Small fund offers hope for small start-up firms

  • Article by: THOMAS LEE
  • Star Tribune
  • March 30, 2008 - 4:14 PM

With one successful start-up under his belt, John Fraser thought it would be easier to raise money for his latest venture, Mednet USA.

He was wrong.

"It has been just as difficult," Fraser said. "I can't even imagine the difficulty for someone without experience, but has a great idea."

Fortunately for Fraser, a new venture capital fund operated out of the University of St. Thomas recently invested $50,000 in Mednet, a software company that allows doctors, hospitals, insurers and patients to exchange and access information electronically.

The fund, officially called the James Rogers Fox, M.D., Fund for Healthcare Innovation, seeks to invest in early-stage health care companies based in Minnesota. Fox, a former medical director for Minneapolis Public Schools and for Control Data Corp., left $1 million to establish the fund after he died in December.

Local start-ups often face a tough time raising money, experts say. They are too small and risky for larger venture-capital firms. And there are not enough angel investors to fill the gap.

"Even though the Twin Cities is known for medical devices and health care technology, there are no investment funds for smaller companies," said Mike Moore, director of the William C. Norris Institute, which runs the Fox fund.

"There are lot of things out there right now that are dying on the vine because there is no money in Minnesota to get them to market."

Seed capital is crucial

Average rounds of venture-capital investment total $5 million, $2 million for start-ups, said Jay Hare, a partner at accounting firm PricewaterhouseCoopers' technology industry group in Minneapolis. The $1 million Fox fund, which invests in $50,000 to $75,000 increments, is hardly enough to bring a new product or service to market, he said.

Still, the fund is "perhaps most helpful at a critical seed level, if it helps get an entrepreneur to a level to raise more meaningful capital," Hare said.

Nationally, health care firms attracted only 1 percent, or $69 million, of the $7 billion in venture-capital money during the fourth quarter, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

However, Minnesota has attracted some promising health care deals over the past two years.

Last year, Minneapolis start-up RedBrick Health raised $15 million from Versant Ventures of Menlo Park, Calif., and Highland Capital Partners of Lexington, Mass. The two firms previously gave RedBrick $15 million. Founded in 2006, RedBrick works with large, self-insured employers and runs health-and-wellness and disease-management programs for companies.

$32 million spread around

In 2006, Dutch publishing giant Wolters Kluwers purchased ProVation Medical Inc., a local software start-up backed by Minneapolis-based Affinity Capital Management, for as much as $112 million.

Excelsior-based Lemhi Ventures, founded by Definity Health veteran Tony Miller, has invested $32 million in local start-ups, including Plymouth-based, an online marketplace for health insurance, and VisionShare Inc. of Minneapolis, which allows doctors and hospitals to send billing information over a secure broadband network to Medicare. VisionShare was co-founded by Fraser.

That the Fox fund, along with Lemhi, focuses exclusively on health care start-ups reflects the presence of major hospitals and insurers in the region such as UnitedHealth Group Inc., Medica and HealthPartners.

"One of the reasons Lemhi was interesting, is that they understand health care," said VisionShare Chief Executive John Feikema. "We spend a lot of time talking to VC [venture-capital] firms, and they are smart people. But health care is such a complex marketplace. Having folks like Lemhi [and the Fox fund] is going to be helpful to a lot of companies."

Fraser, who spun off Mednet from VisionShare, says the problem is not the lack of VCs who understand health care but rather the lack of VCs willing to take risks.

"VC funds that specialize [in health care] is helpful," Fraser said. "But if there aren't enough crazy investors investing in crazy ideas, start-ups will move to the coast. That will limit innovation in Minnesota."

Thomas Lee • 612-673-7744

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