Minnesota venture funding dips sharply in first quarter

Venture capital funding in Minnesota fell 58 percent in the first quarter compared with a year ago, a bleak sign for the state's start-up community as investors across the country pulled away from medical devices and clean technology.

National venture capital investment fell 6.4 percent compared with the first quarter of 2012, to $5.9 billion, according to the MoneyTree Report by the National Venture Capital Association and PricewaterhouseCoopers (PwC), using data from Thomson Reuters.

Funding for the medical device and equipment industry declined 20 percent to $509 million.

The weakness in Minnesota isn't surprising, said Mark Scholtes, a Minneapolis-based partner for PwC, considering the overall dearth of capital and Minnesota's historic emphasis on medical technology, a sector that's been dogged by a lengthy regulatory process and a new excise tax on medical devices.

"Across the country, medical device investments are down, for the same reasons we've been talking about for the last year or so," Scholtes said. "The long investment time frame, the fact that venture capital is more scarce than in the past and investors are looking for more quick liquidity events."

In Minnesota, venture capitalists did nine deals in the first quarter worth $37.5 million. None of the investments was seed capital for a new start-up. Five of the nine were for medical device companies.

Holaira Inc., a developer of medical devices that treat lung diseases, raised $10 million in one deal. The firm raised all the money from existing investors, including Advanced Technology Ventures, Morgenthaler Ventures, Split Rock Partners and Versant Ventures.

The four other medical device firms that attracted funding were Celleration with $6.4 million; Mardil with $4.3 million; NeoChord with $3 million; and Wound Care Technologies with $1.2 million.

"It's not a great quarter," said Dan Carr, head of the Collaborative, a Minneapolis organization that helps start-ups. "We are facing some longer-term challenges in the medical tech space, which is our traditional strong suit, but we are also seeing more interest in some of our technology talent and software development."

Carr said Holaira has the advantage of being in a younger sector of medical technology — pulmonary devices. UpdateLogic's new funding is encouraging because it's an example of a company not in medical technology that's attracting capital, he said.

"I'd like to see us continue to diversify in our sectors where venture capital is imported into Minnesota," Carr said.

Minnesota has never been a VC hotbed like California, Texas or New York, but as recently as 2008, investors pumped $478 million into start-ups in the state. In all of 2012, Minnesota start-ups received $253 million in venture capital.