Schafer: Start-up funding is hard to get, but it exists

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: March 2, 2013 - 7:00 PM

The founders of a closely watched website called TECHdotMN aren’t what you would call verbose editorialists. Yet they managed to communicate plenty in just a single sentence of a recent post.

TECHdotMN’s Jeff Pesek was writing about 2012 investment in technology-oriented start-up companies, reporting that 87 of them in Minnesota last year together raised in excess of $145 million of capital. Then he observed that “there’s less of an ‘innovation contraction’ and more of a vibrant market for start-ups and investors, according to the facts.”

The term “innovation contraction” had come from St. Paul Mayor Chris Coleman’s comments in late 2012 about Accelerate MSP, a nonprofit just getting started that plans to raise foundation and other money to invest in business start-ups.

In other words, relax, Mayor. There is a market for start-up company capital in the region, and it’s working just fine.

The market has momentum, too, as, according to TECHdotMN, the investment activity in 2012 was up from 63 technology ventures raising $126 million in 2011 and 42 companies raising about $60 million in 2010. In the same post TECHdotMN noted the totals for investment are assumed to be at least 25 percent greater than what it reports, because private investors wish to remain private.

In conversations in the past week with investors and entrepreneurs they had a number of reasons for the improving health of the technology start-up financing market, starting with the observation that memories of the financial crisis of 2008 keep receding.

Investors also talk about how many more opportunities exist now than did in 2009 or 2010 for entrepreneurs and investors to meet each other. In fact there was a pretty active calendar last week on TECHdotMN for meetings like Capital Call on Tuesday evening in Minneapolis and the Bootstrappers Breakfast on Thursday morning.

Mark Marlow of Omphalos Venture Partners, an early stage investment group founded in 2010 with its office in Shakopee, is one who credits the Minnesota Angel Tax Credit program with boosting the local appetite for investing. The Minnesota credit is a refundable credit of 25 percent on any dollar invested in a qualifying company, and Marlow suspects that the $12.7 million of 2013 credits will be fully allocated by the end of April. If so, that would suggest an annual pace of investment in excess of $150 million in start-up companies.

“I tell you what, that’s not bad,” Marlow said. “We are a $20 million fund, and we are certainly investing actively.”

He estimates that he and his partners have “looked at between 500 and 600 business models that are just in the Twin Cities area” since opening up in 2010 and have invested in 14.

Odds that long may discourage entrepreneurs, but they should have known that raising capital is a killer assignment, a second and even tougher full-time job. Casey Allen, an entrepreneur and co-founder of the tech accelerator Project Skyway in Minneapolis, said it’s no mystery why. The entrepreneur raising capital is asking someone who is still mostly a stranger to put money into a business that’s still mostly unproven. Who could possibly expect that to be easy?

It’s why 19 of 20 technology entrepreneurs would complain about the dearth of savvy investors in the Twin Cities, but the only thing wrong with Twin Cities investors, Allen said, is “that they are not very visible, which means entrepreneurs just need to hustle way harder.”

Allen, who has a stake in 11 software companies, believes Minnesota entrepreneurs need to realize that some ventures will fit far better than others into a niche or category that Minnesota investors readily understand. Entrepreneurs have to figure out if the right investor is hearing the pitch, and that may mean buying an airline ticket.

Minnesota, Allen said, is a “great” place to launch companies creating business and educational software, “decently great” for health information technology, and not so good for things like gaming-related software or mobile device software.

That’s partly what sent Adam Sellke, co-founder and CEO of the gaming platform company Echobit, out of state for an early investor, as gaming is best understood elsewhere. Allen said founders of a Minneapolis company called Heroic Inc., creator of a product that lets friends refer favorite service providers, have been looking for capital in California. That’s where to find investors who really get the “collaborative consumption” model.

In a brief conversation with Heroic co-founder and CEO Justin Barrett on a morning when he had just stepped off a red-eye flight from California, he confirmed that is the case. He also described finding an “unreal” funding climate for his kind of opportunity in California, with packed days of meetings with potential investors.

A good example of what’s possible here at home, Allen said, is TST Media of Minneapolis. It’s the creator of a website platform that is best known in the sports management field. Co-founded in 2004 by CEO Justin Kaufenberg, TST in late November filed with regulators that it had raised a little more than $3.3 million of equity in its latest round, part of the amount TECHdotMN included in its $145 million total for 2012.

“What’s cool about Justin is that when he was starting out he was a nobody,” Allen said. “He didn’t know any rich people, he didn’t know any angels, he didn’t know any successful entrepreneurs. And what I like about Justin is that he doesn’t epitomize the outlier. He epitomizes the normal entrepreneur.”

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