Building Minnesota’s Tech Reputation
California’s Silicon Valley is still a paramount technology universe in the United States. But Minnesota is performing well in the science and technology arena when compared with most other states.
Minnesota’s technology and science workforce ranks fourth nationally, while its human capital investments are fifth. That’s according to the Milken Institute’s 2016 State Technology and Science Index, which ranks all 50 states in five categories.
Massachusetts came in first in the composite ranking, followed by Colorado, Maryland, California, Washington, Connecticut and Minnesota. States earn their rankings based on five categories and numerous subcategories. Here’s how Minnesota—the only Midwestern state in the top 10—ranked in 2016:
- Tech and science workforce: Fourth (seventh in 2014)
- Human capital investments: Fifth (fourth in 2014)
- Tech concentration and dynamism: 15th (20th in 2014)
- Risk capital and entrepreneurial infrastructure: 16th (11th in 2014)
- Research and development inputs: 19th (24th in 2014)
Placing seventh in the nation for science and technology? Not bad, as many a native Minnesotan might say. For some, however, it’s still not good enough. The Minnesota High Tech Association (MHTA) is aiming to make Minnesota a top five science and technology state. To get there, the state has a few things to work on, in both the public and private sectors.
Broaden tax benefit
To boost investment in research and development, MHTA wants the Minnesota Legislature to reinstate the refund portion of the research and development tax credit. The credit reduces corporate franchise taxes and individual income taxes for certain companies and individuals with qualified research expenses. The tax credit is available for the first 10 percent of up to $2 million of qualifying research expenses and 2.5 percent of qualifying expenses beyond $2 million.
For tax years 2010 through 2012, eligible taxpayers could receive a refund when their R&D tax credits were greater than their tax liabilities. Because the total refunds grew too large, the Legislature disallowed them in 2013.
The Minnesota Department of Revenue “estimated that for fiscal year 2017, $50.2 million in corporate franchise tax credits will be allowed and $18.5 million in individual income tax credits,” according to a House Research report in September 2016. This issue of TCB went to press before the 2017 Legislature was scheduled to take final action on key tax policies.
MHTA president and CEO Margaret Anderson Kelliher argues her former legislative colleagues should consider restoring the refunds with a cap in place or treat pre-revenue companies differently than moneymakers. More R&D may produce more jobs in the short term from a home-run product or concept, and generate later benefits if that product or concept yields other profitable ideas, she says.
Although the Milken Index cited Minnesota as lagging in tech diversity, Kelliher, who served as Minnesota House speaker, says stakeholders should remember when Minnesota tried to lure biotech and green tech companies about 15 years ago.
“We do have a little more of a biotechnology community here now,” she says. Yet she cautions that leaders need to be careful about how they are attempting to build Minnesota’s tech sector. She contends it would be unwise to “force [development of] an industry that doesn’t have some root or seed in either the research arm that’s happening here or the underlying companies.” Otherwise, she explains, “it can set you up for kind of a false idea of what can be happening.”
Kelliher points to an uptick in data analytics companies that track the agriculture and retail industries as examples of that organic growth.
“Building on strength has been a stronger growth strategy for us,” Kelliher adds. “I don’t want to dismiss a moonshot here on something we don’t know about, but I think the moonshot needs to come out of something that has a real business idea with it.”
Expand venture capital
More venture capital would certainly help raise awareness and support Minnesota tech startups. Minnesota has dropped five spots in the Milken ranking for risk capital and entrepreneurial infrastructure. But some Minnesota startups have been attracting more venture funding from outside the state, thanks in part to business accelerators. They include past grand-prize winners and division winners of the Minnesota Cup, the largest statewide entrepreneurial competition in the country, according to MN Cup director Melissa Kjolsing Lynch.
The contest for Minnesota-based companies with less than $1 million in annual revenue introduces entrepreneurs to experts in intellectual property, marketing, manufacturing, distribution and retail. Many division winners, who are vetted by industry experts, investors and other entrepreneurs, go on to raise money elsewhere.
“They’ve already been through the wringer,” Lynch says. “They know their pitch really well. They know their value proposition. They know what they’re looking for and they’re connecting with these people in a couple of weeks versus what might take several months or even a year to get to.”
Most investors want to put their money into ventures that will attract buyers in three to five years, according to Lynch. General technology and health IT have been attracting more investments than biotech or medical devices because of the long regulatory path to market for the latter two industries. Venture capital for medical technology, a major Minnesota industry, remains in the doldrums worldwide.
Retail tech has been attracting more investor cash to Minnesota. Colorado-based Techstars runs 27 business accelerator programs globally, including a retail-only one in Minneapolis, in partnership with Target Corp. Techstars invests $100,000 each in up to a dozen startups enrolled in a 90-day mentoring program, which includes learning from Target’s top brass.
The first class of 11 companies went through the program in 2016 and has since raised about $25 million, according to Ryan Broshar, managing director of the Minneapolis program. They included Branch Messenger, an application that helps retailers reduce absences and increase productivity, and Inspectorio, which uses data and machine learning to improve product quality inspections for retailers.
The first class also included Revolar, which makes a wearable safety device that can send location-based alerts to loved ones if the wearer feels unsafe. Target is helping Revolar with its retail strategy, according to Jason Seats, a managing partner at Techstars.
“That’s the type of access that a startup never gets,” Seats says. “Sometimes you may under-appreciate the resources that are in your backyard. The CEO of this company actually comes and spends time with these startups.”
The second Minneapolis Techstars class is set to begin in July. Broshar also runs Minneapolis-based Matchstick Ventures, an early-stage VC fund for tech startups. He cofounded Twin Cities Startup Week to showcase new companies, and Beta.MN to host informal events to connect entrepreneurs with future users, investors, employees and advisers. Broshar also sees venture capital beginning to flow into Minnesota from the coasts.
“It doesn’t have to be from here to have an impact,” Broshar says. “Minnesota is starting to be put on the map as an investment destination.”
He maintains Minnesota’s business landscape of Fortune 500 and smaller firms makes the state attractive to outside investors.
“We have such a diverse set of companies and startups, we see a diverse set of investors,” Broshar says. “The national conversation about startups in the Twin Cities has grown exponentially. If you are investing in tech companies, Minneapolis is one of those stops along with New York, Chicago, Denver.”
What Minnesota needs are large venture funds that focus on technology, according to Joy Lindsay, president and cofounder of StarTec Investments in Minneapolis, which targets early-stage tech companies. She is also a managing partner of the Sofia Fund, a VC fund focused on women-led, early-stage firms.
Lindsay is noticing venture money heading to Minnesota not only from the coasts, but also from Chicago and elsewhere in the Midwest.
For example, Drive Capital of Columbus, Ohio, was one of three investors that joined to provide a total of $15 million in a Series B round for online employee-scheduling software company When I Work. The money, which also came from Arthur Ventures (Fargo) and High Alpha (Indianapolis), enabled the fast-growing startup to move from St. Paul to Minneapolis’ North Loop.
In its first fundraising round, When I Work attracted $9 million led by e.ventures (San Francisco and globally), Greycroft Partners (New York and Los Angeles) and Arthur Ventures, bringing the company’s total financing to date to $24 million.
“What’s more exciting about what’s happening in Minnesota is the startup community is really growing,” Lindsay says. “It’s going to take a while, and a couple of really great exits [business sales], I think, and we’ll see that number increase the amount of venture capital that comes here.”
In one noteworthy recent exit, NBC Sports bought Sport Ngin (now Sports Engine), which creates software for managing sports teams, in July. Terms were not disclosed.
The talent of the state’s tech and science workforce has put Minnesota near the top of the Milken Index since 2010. The state ranked in the top five for biomedical and industrial engineers, biochemists, biophysicists, material scientists, computer network architects, computer occupations, life scientists, and agricultural and food science technicians.
Minnesota also came in second for its share of graduate students in science, engineering and health, fourth in average math and verbal SAT scores, and 11th in the percentage change in state appropriations for higher education.
Those academic figures look promising, but will they yield enough tech graduates willing to stay in Minnesota? The state is facing a shortage of 278,000 workers by 2022, with the greatest need for workers to fill tech jobs, notes Erin Olson, a research strategist with RealTime Talent, which is a partner with the MHTA.
The tech worker shortage already is affecting Minnesota employers. Uponor North America employs 600 in Apple Valley to manufacture plumbing, heating, fire safety, hydroponic and pre-insulated piping.
With changes in technology and materials, the company finds itself competing for skills and talent with Minnesota’s Fortune 500 corporations, according to its president, Bill Gray.
“Our jobs span the gamut from entry-level warehouse work right through to [employees with] advanced degrees in polymer chemistry,” Gray says. “We have to figure out how we market ourselves as an employer.”
MHTA and RealTime Talent recently rolled out the Talent Exchange, a job board that promises to help fill science, technology, engineering and mathematics (STEM) openings by connecting employers to applicants with a focus on skills and interests rather than just a resume.
The Minnesota Chamber of Commerce is going to introduce a platform similar to MHTA’s with potentially 40 of its affiliates posting job links there.
To reduce the science and technology labor shortage, Olson says Minnesota needs to increase labor market participation among people of color, dislocated workers and young people, improve access to employment, and perhaps even boost the retirement age.
Even with all those improvements, she adds, Minnesota will still need workers from out of state and outside the United States.
Nancy Crotti is a St. Paul-based freelance writer and editor.