Winds of Change

For each of the following statements about the Minnesota venture capital climate, answer true or false:

{1} The Twin Cities area is home to one of the most vibrant venture capital communities between the coasts. Even after adjusting for the unworldly volatility that created havoc with technology company valuations in the bubble years, venture investments have been rising significantly here. This growth is due largely to the strength of the region’s robust medical device industry.

{2} Over the long haul, venture investments in Minnesota have fallen relative to the rest of the country. That’s largely because innovative companies in other states have become more successful in attracting venture money. Meanwhile, the argument persists about whether enough seed money is going to start-ups and early-stage companies.

Retired Minnesota venture capitalist Andy Greenshields knows the history of the venture business here about as well as anyone. In 1980, he did a study that showed Minnesota ranking ahead of nearly all other states by the measure of venture capital investments in their companies relative to their populations. In the 1970s, companies in Minnesota captured 3.1 percent of all U.S. venture money invested, and the state had 3.8 percent of all of the venture-financed companies, according to data from the National Venture Capital Association in Arlington, Virginia. Minnesota had 1.9 percent of the U.S. population in 1970 and 1.8 percent in 1980.

But since 2000, the association’s surveys show that Minnesota’s companies received 1.2 percent of the venture money invested nationally and accounted for 1.6 percent of all of companies receiving venture money. Today, the state’s share of the U.S. population is 1.7 percent.

Then and Now

“Things have really changed,” Greenshields says of the venture capital landscape that has progressively moved toward the East and West coasts. Much of the shift is due to the increased mobility of young technology companies, Greenshields says. Another factor: the rise of regions that were literally nowhere on the innovation map in the ’70s. Consider San Diego, which was not a player until the 1980s. Today, the region is home to a teeming cluster of biotechnology companies.

“I don’t think Minnesotans ought to feel sorry for themselves,” Greenshields says, noting that companies here continue to garner a lot of venture money. But he adds the state isn’t as big a fish in the U.S. venture pond as it was in the 1970s.

The amount of venture money going to Minnesota companies in the 1970s is piddling compared to the contemporary numbers, even after adjusting for inflation. Nonetheless, the state’s venture activity in the 1970s reflected its role as one of the incubators of the venture capital business, then barely 20 years old. Now, the business is far larger and more mature. A number of states not in the game then are home to companies landing significant venture investments today.

Alan Ruvelson’s Twin Cities–based First Midwest Capital Corporation, born in 1959, was the nation’s first small-business investment corporation. Northwest Growth Fund, another such entity launched here in 1961, became one of the venture industry’s early national powerhouses under the leadership of the late Bob Zicarelli. Much of Northwest Growth’s success came on the strength of its investments in Cray Research and other startups that once flourished here.

All that said, other statistics from the National Venture Capital Association paint a pretty good picture for Minnesota. The venture association’s surveys show that in 2006, only three states between the East and West coasts—Texas, Colorado and Illinois—got more venture investment than Minnesota. Since the start of 2001, Minnesota companies have gotten three of every eight dollars they’ve received from venture firms over all of the years since 1970.

According to the PricewaterhouseCoopers Money Tree surveys, Minnesota’s strong medical device industry consistently ranks in the top three among states based on the amount of venture money it attracts. The Money Tree report for 2006 shows that venture firms invested $185 million in Minnesota medical device companies, three-fifths of all the venture money the state’s companies got last year. That $185 million was the state’s highest annual total since the report began tracking such data in 1995.

There is a broad sense that the more venture offices an area has, the more successful its companies will be in attracting venture money. Gary Smaby, managing partner of the Minneapolis-based Quatris seed fund and the venture capitalist in residence for the Carlson School’s Ventures Enterprise at the University of Minnesota—one of the only MBA programs in the country to offer students experience in launching a real start-up company—says that belief is a misconception, Silicon Valley excepted.

Nonetheless, leaders in other parts of the Midwest, which have few if any venture offices, would love to have the venture firms that are located in the Twin Cities.