Venture capital down sharply in Minnesota

Minnesota start-ups received the lowest amount of quarterly venture capital investment in 15 years, revealing the state's dependence on the medical device industry for most of its funding, analysts noted Thursday.

Three Minnesota companies drew nearly $17.1 million in the first quarter, down 83 percent from the fourth quarter and down about 65 percent compared with a year ago, according to the Money Tree Report by PricewaterhouseCoopers and the National Venture Capital Association. About 88 percent of that money was received by medical device and equipment companies.

"We've got a strong suit in one [sector], but that's it. That does hurt the amount of money that gets raised," said Jay Hare, a partner at the Minneapolis office of PricewaterhouseCoopers. "Our strong suit is a sector that attracts roughly 11 percent of all dollars nationally. What about the other 89 percent?"

Minnesota's decline comes at a time when venture capital nationwide has been weaker in the recession. U.S. venture capital investments in the first quarter totaled $4.7 billion, down 10 percent from the previous quarter, but up 38 percent from a year earlier, when stock markets hit their bear market lows.

Venture capital investments have been tighter in recent years because the money has been tied up in companies unable to trade publicly on the stock market or be acquired, analysts said.

"Overall there is some contraction we expect to continue," said John Taylor, vice president of research for the National Venture Capital Association. Taylor said he expects U.S. venture capital investments for the year to remain at the $17 billion to $18 billion level for the next year or two.

Some in Minnesota find the trend troubling. Minnesota's venture capital investment in the first quarter set an all-time low for the state since Money Tree Report started reporting Minnesota data in 1995.

Local companies such as Elk River-based Cymbet Corp. said it's been tougher to raise venture capital and more time needs to be allocated to get financing. The technology company announced in January it completed its third round of private equity financing, totaling $31 million, in 2009. The company did not receive any venture capital funding in the first quarter.

"It's a very challenging environment," CEO Bill Priesmeyer said. "Investors are being very selective."

Rao said it's become crucial for companies to look for other ways to grow outside of venture capital investments.

"We might want to rethink what we are doing and figure out whether we should worry about this trend or make some changes in the way we look at the whole issue of building high-growth ventures," Rao said. "The question is not why venture capitalists aren't investing here. Money will come if we have great ventures to invest in."

But others say they expect brighter days ahead for venture capital investments.

Eric Nicholson, a managing director with private investment banking firm Greene Holcomb & Fisher, said mergers and acquisitions are improving because the stock market is performing better, financing has improved and more companies are open to being acquired.

On Thursday, Nicholson and others discussed data from research firm Capital IQ that showed the number of mergers-and-acquisitions transactions in the United States increasing 44 percent in the first two months of 2010 compared with the same period a year earlier. With mergers and acquisitions improving, venture capital investments will eventually follow, Nicholson added.

Dan Carr, CEO of the Collaborative, a Minnesota organization that links entrepreneurs with investors, said: "We'd all like to see more Minnesota companies getting started and funded and creating more jobs than we saw this quarter. But venture capital, being the lumpy business it is, doesn't always lend itself to overarching conclusions by looking solely at the quarter-by-quarter analysis."