [Investors] know people will pay money for good health care."

NeuroVasx raised $8.5 million in a private stock offering to Miller Johnson Steichen Kinnard and the Stephens Group.

But investor enthusiasm for medical devices has not resulted in more money or start-ups for Minnesota. Local firms last year captured 6.0 percent of national medical device money, down from 6.9 percent in 2006. The state's five-year average is 6.2 percent.

Those numbers suggest that despite heightened interest in medical devices, Minnesota's share of the national pool of VC money in medical devices has remained mostly flat over the past five years. Venture money tends to chase the best deals, and perhaps investors are not finding enough good deals in Minnesota, Hare said.

Investing in medical devices is inherently risky because before the products can reach market, the Food and Drug Administration (FDA) must approve the technology and only after lengthy and expensive clinical trials. And even after approvals are secured, the companies must persuade insurance companies and Medicare to cover their products.

That's why VCs tend to work with seasoned entrepreneurs with marketing, product development and management experience with major medical device firms rather than with the guy who tinkered with a device in his garage, said Mike Selzer, who recently launched Plymouth-based ConcepTx Medical Inc.

"Venture folks are looking for people they know can execute," Selzer said. "I don't see much money for someone with [just] a good idea. That's no-man's-land right now."

That's why ConcepTx exists. The company, which recently raised $4 million from Versant Ventures, based in Menlo Park, Calif., and Advanced Technology Ventures, based in Palo Alto, Calif., pitched not a product or technology but rather the experience of Selzer, Mike Berman and Dale Spencer, three well-regarded medical device executives and entrepreneurs. The three men will seek promising new medical technology and plan to spin off two or three companies during the next 18 months.

"We would be interested in working with the creative entrepreneur," Selzer said.

Josh Baltzell, a director with Split Rock Partners, said Minnesota's entrepreneur community tends to be more deliberate. The Eden Prairie-based venture capital firm invests mostly in early-stage companies.

"In the [San Francisco] Bay area, the culture of innovation and start-ups is alive and well and self-sustaining," said Baltzell, who is based in Menlo Park. "We see a lot of people start companies. It happens more spontaneously on the coast.

"In Minnesota, we see large concentrations of large medical firms," he said. "We see relatively few start-ups. Minnesota requires more of a collaborative approach between doctors, entrepreneurs, managers. It takes more time" to launch a company.

Thomas Lee • 612-673-7744