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Tattered economy chills venture capital
With a few sectors excepted, Minnesota reflected a national trend during the fourth quarter of investors putting their money elsewhere.
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For more analysis of venture capital data, go to Thomas Lee's Patent Pending blog at www.startribune.com/blogs/pending.
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The winter months have not been kind to Minnesota companies seeking venture capital in recent years.
Ten local firms shared $60 million in venture financing in the first quarter of 2008, good for 17th place in the country, according to the MoneyTree Survey by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.
By comparison, Minnesota firms raised $62.9 million (17th place) in the first quarter last year, down from $83 million (12th place) during the same period in 2006.
"It's one of our less-strong quarters," said Jay Hare, a partner at accounting firm PricewaterhouseCoopers' technology industry group in Minneapolis. "Starting with the national scene, the off quarter is not just seasonality."
Nationally, venture capitalists invested $7.1 billion in the first quarter, down 7.6 percent from the fourth quarter and 5.6 percent from the same period a year ago. The average deal size in the recent quarter totaled $7.7 million, up slightly from the fourth quarter ($7.5 million) but down significantly from the first quarter in 2007 ($8.8 million).
Experts say the nation's economic woes may be forcing investors to keep funding later-stage companies that in more prosperous times would have been acquired or raised capital through an initial public offering (IPO).
"We do not expect significant declines in investment levels in the coming year," said Mark Heesen, president of the National Venture Capital Association. "However, the dollars going to later-stage investments could increase if the IPO window remains closed for an extended period of time and venture capitalists have to sustain companies longer than expected."
In Minnesota, four medical device firms captured nearly 60 percent of the state's venture money in the quarter. Two software companies grabbed 28.4 percent of the pot. Rain Source Capital Inc., a St. Paul-based network of angel investors, helped provide more than $6 million to four companies.
Perhaps more important, five companies received venture capital for the first time, a positive trend for a state where firms have traditionally struggled to attract early rounds of financing.
One of those companies, Plymouth-based Carol.com, an online marketplace for health care, received $10 million from Lemhi Ventures, a fund dedicated to health care start-ups founded by former Definity Health executive Tony Miller.
However, James Thomas, founder and partner of Thomas, McNerney Partners, said the slowing economy is curtailing venture investment. The Minneapolis-based firm invests in health care companies.
"It could be a lot of noise in the system but total activity is really down," Thomas told reporters in a conference call.
Venture firms are still managing investments from previous years that have not been able to go public or find a buyer, he said. Plus, an uncertain political and regulatory environment has driven up the costs for life sciences companies, especially biotechnology.
In response, Thomas said his firm has pushed its portfolio companies to concentrate on one or two "best projects," conduct limited trials, and "do more focused [product] rollouts to show commercial viability rather national rollouts," he said.
Still, "you can't get rich saving money," Thomas said. "You have to keep moving forward."
Thomas Lee • 612-673-7744
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