When he looks out from his small office in the Mayo Clinic Business Accelerator, veteran Rochester entrepreneur Al Berning says he sees something special going on in his city’s business start-up scene.

CEO of one-year-old Ambient Clinical Analytics, Berning certainly knows his way around a Rochester start-up. After 15 years at IBM, he founded electronics manufacturer PEMSTAR in 1994, leading it through a $115 million initial public offering six years later. From 2007 to 2012, he ran Hardcore Computer/Liquid Cool Solutions, developers of a new type of liquid-cooled computing technology, which by 2013 had raised $18.5 million in venture funding.

At Ambient, he’s the leader of a venture-backed med-tech firm founded in conjunction with five practicing Mayo clinicians in a business accelerator, or incubator, co-funded by the giant health care provider. And the position gives him a front-row seat to what he’s convinced is Rochester’s emergence as an entrepreneurial hotbed.

Key to this is a recent change in the way Mayo leadership views the organization’s mission: not only practicing and improving medicine internally, but helping improve health care through other means, including technology transfer to the private sector. It recently capitalized a $100 million venture and growth fund ($35 million has been invested thus far) and set up the incubator­—complete with offices for five well-funded coastal venture capital firms specializing in biotech (see sidebar, at bottom). It also loosened its rules for its doctors’ outside interests.

“About two or three years ago, Mayo physicians could not own [any] medically related companies—they were prohibited from doing so,” says James Rogers, chairman of Mayo Clinic Ventures. (Rogers also is vice chairman of Rochester Area Economic Development Inc., RAEDI). “Then a task force looked at whether that policy was kind of getting in the way of Mayo being more innovative and entrepreneurial. The upshot of all of that was that physicians and researchers now can own and serve as C-suite members of companies, and they can also serve on boards.” This change, more than any other, has had the greatest impact, according to Berning.

“Back at PEMSTAR, we worked with groups of Mayo clinicians who had ideas, but you always had a sense there were limitations to what they were able to do,” he says of the clinic’s longtime strictures prohibiting its doctors to participate directly as officers in companies spun off from their research. “Now most of those limitations are gone, and if they have a good idea, they’re free to pursue it within certain guidelines.” He points to his own company as an example. Its officer roster includes five practicing Mayo clinicians: Drs. Brian Pickering, Vitaly Herasevich, Ognjen Gajic, Vernon Smith and Andy Boggust. And last year, it landed $1.1 million in seed financing from Mayo and others (see sidebar, at bottom).

“What you discover working with them is that they love being Mayo clinicians first and foremost—they always will, regardless of what else they’re working on, and we all hope they stay there and continue working on their research,” Berning says. “But the difference is now they’ve got the same opportunities as researchers at places like MIT and Stanford—if they can carve out the time to work on a new company, [they’re allowed to], and it’s to everyone’s benefit.”

That includes to the benefit of Rochester, which has committed public resources to partner with Mayo in the business accelerator and other efforts to leverage the clinic’s research clout into a self-perpetuating med-tech start-up engine. Of course, having the kind of financial resources Mayo has doesn’t hurt.

Retaining jobs locally

With more than 32,000 workers, most of them in Rochester, the Mayo Clinic is the biggest non-government employer in Minnesota, with an estimated local economic impact of nearly $10 billion. It’s also a research powerhouse, producing enough new drug therapies, medical devices, software and other ideas to help spawn 94 company start-ups over the last 15 years through licensing deals. And through a pair of seed funds, it invested $12.2 million through 148 awards since 2005.

However, most of the economic benefits of this tech transfer have happened elsewhere. Coastal venture capitalists typically demand their portfolio companies be located nearby—a familiar story to Minnesotans who have long been accustomed to seeing their promising biotech start-ups flee to where the investors live.

Mayo’s recent changes to commercializing its technology are expected to not only benefit its patients and sink more profits back into its practice, but also keep start-ups local to benefit Rochester and Minnesota.

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Because the ramped-up effort is still relatively new, and the gestation time of biotech start-ups is lengthy, few concrete results are yet apparent. But Rogers is optimistic, contending there are signs that “critical mass” is being reached in the push to turn Rochester into a self-perpetuating start-up hotbed.

That vision for Rochester fits into a much larger picture: Mayo’s $6 billion “Destination Medical Center,” an enormous project to rebuild the city’s downtown, add another 30,000 jobs and turn it into a worldwide magnet for patient health care, helping it stay competitive with big-city rivals such as Baltimore’s Johns Hopkins and the Cleveland Clinic. Last year the Minnesota Legislature earmarked $455 million to help launch the ambitious effort.

Rochester: The next Madison?

Mayo Clinic Business Accelerator coordinator Xavier Frigola, a native of Barcelona, Spain, can point not only to a doctorate in immunology, but also an MBA, giving him business acumen to guide the day-to-day management of the accelerator. He cites the example of Madison, Wis., which, like Rochester, is a smaller city that is home to a research powerhouse.

“Madison has a thriving entrepreneurial community because some of the knowledge being spun out of the University of Wisconsin [supported the development of] large companies that stayed there, and they spawned spin-offs of their own,” he says. “It became a self-sustaining cycle. This is attractive for the kids going to school in Madison: They love it and stay there. We want something similar in Rochester.”

Mayo’s philosophy shift to allow its doctors to become entrepreneurs is a potentially game-changing development that is making the soaring vision more feasible, he asserts. “Now everyone is in alignment in saying we’ll continue creating companies, but all things being equal, let’s try keeping some of those companies here,” Frigola says. “It also helps Mayo. It’s easier for them to recruit someone to Rochester when their significant other also has opportunities that are not in the medical field. The city would like to have job opportunities for those spouses, who are highly educated professionals in whatever industry they’re in.”

In a related move, Frigola says RAEDI is working to establish Rochester as a worldwide hub for regenerative medicine, the science of regenerating human tissues and organs in the lab from stem cells. The city scored a hit in March; the Belgian company Celyad (formerly known as Cardio3), which in 2007 licensed Mayo research in the field, announced it would set up a 15,000-square-foot prototype manufacturing facility on the fifth floor of the BioBusiness Center. It will be used to support the clinical trials of its heart cell regenerative therapy candidates.

During its initial public offering in November 2014, Celyad issued to Mayo 20,833 shares of common stock worth about $500,000 as part of its licensing deal. The city invested $600,000 in the new facility, while the Minnesota Department of Employment and Economic Development offered to kick in $357,000 more if Celyad invested at least $1.5 million in Rochester within a year and creates at least 33 good-paying jobs by 2017.

RAEDI’s ultimate aim is to persuade the company to establish a 100,000-square-foot facility with a hoped-for 350 to 1,000 jobs in the city once its products receive FDA approval—a development it figures will help trigger a regenerative medicine industry cluster.

The view from Versant

The prospect of getting next to Mayo’s vast store of medical knowledge and expertise at a time when it has moved into a commercialization mode has proven attractive to the cadre of coastal VC firms mentioned earlier, including Versant Ventures, which has $1.9 billion under management in North America and Europe.

As one of the original takers at the opening of the incubator two years ago, the firm saw not only the possibilities of potential investments in Mayo spin-offs—it has previously invested in Mayo research-based companies Torax Medical and Nevro Corp.—but also in forging partnerships between its existing portfolio companies and the clinic’s researchers, according to Kirk Nielsen, Versant’s point man in the Midwest. (See “Examples,” at bottom, for more on Nevro.)

“There are a number of ways we think Mayo could add value to us and our companies, and a number of ways we think Versant could provide value in return,” he says. “Over the course of the past two or three years, we’ve had a variety of discussions with Mayo either about company creation or about ways that our existing companies could collaborate with them.”

Those collaborations, he says, could take the form of developing products or in “setting clinical strategy for those products and assessing the health economics of those products. Considering all the ways we could work together, taking space in the accelerator was a natural fit for us.”

One of the biggest benefits of med-tech start-ups working with Mayo, Nielsen says, is that it understands the changing dynamics of the health care business, which due to reforms has become a world “where quality and cost of care are more important than quantity of care, and no one embodies that approach more than Mayo.”

Whether Rochester could eventually develop into a Midwestern med-tech VC hub “remains to be seen,” he says, but adds, “I think Mayo and the city of Rochester do about as much for their early-stage ecosystem as anyone I’ve seen in terms of the quality of the team they’ve assembled to support their companies and the in-kind resources they provide, not to mention the capital they make available along the way.”

Don Jacobson is a Twin Cities-based freelance editor and writer.