Minnesota venture-capital deals, dollars dropped in 2012

  • Article by: NEAL ST. ANTHONY , Star Tribune
  • Updated: January 18, 2013 - 12:15 AM

Fourth-quarter funding was particularly weak after a stronger third quarter.

Venture capital investments in emerging companies nationally and in Minnesota declined markedly in 2012, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association being released on Friday.

The dip was more pronounced in Minnesota, where venture capitalists invested $225.6 million in 27 companies in 2012, down 18 percent from the $274 million invested in 47 deals in 2011. Nationally, venture capitalists invested $26.5 billion in 3,698 deals, down 10 percent in dollars from 2011.

"I think it is too early to determine if Minnesota is falling behind the national trends," said Mark Scholtes, a partner with PwC. "For the last four years through 2012, Minnesota has averaged $230.3 million in deal dollars annually. So, depending on the timing of deal flow, another deal would have put 2012 Minnesota at or above the average for the last four years."

Scholtes said he is more concerned that volume of Minnesota deals fell to 27 compared with the average of 35 over four years.

"I think this is a factor to keep an eye on for 2013," he said.

Minnesota, which typically ranks around 15th out of the 50 states in terms of dollars invested, slipped to 25th in the fourth quarter.

Venture capital funding trends vary considerably from quarter to quarter and are influenced by a variety of factors. For example, in the lackluster fourth quarter of 2012 only $19.7 million was raised by eight companies -- among the lowest quarterly fundings in recent years. But the third quarter was the best of the year, with $85.8 million raised.

Dan Carr, CEO of the Collaborative, the 25-year-old forum that brings together financiers and young companies, said: "Quarter-to-quarter developments, although somewhat valuable in watching trends, [make it] difficult to prognosticate based on one quarter's numbers. Also, Minnesota is disproportionately impacted by medical-technology funding and that's been negatively impacted by lack of regulatory certainty and the effects of health care reform.''

Fourth-quarter uncertainties, including the general election and the fiscal-cliff negotiations, also undermined investor confidence.

'It takes time'

Carr added that Minnesota remains well positioned. "Our innovation still draws attention from venture investors. We had 60 companies at our fall conference. It takes time."

Institutional and individual investors also have been slower to part with their money since they were burned during the Great Recession.

Minnesota never has attracted venture capital like California, Massachusetts or New York, but as recently as 2008, investors pumped $478 million into start-ups in the state, double the average of the last few years.

And med-tech has long been the state's leading sector, spawning the likes of Medtronic, St. Jude and AGA Medical.

The National Venture Capital Association and Minnesota medical-venture community have criticized the Food and Drug Administration, arguing that the pullback in funding for medical innovation has been affected by long approval times for new treatments and products, all of which require large amounts of capital. The government, faced with escalating health-care costs through Medicare, looks to approve technology that not only is safe and effective, but more economical.

The two Minnesota deals that drove the buoyant third quarter included Segetis, a Golden Valley company that develops and manufactures plant-based resins used in cleaning solutions and plastics. It raised $25.5 million, for a total of $60 million over several years.

Also, Shoreview-based Torax Medical, which makes pacemakers and artificial organs, attracted $30 million in the third quarter. Minneapolis-based Tactile Systems Technology, which makes medical therapeutics, attracted $10.4 million.

In the first quarter, Code 42 Software, a backup software and data storage firm, brought in $52.5 million of the $70.5 million raised in Minnesota.

Neal St. Anthony • 612-673-7144

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