As signs of life are finally appearing in local landscapes after what seemed like our longest winter in history, they’re also popping up in the investment community after one of our longest droughts of financing for early-stage businesses.
“I’m hearing about more activity taking place out there than I’ve heard in a long time,” says serial tech-entrepreneur Tom Kieffer, co-founder and CEO of Virteva. In 1999 he founded Agiliti, a pioneer in what would become the cloud computing industry. Kieffer also is on the board of several organizations, including the Itasca Project and Minnesota High Tech Association.
Financing is coming from a variety of sources, including Gopher Angels (see here); a reinvigorated Brightstone Venture Capital, which currently manages a $50 million fund focused on early-stage opportunities; and Arthur Ventures, which has $45 million to invest in software companies primarily in the Midwest.
Quite a bit this recent financing seems to be going toward med-tech and high-tech companies (see table below).
Investment in Minnesota-based med-tech companies surged to $341 million in 2013, up 81 percent from 2012, according to LifeScience Alley (see here).
Minnesota also was recently ranked as the nation’s third-highest financier of tech-related projects through the crowdfunding site Kickstarter.com, according to a National Bureau of Economic Research report. Kickstarter, by the way, announced it hit $1 billion in funding through its site as of March 3, with half of that raised in the last 12 months. Thus far, $118 million for 3,833 technology projects have been raised through the site.
“Things are loosening up out there, and there’s a multiplier effect because of the deflation associated with doing a startup today,” says Rick Brimacomb, founder of Brimacomb and Associates, and a long-time player in local venture capital and early-stage private equity transactions. “You can get further than you could have before with the dollars that you raise” because of advances in technology and the ability to tap quality, affordable talent on a global basis.
The startup scene is also benefitting from what Kieffer refers to as a great environment for entrepreneurism. “Minnesota is a great place to do a startup. It’s cheaper and all the talent you could possibly need is here,” as are mentors, fellow entrepreneurs, advisors and professional services firms eager to help, he says. “But we don’t do a great job of promoting ourselves this way, while other states that don’t have as good of an environment for startups are marketing themselves better, and attracting opportunities there.”
The newly formed Accelerate MSP plans to change this by helping promote the state as a great place for entrepreneurs (Kieffer is on its board). It also plans to help entrepreneurs find the resources they need to grow their businesses, according to CEO Pam York, who was hired in October.
“Right now I’m going around to all the organizations such as LifeScience Alley and the High Tech Association to figure out how we’re going to do this. First and foremost, we want to make sure we’re all singing the same song,” she says. Accelerate MSP also is looking to wrap up its own $750,000 funding round to cover operating costs for the first two years; about $175,000 has been raised thus far. On hold for now are plans discussed last year to manage a seed fund that would invest in as many as 10 companies a year.
These and other positive developments are fantastic for entrepreneurs seeking financing. What still needs to be resolved, however, is how they will attract larger, more significant investments to further grow their businesses and provide a return to their first-round investors. It’s a stage in a company’s financial development commonly referred to as “Death Valley.”
The solution will likely require the same type of revolutionary thinking that helped make Minnesota one of, if the not the best, places to fund startups years ago.
In 1996 Fortune magazine described the Twin Cities as “Money-apolis” because of its decades-old ecosystem for funding innovation from startup through initial public offering and making a market in freshly minted public stocks. In the 1960s, it was where one of the nation’s first venture capital firms formed, and it became one of the first areas to advance the sale of stock in local companies due to young brokerages Craig-Hallum and John G. Kinnard & Co. By the time Fortune wrote about us, Minnesota ranked first in the nation per capita in the number of locally based small companies traded on Nasdaq. We were second per capita in the number of IPOs done in a year. “There are few spots on the planet where so much cash is chasing so many creative ideas,” the article stated. Privately funded companies would go public, providing to their earlier investors their returns, or “exits,” and the opportunity to reinvest some of those winnings in new startups.
Also around 1996, this engine for opportunity began to stall. The bid-offer spread for making a market in a publicly traded stock was narrowed, reducing how much traders could earn buying and selling shares. These and other regulatory changes made it too expensive to continue making a market for many of our 40-plus local micro- and small-cap stocks. Worse, this development, plus additional pressures on brokerage firms, made IPOs less lucrative, especially after the tech bubble burst, the 9/11 attacks and the recession that hit in the early 2000s. Without IPOs, it was much harder for local investors to make a return and reinvest in early-stage companies. This confluence of events destroyed an ecosystem that for 40 years had helped launch companies from Grand Casino and Rainforest CafÃ© to Medtronic and St. Jude Medical.
That system’s genesis was the creative thinking of Alan “Buddy” Ruvelson, who in the 1950s identified a need for more financing for emerging growth companies. (Read more here.) He gathered a group of investors and received the nation’s first Small Business Investment Company (SBIC) license, allowing him to start the state’s first venture capital business. That in turn helped fuel the growth of what became the Twin Cities’ vibrant venture capital and securities brokerage industry.
As in the 1950s, when the federal government came up with SBICs, changes are underway today to make it easier for early-stage companies to raise capital, primarily through the Jumpstart Our Business Startups Act of 2012 and Dodd-Frank. At the same time, crowdfunding (projected to provide $5 billion in financing in 2013) and advances in social media and technology make this an ideal time for someone to innovate the industry that finances innovation.
The question is, who will be the next Buddy Ruvelson?