Venture capital still scarce in Minnesota

Venture capital investments in emerging Minnesota companies perked up a bit in the second quarter but remained on track for the weakest year in 15 years of record-keeping, according to data being released Friday.

The $45.4 million in investments was more than double last quarter's amount but still half the level of a year earlier, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. Nearly all the investment went toward life science and health care-related companies, with 74 percent going toward medical devices and equipment.

"If we finish out the year at this pace, we're well below the lows of 1995 when the survey started," said Jay Hare, a partner at the Minneapolis office of PricewaterhouseCoopers. "We are still so heavily concentrated in one industry that it's hurting us when we're seeing the national [venture capital numbers] rebound."

So far in 2010, there have been 13 deals totaling $65.5 million. That's down from $138.4 million in the first six months of last year, already a relatively weak year for venture investments.

Analysts said investments have fallen because venture capital firms have a lot of money tied up in companies that have been unable to complete initial public offerings in the current climate or to get taken over by bigger companies. Such exit strategies can free up funds for the next round of investments.

But the venture capital climate appears to be improving on a national scale. U.S. venture capital rose to $6.5 billion, up 33 percent from last quarter and an increase of 51 percent from the second quarter of 2009, the report said.

Nationally, the number of seed and early-stage deals rose to 429 deals, up 32 percent from last quarter, according to the report. That represented 47 percent of the deals done in the United States in the second quarter, which analysts say indicates that venture capital firms have been able to turn their attention to the next generation of companies.

But in Minnesota, Hare said the uptick is weaker because of the concentration of venture capital on the life sciences industry and a general six-month delay for national venture capital trends to hit the Midwest.

Hare said he believes that Minnesota should try to diversify its venture capital investments more. "Looking at some of these other states, you would not find them to be one-trick ponies," he said.

Local companies raising money in a tight venture capital environment say it's been tough.

Take medical device company Anulex Technologies Inc., which started the process last July but didn't end up closing the fund until May of this year, said CEO Rich Lunsford.

Anulex raised $20.7 million in private equity financing, which included venture capital. Three or four years ago, that process would have taken three or four months, Lunsford said.