A Mouse That Roars

So there are many IT companies that today can be formed and actually don’t need venture capital. And does that hurt the venture capital industry? Absolutely not. Entrepreneurs go out and create companies and become serial entrepreneurs. And eventually they’re going to want venture capital, because they’re going to have a bigger deal and they’re going to be seasoned entrepreneurs. They’re going to be great people to work with in this industry. But you are seeing a lot of IT companies today being able to forgo venture capital dollars because they frankly don’t need it.

Clean technologies (or cleantech) are developments that improve performance while reducing environmental impact. It’s an area that is growing, but we’re not seeing explosive growth. We’ve doubled the amount of money going into cleantech, but it still only represents about 7 percent of all the dollars that venture capitalists are putting into deals across the country. However, it is absolutely a great area for investment. It has a lot of what a venture capitalist is looking for—a huge market, an area that needs dramatic change (disruptive technologies), and an area in which, finally, the traditional players are realizing they’ve got to play. Traditional utilities, big oil . . . these companies are coming to the realization that they need to work with many companies that in the past they’ve kind of ignored. They are going to be very interested in acquiring these venture-backed cleantech companies or will end up competing with them down the line.

Minnesota is doing very well in 2007. You’re on track to have the best year since 2001 in the amount of money and the number of deals being done here. When you break it down, medical device firms are the clear frontrunner, and that is very different than what I see in most states. You have put yourself on the map when it comes to medical devices. People think northern California, people think San Diego, people think Boston, and people think Minnesota. There is no question about it. It has taken many years to do, but it’s now ingrained that this is a place where, if I need a good medical device CEO, I’m going to be looking in Minnesota. If I want to look at good deals, I’m going to be looking in Minnesota. I’m going to be looking at venture capital firms or working with those firms in Minnesota. Over half of the money is going into this very, very hot sector right now.

There are a couple of reasons medical devices are important right now. For one, the doubling of the National Institutes of Health budget several years ago is truly starting to bring out a lot of discoveries. We’re now taking that basic research and applying it.  In addition, venture capitalists are now much more concerned about the Food and Drug Ad-ministration pre-market approval process on the biotech side than on the medical device side. You’re seeing reimbursement issues becoming easier on the medical device side, too, at least compared to pharmaceuticals. And we’re also seeing medical devices that don’t even need to go through the reimbursement process—those related to obesity and cosmetic surgery, in particular—which is very attractive to venture capitalists. So all of these things are making for a better picture in medical devices. A very healthy environment, and I think it will continue.

For venture capitalists, another important consideration is the exit. And here too, I think we have seen a lot of change over the past year. The IPO market has gotten a bit better this year. As of the third quarter in 2007, we had 56 venture-backed IPOs in the U.S., and those companies that have gone public in 2007 are doing well, by and large. The median valuations of those IPOs have gotten healthier.