Should the state's pension fund be used to finance the next Medtronic?

That's the question a group of lawmakers pondered Wednesday before they passed a bill that urges the Minnesota State Board of Investment, which oversees Minnesota's $63 billion in retirement assets, to direct some of that money toward early stage start-ups.

Lawmakers, industry officials and venture capitalists have long warned that Minnesota could lose its dominance in medical technology. Although the region is home to giants such as Medtronic Inc. and St. Jude Medical Inc., local start-ups have struggled to raise money from venture capitalists, especially from local investors who are more likely to keep the companies in Minnesota.

The dearth of early-stage venture capital money comes at an especially sensitive time for the state: Minnesota's job growth, which for years outpaced the national average, is lagging in nearly every major sector. Stalwarts such as Boston Scientific Corp. and Medtronic face maturing markets; both companies have pared their workforces.

"Medtronic didn't start out as a [$13 billion] company," said Rep. Tim Mahoney, DFL-St. Paul, chairman of the House Biosciences and Emerging Technologies Committee. "We got a hole in our system and we are trying to fix it."

There's widespread investor enthusiasm in the state for medical technology.

But local firms last year captured 6.4 percent of national venture-capital money in that industry, slightly down from 2006, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial.

States such as Indiana, Texas, California, New York and Washington in recent years have directed public money, including retirement funds, into local start-ups.

But in Minnesota, the State Board of Investment doesn't invest directly in any one company. Instead, the board puts about 11.5 percent of its portfolio into "alternative investments," which include private-equity and venture-capital funds. So far this year, the board invested $66 million in Split Rock Partners of Eden Prairie and Minneapolis-based Affinity Capital Management.

The bill, sponsored by Rep. Ryan Winkler, DFL-Golden Valley, is relatively modest. It calls for the State Board of Investment "to try to ensure" that at least 1 percent of the value of private-equity investments, about $26 million, goes to venture-backed companies that have the majority of their employees in Minnesota.

But Howard Bicker, the board's executive director, said the board's primary job is to provide the best return for the pension fund, not to nurture homegrown companies.

"We're not in the economic-development business," Bicker told lawmakers. "We are in the making-money business."

Art Rolnick, senior vice president and director of research at the Federal Reserve Bank of Minneapolis, agrees. Rolnick, a well-known critic of government subsidy programs, said investing pension money into start-ups, even indirectly, is too risky.

"If I were a state employee, I wouldn't be too happy," he said. The mission of pension funds is "to go after the best, safest return rate as possible." If early-stage companies aren't receiving venture money, then "maybe the market is telling us something -- the deals are not that good, or there are better investments out there," Rolnick said.

Industry officials reject that notion. There are plenty of promising local start-ups, said Don Gerhardt, president and chief executive of Life Science Alley, a trade organization. What's missing is the venture-capital money, he said.

"There are bad deals getting funded," Winkler said. "That tells me good deals aren't getting funded."

Thomas Lee • 612-673-7744