New funding for Minnesota start-ups fell 19.5 percent in the third quarter compared with a year ago as venture capital investment for medical device companies dropped 42 percent across the country.
Venture capitalists fronted $83.3 million in the quarter in Minnesota, including $50.4 million for three companies in the state's crucial medical device industry. That was up significantly from a weak second quarter. But none of the third-quarter deals represents a new start-up's first round of funding, indicating that investors are sticking to existing ventures.
"It's just infinitely harder than it was 10 years ago, even five years ago," said Kai Kroll, president of Ionix Medical, a device company in Maple Grove. "I think there's a lot of money sitting on the sidelines."
Venture capitalists invested $6.5 billion in the United States in the third quarter, a drop of 11.5 percent from the year-ago period, according to the MoneyTree Report by the National Venture Capital Association and PricewaterhouseCoopers (PwC), using data from Thomson Reuters.
Software companies led the way, attracting $2 billion in investment. Funding for medical device companies declined nationally for the third straight quarter, falling to $434.4 million, its lowest level since 2004.
Venture capitalists did seven deals in Minnesota in the third quarter, including three in medical devices, two in software, one in IT services and one in biotechnology.
Shoreview-based Torax Medical, which makes pacemakers and artificial organs, attracted $30 million. Minneapolis-based Tactile Systems Technology, which makes medical therapeutics, attracted $10.4 million. Golden Valley-based Segetis Inc., a company that makes biochemical products, attracted $25.5 million.
Minnesota ranked 12th among states in share of venture capital dollars, which was about average for the state, as was the dollar amount.
"The third quarter was a nice comeback when you look at the second quarter," said Mark Scholtes, a Twin Cities-based partner with PwC. "It was nice to see a bounceback, but I think that has more to do with timing of deal flow as opposed to some great improvement in the economy."
From 2008 to 2011, Minnesota averaged 40 deals a year, Scholtes said. This year, venture capitalists have done 18 deals through three quarters.
"Definitely from a volume perspective, 2012 has been a down year," Scholtes said.
Minnesota has never been a venture capital hotbed like California, Texas or New York, but as recently as 2008, investors pumped $478 million into start-ups in the state. Through the first nine months of 2012, Minnesota start-ups have received $203.3 million in venture capital funding.
Part of the problem is the difficulty in getting a medical device start-up off the ground.
The National Venture Capital Association has long been a critic of the Food and Drug Administration, arguing that the pullback in funding for medical innovation has to do with long approval times for new treatments and products, all of which require large amounts of capital.
"It's the same issues that we've been talking about for some time," Scholtes said. "FDA approval times are taking longer and longer."
Also, the medical device excise tax provision of the Affordable Care Act may be discouraging investors, Scholtes said.
Biotechnology and medical devices still accounted for more than a quarter of venture capital funding in the country.
Three of the four largest venture capital deals in the country were for California companies. Square, a mobile payments company, attracted $200 million in funding; a software company called Box received $125 million; and Fisker Automotive, an electric-car manufacturer, received $103.7 million.
Woodridge, Ill.-based Elevance Renewable Sciences, which makes specialty chemicals, received $104.4 million.
Adam Belz 612-673-4405 Twitter: @adambelz