In the past, the process seemed simple: Come up with a great idea, start a company and work your way toward the IPO.

But that road to success has eroded in recent years, as initial public offerings became rare events in Minnesota.

In the peak IPO years of the mid-to-late 1990s, the state produced new public companies at a rate of nearly one a month. Recently, it's been more like one a year -- if that.

Many of those recent IPOs haven't fared well. More than half the Minnesota IPO companies of the past decade are trading below their initial price or have been taken over for less than the IPO valuation.

"It's dismal," said Thomas Niemiec, managing director of Oak Ridge Financial Services Group in Golden Valley. "Unless we somehow can turn this around ... I think we're going to have a tough time creating jobs by creating new start-ups in the state."

The drought has important implications for entrepreneurs. With IPOs less of an option, early investors who want to cash out may be more likely to sell a company to larger, distant competitors. That can come at a cost, if new owners move jobs out of the state.

The rough IPO climate also makes it tougher to start companies to begin with, if venture capitalists and other start-up investors don't see a clear exit strategy to get a return on their money. Plus, a lot of those investors' capital is stuck in earlier companies that haven't been able to go public.

Bill Mower, an attorney with the Minneapolis law firm Maslon Edelman Borman and Brand, remembers his firm helping out in an average of two IPO closings a year before the start of the recession. In celebration, companies would throw dinners with lobster and hand out favors to commemorate the hard work involved. "It's been pretty much dead since," Mower said.

IPOs have been hurt by what he calls the "microwave mentality," Mower said. Investors want to get a return on their money right away, and are reluctant to place investments in start-ups that might not generate a return for a long time.

That works against medical device start-ups, a key sector in Minnesota, for which the timeline to bring a product to market has become more uncertain.

Pete McNerney, a partner at venture capital firm Thomas, McNerney and Partners, said the IPO market hasn't been receptive to medical device companies for a while. "Uncertainty is the thing that public investors just don't like," McNerney said.

The alternative, for early investors who want to get their money out, is to sell the company. But without a strong IPO market as an option, sellers can be at a disadvantage in getting a good price.

Ten of the 22 Minnesota companies that filed IPOs in the past decade were acquired or taken private, with the majority bought for less than the stock was originally worth.

That was the choice Bob Paulson made for his business, Restore Medical Inc., in 2008. The company went public two years earlier, only to be sold to Medtronic for $29 million, an 80 percent discount from the IPO price.

The promising start-up was developing devices to treat sleeping disorders. Sales were $4.1 million in 2007, but the unprofitable company was in danger of running out of cash due to troubled investments in short-term securities.

"It's hard to take a company public if your business model hasn't matured to the point where you can consistently meet your forecast," Paulson said. "In earlier times, it was less of an issue."

Even profits don't always bring a booming stock price. That was case for Virtual Radiologic Inc., which has built a profitable niche in the field of "teleradiology," analyzing diagnostic images for hospitals and clinics.

In the first quarter of 2010, the company's net income rose 40 percent to $2 million and sales were $30.8 million. But its stock was trading for around $12, about two-thirds of its IPO price, when an investment firm stepped in to take the company private at $17.25 -- just 25 cents more than the original stock price.

Revival elsewhere

Nationally, IPO activity has picked up, according to Bloomberg News. So far, 98 companies have priced IPOs this year, up 44 percent from the same period a year ago.

California-based LinkedIn raised $352.8 million last month, and its stock price has gone up 60 percent since trading began.

In Minnesota, Kips Bay Medical Inc. is the only company to complete an IPO this year. The medical device business raised $16.5 million in February, and its stock has lost more than half its value since then.

Regulatory changes have made it tougher to go public. In 2002, Congress approved the Sarbanes-Oxley Act, which increased accounting and regulatory oversight of publicly traded companies. The act was passed to prevent scandals such as Enron Corp.

But some attorneys that handle IPOs said the act has significantly increased the cost for smaller companies, causing them to shy away from filing an IPO. "It scares people, all the extra costs," Mower said.

At Electromed Inc., a New Prague-based medical device business, Sarbanes-Oxley pushed the cost of going public by at least $150,000, CEO Bob Hansen estimates.

"Sarbanes-Oxley isn't going to make Electromed a better company. It's going to protect the public at a higher level, but it's doing so at a very great price," Hansen said. "They have made the regulations more expensive and truly more onerous. Fewer companies will want to go public."

Larger deals

Some investment banks, which play a key role in pulling together an IPO, have shifted their strategy toward larger IPO deals.

Chad Abraham, Piper Jaffray's global co-head of investment banking and capital markets, said current IPO investors usually want to see $40 million or $50 million in revenue and a near-term path to profitability.

Today, Piper Jaffray generally participates in IPO deals that raise $75 million to $200 million, Abraham said, while it would have done deals for less than $50 million before the dot-com bubble burst in 2000.

He said that in the past decade there has been an increasing burden on companies to raise more private money to get big enough for an IPO deal.

"The transactions we're willing to take on, is really driven by what our investor clients demand and are interested in," Abraham said. "Right now, there's just not as much interest in early stage IPO transactions."

Some companies, like Electromed, are willing to take the gamble. It was one of two Minnesota companies to go public last year, raising $5.5 million.

Electromed posted a profit in its most recent quarter and said sales grew 23 percent to $5.2 million. But Hansen still gets questions on why the stock price is low. Shares closed Thursday at $3.36, 64 cents below the initial asking price.

Hansen remains hopeful on the value of his company. Even though stock prices fell with the economy, Hansen said he doesn't see this as a "permanent problem."

"It takes time to be discovered," he said.

Wendy Lee • 612-673-1712 •