The Southeast Minnesota Capital Fund is a small but increasingly popular investment firm focused on funding good ideas in the Rochester startup scene.
While the vast majority of the state's investment funds are headquartered in the Twin Cities, Rochester-based SMCF makes seed-stage angel investments in Minnesota startups, with a particular focus on companies in the southeast corner of the state.
Rochester is replete with young businesses in the life sciences and medical-technology space, a direct result of the world-class Mayo Clinic. The fund's managers, David Herbert and Harry Hoffman, are both Mayo veterans who saw an opportunity to build a local funding source.
"There wasn't a source of equity capital here. ... We're helping to provide that," Hoffman said.
Its first fund, launched in 2017, invested nearly $2 million in 14 startup companies. Ten of those are either in the Rochester area or are based on technologies originally developed there.
SMCF launched its second fund in February. Herbert expects to close with up to 100 investors and commitments exceeding $5 million. Investors have been committing larger amounts more quickly than expected, he said.
Herbert had leadership roles for Mayo Clinic Ventures, Mayo Clinic Labs and Mayo Clinic Global Business Solutions. Hoffman spent 25 years as Mayo's chief investment officer and treasurer.
Typical investments from the new fund will be in the range of $200,000 to $500,000, Hoffman said. This could include follow-on investments in promising companies.
Herbert and Hoffman screen and select potential companies. Investors then get to hear the company's pitch and ask questions before giving Herbert and Hoffman feedback.
"It is a very different model. ... Everyone feels engaged," said Herbert. "I think people like the idea of making an investment that goes to help a company grow."
One of those companies is Vyriad Inc., formed in 2015, which develops viruses to be used as a new form of cancer therapy. The development of the concept started at Mayo Clinic through the research of Dr. Stephen Russell, now CEO of Vyriad.
Vyriad signed a deal in late 2019 with New York-based Regeneron Pharmaceuticals, a large industry player, for a research collaboration to co-develop viruses.
Russell said SMCF was among a large group of investors in Vyriad during a $10 million fundraising round.
"The reason I was so keen to get [SMCF] involved is that they're the movers and shakers in Rochester," said Russell. "Getting the local buy-in through that fund [is] very valuable for companies, especially in the health care space."
Ambient Clinical Analytics was co-founded with Mayo Clinic in 2014. The digital health firm, which makes clinical analytics software, was backed by SMCF from its first fund. Ambient's Sepsis DART product can provide an alert to health care staff when a patient is developing septic shock.
"There's always been a strong base of angel investors in Rochester. This is really expanding on that," said Al Berning, Ambient's CEO, of SMCF.
Berning previously co-founded and led Rochester-based Pemstar Inc., an engineering, product design, manufacturing and fulfillment services company. Pemstar's sales hit $871 million in its last fiscal year before it was sold in 2007.
The second fund will remain open until the end of June or until it hits investor goals. Southeast Minnesota Capital was founded by Rochester Area Economic Development Inc.