ADC sale leaves high-tech vacuum in Minnesota

  • Article by: STEVE ALEXANDER , Star Tribune
  • Updated: July 14, 2010 - 11:22 PM

The state's computer industry is largely gone, and software isn't bridging the gap.

ADC Telecommunications Inc. may be the last member of a bygone era when the Twin Cities was one of the nation's top technology centers.

Whether the state can nurture the rise of software firms to take its place and keep Minnesota on the tech map after the $1.25 billion sale of ADC becomes final remains to be seen.

Local venture capitalists say the software industry has yet to really gain its footing here.

"I think we are still more technically talented than most U.S. cities, but the financial ecosystem to support start-ups is not as strong here as it is in other parts of the country," said Phil Soran, CEO of computer storage firm Compellent Technologies Inc. of Eden Prairie.

Started in 2002, Compellent may be the wave of the future. More software company than computer firm, it sells standardized computers whose real value is the proprietary software they use.

Other successful computer technology firms in the Twin Cities include Lawson Software Inc. in St. Paul, e-commerce firm Digital River Inc. in Eden Prairie and the satellite operations of California-based disk-drive maker Seagate Technology in Bloomington and Shakopee. Of the three, only Seagate is primarily a hardware company.

But these software companies are the exception. Venture capitalists say most local software firms are tiny and may never grow.

"We have software start-up companies here, but it remains to be seen if any of them will emerge as market leaders or large companies, or if they will be acquired by other companies along the way," said Mac Lewis, a partner at venture capital firm Sherpa Partners in St. Louis Park.

Why? Some fledgling Twin Cities software companies never get funded, while others flee to the West or East coasts in search of money, then stay there. Of those that get funding and remain in the Twin Cities, about 70 percent fail to catch on, and either go out of business or are acquired by ther firms.

What's changed since the glory days of Twin Cities technology? The absence of a critical mass of people and ideas.

Although founded in 1935, Eden Prairie-based ADC came of age in the 1960s, '70s and '80s, when computers and electronics were king. During that time, the Twin Cities was home to some of the most important computer manufacturing operations in the world: Control Data Corp., Sperry Univac, Cray Research and dozens of smaller related companies. Honeywell's corporate headquarters was also here, although its computer operations were elsewhere. These companies fostered countless spin-offs.

But none of them correctly gauged the future.

"With all the technical geniuses congregated here, no one saw the future," said Chuck Denny, ADC's chief executive from 1970 to 1991. "We had a leading position in mainframe computers, but when the world moved to distributed data processing, including minicomputers and personal computers, every one of our players missed the boat."

With so many firms having gone by the wayside, the potential pool of start-ups in Minnesota is much smaller, venture capitalists say.

"Without the critical mass of the mainframe computer companies there are fewer start-ups," Lewis said. "And because it's difficult to raise money for start-ups, it's possible that Minnesota will see fewer of them."

The economies of backing start-up companies have also changed.

"The venture capital business as we knew it in the '70s, '80s and '90s is a thing of the past," said Gary Smaby, managing partner of Quatris Venture Capital Fund of Minneapolis, an early-stage investor in technology companies. "The financial returns of venture capital are not all that great for institutional investors, and so they are investing in hedge funds instead."

The terms venture capitalists demand from start-ups now -- including a tenfold return on investment and the ability to reach $100 million in annual sales -- shut out many young software outfits in the Twin Cities, Smaby said.

"I don't want to leave the impression that there are not good start-ups," Smaby said. "It's just that there are not many good start-ups with that kind of potential."

The 350-member Minnesota High Tech Association said it believes the technology sector in Minnesota remains in good shape despite the sale of ADC and the potential loss of up to 1,000 jobs.

While access to venture capital has been difficult for small start-ups, a new state credit for "angel investors" should provide a fresh source of capital, said Peter Lindstrom, the association's vice president for public affairs. The credit goes into effect later this summer.

"We're really optimistic about that. That'll have a huge impact on start-ups. It might even fund the next ADC," Lindstrom said.

Staff writer David Phelps contributed to this report. Steve Alexander • 612-673-4553

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