It's a painful time for venture capital funds. So far, only $62 million in venture capital money has been invested in Minnesota this year, the lowest in the 15 years people have been keeping track.

Money going toward medical technology represents the largest chunk of that money, and uncertainty over the regulatory climate has given some investors pause. There's also less money available to invest.

Three executives from local venture capital firms discussed the challenges facing their industry in a Friday roundtable discussion organized by the Collaborative, a Minnesota organization that links entrepreneurs with investors.

The roundtable was a preview to discussions that will happen at the 24th Annual Minnesota Venture & Finance Conference in October.

Panelist Dave Stassen is a managing director at Split Rock Partners, a venture capital firm that invests in health care, software and Internet services companies. Joy Lindsay is president of StarTec Investments, which focuses on investing in early stage tech companies.

And Ed Spencer Jr. is founder and chairman of Affinity Capital Management, a venture capital firm that invests in health care companies. He is also the 2010 president of the Minnesota Venture Capital Association.

Dan Carr, CEO of the Collaborative: We typically had about 1 percent to 1 1/2, sometimes as high as 3 percent of the total national [venture capital investment] pie. [That's] pretty small percentage wise, but relative to other states it's been a pretty large number. The number has typically fluctuated based solely on whether med-tech was hot nationwide. In 2006 and 1996 we were up over 3 percent, but it was because everything was going toward medical devices.

Stassen: If you look within venture investing in the Minnesota marketplace, it is heavily skewed toward medical technology. Things are going to flow up and down, based upon the favor of medical technologies. ... I would say right now it's somewhat out of favor and possibly going more out of favor over time because of some of the factors [such as the] FDA, reimbursement and all the governmental changes going around us. ... We need to be careful that we can continue to protect the med-tech arena ... and support and grow other cluster areas. Venture capital goes where opportunities are.

Spencer: Anytime there is uncertainty, there is less capital available. ... We clearly now take a deep breath and a big pause when we see an early stage company simply because the timelines seemed to be stretched out significantly, and the path to actually getting through the regulatory and reimbursement process is so challenging.

Stassen: As people may or may not know, we go out to raise money from investors too, and we deploy our money into companies. When we go out and raise money from limited partners, we're seeing an accelerated or higher volume discussion on can you make money in the med-tech arena. Collectively, investors in the industry are asking the question, "Is the med-tech space a good space to be in any longer? Can you make money in it or not to get the kind of venture returns you are looking for?" That has a profound longer-term impact on the industry. If we don't have sources of capital, then the companies we invest in won't have sources of capital as well.

Carr: How is angel and seed capital being affected in Minnesota?

Lindsay: As time goes on, the venture funds [are moving] further and further up the food chain. They are doing the later rounds of financing. There aren't that many venture funds that do seed [capital]. It's really been angel investors and angel funds that have filled in that gap [for tech companies].

The [angel] tax credit is another reason for optimism. There's $11 million for 2010 that could be awarded for tax credits. I looked earlier this week and there were 54 individual angels that registered and three angel funds. I looked at the list and I think I recognized one person. That's very positive to me that we got new individuals considering this. ... There are some shortcomings with that angel tax credit ... but I think it's a great start.

Carr: [Some] people say, "We need more deals," and there are entrepreneurs out there saying, "I can't get funded in the state of Minnesota." Do you think there are deals that aren't getting funded? Do you think we have the same quality level of companies out there we would like to see in Minnesota?

Spencer: I think the quality is probably just as good as it's always been, but when you have a retrenchment on the capital side of the equation ... it would clearly suggest there are good deals out there not getting funded. ... While Affinity used to be an early stage investor, what we are doing now for the last two or three years has all been late stage. ... The typical [premarket approval application for a medical] device maybe used to take $60 million to $90 million to get from start to finish. These things take a lot of capital. Now with the uncertainty out there ... it may take $100 million to $150 million to get there. As a venture capitalist, you sit back and say, so what kind of return do I have to get? ... It's pretty daunting.

Lindsay: It's particularly hard for first-time entrepreneurs. ... There are plenty of really bright people out there with very interesting ideas, and it's much more difficult to get funding for the first time.

Stassen: We invest in pre-seed deals almost, where we fund an incubator to generate an idea and then spin the company out it. ... Up until 2008, you could put money in really early stage and could expect a return on that, a markup in the next round of financing. That justified the risk in the early stage. What's happened more recently, is if you do the really early stage [funding], when you go out for raising more money, you get a flat round or you get a haircut. So, the money you've put in at the highest risk ... ends up not getting the best price. That's a little bit on what's restraining playing in the early stages. ... We're not getting paid to take the risk.

Carr: What about exit strategies and their impact on all of this? Clearly, the IPO markets have continued to be pretty weak. [Mergers and acquisitions are] a little better than 2009, but still very slow. How do you envision this slower environment long-term from the venture capital perspective?

Stassen: There's been a relatively consistent exit activity over the course of a few years. That's roughly $30 billion a year that has come in exits out of the venture industry. The challenge is, there has been anywhere from $30 billion to $100 billion invested in the industry. That's not a sustainable model. Where we are headed, I think, is to $10 billion invested in the industry in venture funds. If you could still maintain that $30 billion exit, you now have a sustainable return model. ... As soon as that happens and a few big wins, the limited partners are going to want to pile back into the asset class and the numbers are going to go up again. That part is cyclical.

Carr: Deeper than we've seen.

Stassen: Deeper, yes, but maybe there's a time to reset a new normal. The new normal is in that $10 billion of inflow into the industry. It's going to be painful getting there, and we've already seen it.

Wendy Lee • 612-673-1712