Code 42 attracted surge in venture funding

Venture capital investments flowing into Minnesota start-ups rose 21 percent in the first quarter, a success largely due to investor excitement about a single Minneapolis software company.

Code 42 Software Inc., which specializes in backup software and data storage, brought in $52.5 million of the $70.5 million total, a key factor that caused Minnesota to buck the national trend of declining venture capital.

Mark Scholtes, a partner with PricewaterhouseCoopers (PwC), said it's a positive sign that Minnesota can thrive in different industry sectors in addition to the state's specialty in medical devices.

"There's no guarantees in life," Scholtes said. "Certainly diversity in our start-ups can help us weather difficult economic times."

Nationally, venture capital investments declined 14 percent to $5.75 billion in the first quarter compared with a year earlier, according to the MoneyTree Report by the National Venture Capital Association and PwC, using data from Thomson Reuters. The drawback was due to cautious investors discouraged by a weak IPO market in the fourth quarter, as well as an emphasis on placing money on later-stage companies, the report said.

Code 42 is the ninth-largest deal in Minnesota since 1995, according to the MoneyTree Report. The company, which provides services to corporations ranging from Google to Apple, is feeding the growing demand among investors to put their money in software firms that require less money to develop. In addition, analysts said as more consumers and businesses purchase devices, it will become even more crucial for them to want to protect their data using products from Code 42.

"It's a combination of a greater opportunity and leadership position in a rapidly growing market," said Michael Gorman, a managing director in venture firm Split Rock Partners, which invested in Code 42.

"It takes time to create sufficient value to obtain reasonable valuations," Dornquast wrote. "... Rare is the overnight success."

Minnesota's stronghold has long been in life sciences, particularly in medical devices. However, nationally, such life sciences investments declined 22 percent in the first quarter to nearly $1.5 billion and there were only 171 deals, the lowest number since first quarter of 2009, the report said.

Minnesota has had other notable deals in non-medical device sectors. Last year, biotech firm BioAmber raised $45 million in venture capital, the largest deal on record for a U.S.-based biotech chemical products business.