Show Me the Money: Finding Local Venture Capital in Minnesota

Show Me the Money: Finding Local Venture Capital in Minnesota

Local venture capital is in decline but startups can still find local capital, if they know where to look.

Everybody has an idea. Everyone has a business plan. Just about anyone who’s out of high school has startup dreams of building the magic company, making millions, saving the world, and never having to work for somebody else. While maintaining a business sounds boring to some, startups are always cool.

Today, the Twin Cities is awash in resources for aspiring founders: the MN Cup entrepreneurial competition, Twin Cities Startup Week, and an expanding range of incubators and accelerators to help build businesses. No one needs an office when they can sign up for co-working space and start tinkering. But sooner or later, every founder has to find financing to fuel the vision.

Where can you find the money? First-time founders can get obsessed with trying to raise “VC”—venture capital—to bankroll their vision. Minnesota investors and entrepreneurs say there’s money out there, but these days, founders and companies have to be creative.

The emerging startup culture in the Twin Cities has created a new breed of seed-stage investors and funds that back founders at the earliest stages of their new business. The local Gopher Angels group, for example, connects startups with angel investors. There’s also increasing support for diversity, including women starting companies and investors looking to back woman-led companies.

“If you look back five years to what’s available today, it’s probably gone from three or four legitimate early-stage investment firms to maybe a dozen,” says Reed Robinson, executive director of Minneapolis–based Beta.MN, which offers startups resources and access to potential mentors and investors. “There is a lot more capital than there was.”

Robinson says that over the last five years, Beta.MN has worked with 124 companies that have raised nearly $250 million in financing. But he notes that founders everywhere will always argue there’s not enough capital available for new ventures: “You won’t find an active startup market that believes it has enough capital.”

Following the money can be complicated. A Minneapolis startup may find some of its financing in Silicon Valley, while a locally based fund might invest in a company headquartered in Chicago.

While seed-stage and angel investing are on the upswing, traditional venture capital firms that make larger, later-stage investments are increasingly rare in the Twin Cities. That means when a company starts seeking more significant financing rounds, it will often have to look out of state.

While seed-stage and angel investing are on the upswing, traditional venture capital firms that make larger, later-stage investments are increasingly rare in the Twin Cities. That means when a company starts seeking more significant financing rounds, it will often have to look out of state.

“In the late ’90s, we were all geniuses … a lot of venture firms made a lot of money. There were 15 or 20 active venture capital firms” in the Twin Cities, recalls David Dalvey, managing general partner of Minneapolis–based Brightstone Venture Capital. “Now there [are] probably [fewer] than five or six [that are] active.”

Minnesota is not unique.

“I think it’s a national phenomenon,” Dalvey says. “You had a big shakeout in the venture capital industry.”

Planting a seed

VC Investment Trends in Minnesota

2014: $605.7 million

2015: $405.8 million

2016: $401.1 million

2017: $698 million

2018: $641.9 million

Source: PwC/CB Insights MoneyTree Report

It might be fair to call Ryan Broshar “Mr. Startup” in local investment circles. Broshar co-founded Beta.MN and Twin Cities Startup Week, the latter of which began in 2014. He served as managing director of the Techstars Retail Accelerator in partnership with Target Corp. for three years. He’s also founder and general partner with Matchstick Ventures, which has offices in Minneapolis and Boulder, Colo.

Broshar says that Matchstick is investing $500,000 to $2 million in companies, which he defines as “seed-stage” capital. Matchstick has invested in more than 50 companies—40 percent of which are local—and is assembling another fund. Broshar did not offer details, but an October 2018 filing with the U.S. Securities and Exchange Commission indicated that Matchstick had raised $12.3 million of a $25 million offering.

Broshar says he was motivated to launch Matchstick because he saw local companies with talent on par with that of higher-profile markets, but Minnesota startups were having trouble raising money. “There was this tremendous need for startup capital,” Broshar says.

He credits a saturated investment market on the coasts for driving investors to the Midwest. “There does seem to be a lot more outside capital interested in investing in our market. They’re looking for breakout stuff.”

Twin Cities–based The Syndicate Fund is also new to the region. “We invest in tech-enabled companies,” says Brett Bohl, Syndicate’s founder and managing director. Its first fund in 2017 was $1.5 million and invested in 22 companies. (Broshar is also an advisor to Syndicate Fund.)

“I moved here 10 years ago from the East Coast … and I remember thinking, ‘Where the heck are the other entrepreneurs?’ ” he says. “[Now] you can move here and find an organization like Beta.MN and plug right in.”

Approximately 20 percent of the firm’s investments have been Twin Cities–based ventures. In March, it announced it had raised $5.75 million for its second fund. Bohl says that he’s planning to make a similar number of investments from that fund: “We’ll be writing bigger checks.”

Gopher Angels began in 2012 as a network of angel investors. But it’s become more organized and is now a recognized tool for local founders to access investment money. “Gopher Angels itself was like a startup,” says Dave Russick, managing director.

Network members make their own investment decisions: $15.5 million in 50 companies so far. Russick says today typical investments are $350,000 to $400,000. The group has approximately 80 members, primarily individuals, but also including a few “microfunds” of about $1 million or $2 million. In some cases, investors may do “follow-on” investments with companies they have previously backed.

“We’ve helped some companies get off the ground,” says Russick. “We’ve had some successes, we’ve had some failures.”

Even so, it’s a competitive process. “We have pitch meetings every other month and we invite four companies in to pitch [to] our member investors,” Russick says. “We might get 30 applications in between meetings, but we only invite four.”

Show me the equity

If you’ve never started a company, it can be inspiring to see other local startups making it work. There is no single path to landing financing, but many local companies are finding a way.

Maple Grove–based StemoniX, which provides “human micro-organs” to pharmaceutical companies for faster and more reliable drug testing, is off to a strong start. The company won the 2016 MN Cup competition; at the end of February, it announced it had closed on its $14.4 million Series B [see “A VC Glossary” on this page] round of financing. Minneapolis–based Brightstone Venture Capital led the round; other investors included Rochester–based Mayo Clinic. “We basically turn skin into usable micro-organs,” says co-founder and CEO Ping Yeh.

“It’s been hard. The first $50,000? That’s really hard. In the early days, you’ve got this idea, right?” Yeh says. “You‘re trying to get traction or customer feedback somehow.” Yeh credits the Minneapolis–based incubator TreeHouse Health with helping get the company on its feet; StemoniX was housed there for about a year.

Yeh believes that the local market benefits from angel investors, an emerging entrepreneurial ecosystem, and the presence of offices of well-to-do families, which may also invest in young companies.

Yeh declines to disclose revenues, but says StemoniX clients now include about half of the top 25 global pharmaceutical makers. He says that talking to potential investors is a different game when your operation starts to look like a “real” company.

“Once you start showing some signs of life,” Yeh says, “people will start talking to you.”

Branch, a platform for streamlining scheduling and other services for hourly employees, began in an incubator in Pasadena, Calif., says founder and CEO Atif Siddiqi. The company relocated to Minneapolis after participating in Target’s Techstars program. In the wake of that, it raised $2.6 million, largely from local investors such as Matchstick Ventures.

In 2017, the company announced it had raised more than $10 million in financing, including a $6.8 million Series A round.

The local finance climate is very favorable for early-stage investments, Siddiqi says. As for later-stage venture capital investments? “There are definitely areas of opportunity for investors who are interested” in backing Minnesota companies, he says.

But he notes that companies often overvalue funding over proof of concept.

“I would say the ultimate validation are customers. Focus more on building the product,” Siddiqi says. “Money will come if you have that first.”

Melissa Kjolsing served as the director of the MN Cup competition for five years. Now she runs her own startup, St. Paul–based Recovree Inc., which works with employers to provide recovery coaching services to employees with drug and alcohol addiction.

Kjolsing has raised $325,000 in financing—all locally—but also landed $105,000 through competitions, including MN Cup.

“My experience was probably pretty unique because of the relationships I was able to develop through MN Cup,” Kjolsing says. “I was plugged into the investor community.” She says founders should focus on building relationships with investors more than simply trying to hammer out a transaction.

“There’s a lot of money in this market, there’s a lot of wealth in this market,” Kjolsing says. “It’s just figuring out where to access it.”

Shaking up the old boys’ network

The world of startups and investing has often been dominated by men. But the local Sofia Fund, which began as the Women to Women network in 1998, is one sign that it’s changing. The fund focuses on investing in women-led companies in the Midwest.

“Clearly, we formed because we knew there was a lack of funding for women-led companies,” says Cathy Connett, CEO. She adds that when Sofia began approaching local women executives, the fund discovered that the vast majority had never been invited to invest in companies. “We not only are investing in women-led companies, but we’ve also brought new money into the market.”

Sofia’s first fund in 2006 was $1 million; its second in 2015 was $5.5 million. Sofia is still making investments from that fund.

Connett avoids using terms such as “Series A,” noting that the definitions of what’s a seed round versus a venture round can differ widely. She says that Sofia typically invests when companies are trying to raise financing in the range of $500,000 to $2.5 million. Sofia’s Investments range from $100,000 to $500,000. “We tend to do the early stage.”

What if a company is looking to raise between $3 million and $15 million? “That’s where there’s a shortage of funding in this market.”
— Cathy Connett, CEO, Sofia Fund

What if a company is looking to raise between $3 million and $15 million? “That’s where there’s a shortage of funding in this market,” Connett says.

One company backed by Sofia Fund is Minneapolis–based Kidizen, which offers an online marketplace for parents to resell and buy children’s clothes. Kidizen has raised about $5 million since it began in 2013: $1.8 million in seed and angel investments and a $3.2 million Series A financing round in 2017.

10 Largest Venture Capital Deals in Minnesota, 2018

Bright Health – $200 million

Bind On-Demand Health Insurance – $60 million

Relievant Medsystems – $58 million

NeoChord – $25 million

Urotronic – $20 million

Total Expert – $20 million

Evolve Additive Solutions – $19 million

Francis Medical – $18 million

Cardialen – $17 million

KeyedIn Solutions – $15 million

Much like being in Congress, fund-raising “requires somebody basically … traveling and fund-raising and pitching,” says Dori Graff, Kidizen co-founder and CEO. “It definitely takes away from [the] work you’re doing on the business itself.”

Graff says that the company’s previous CEO did the legwork. “It helped us grow the team, particularly with developers, so that we could build out the product,” she says of the $3.2 million financing round, led by Chicago–based Origin Ventures.

Experienced local tech investor Joy Lindsay is a Sofia Fund partner, and she also invested in Kidizen: “I would say in terms of access to early-stage capital there are a number of new funds that have started in Minnesota, which is great.”

Lindsay focuses on early-stage Minnesota tech companies, with investments ranging from $50,000 to $500,000. But she echoes others who say that companies looking for larger, venture capital-scale investments often have to look out of town.

“One area that does concern me is the Series A and B funds,” Lindsay says. “We’re needing to get outside VC to be interested in Minnesota companies.”

Bigger deals = fewer deals

By most accounts, 2018 was a strong year for venture capital investment across the U.S. The PwC/CB Insights MoneyTree Report tallied $99.5 billion in VC investments. That’s the second-highest annual total since 1995, eclipsed only by the $119.6 billion invested in 2000 during the dot-com mania that preceded the “dot-bomb” crash. Compared to 2017, dollars invested nationally in venture deals last year were up a robust 30 percent.

But more money is now going into fewer deals. So-called “megadeals” soak up an increasingly larger share of capital. Even though 2018 saw $23 billion more in investments than in 2017, the total number of deals dropped 5 percent, to 5,536 for the year. The average deal size of $13.1 million in 2017 shot up to an average of $18 million for 2018.

Minnesota reflects the national trend.

Minneapolis–based Bright Health, the current kingpin of Minnesota startups, is an example. The company, which is building a national health plan, has raised more than $440 million in three rounds of financing. A single deal—its $200 million Series C round in 2018—represented 31 percent of all venture capital raised in the state last year, according to the MoneyTree Report.

Bright Health has raised its financing almost exclusively out of town. Backers include Bessemer Venture Partners and New Enterprise Associates, two of the world’s largest venture firms, both based in Silicon Valley.

“What we set out to do is very expensive,” says Kyle Rolfing, Bright Health’s president and one of three co-founders. He says there are no local firms large enough to write checks on the scale Bright Health needed. That makes it tougher for other startups hoping to land local capital.

“It is harder for these Minnesota companies to get funding,” Rolfing says. “We have a lack of local VC firms here.”

“It is harder for these Minnesota companies to get funding. We have a lack of local VC firms here.”
— Kyle Rolfing, president, Bright Health

Nothing ventured, nothing gained?

VC veterans say that the swashbuckling days of 20 years ago are gone. Brightstone’s Dalvey says that the dot-com gold rush of the late 1990s drew many to the business; in the wake of the subsequent crash, many venture firms evaporated.

“It was an oversaturation: Too much money chasing too few deals,” Dalvey says. Brightstone focuses on Series A-stage investments in technology and life sciences. Most are $1 million to $5 million. Its current fund is $100 million. Given that fact, Brightstone is not competing with seed-stage investment firms. “I don’t see any of those firms in deals we’re doing,” Dalvey says.

Dalvey says that Brightstone saw three good recent exits from companies it had invested in from a $20 million fund that launched in 2013. Minneapolis–based Flipgrid, a video-sharing education app, was acquired by Microsoft in 2018. The $321 million sale of Minneapolis–based Bite Squad was announced in December. Plymouth–based biotech company Celcuity went public in 2017, an increasingly uncommon exit path for startups.

Founded in 2004, Eden Prairie–based Split Rock Partners has been one of the largest traditional venture capital firms in Minnesota. It does not plan to raise future funds but continues to manage current investments. Split Rock managing director Michael Gorman says that venture capital is no longer the be-all and end-all for founders seeking financing.

“I focus on software and internet-related investing,” he says. “That domain has changed. The cost overall of technology development has come down dramatically,” Gorman says. He says tech startups that once might have needed millions to get started and prove their product can often get rolling now with “tens of thousands of dollars” instead.

“There are a wider variety of funding sources than just VC,” continues Gorman, who points to angel investors, incubators, accelerators, and other tools. “There’s a diversity of forces providing that capital.”

The game has changed, but at the end of the day, Gorman believes that the best ideas and entrepreneurs are finding capital.

“Are there really strong teams and opportunities that are not getting funded?” Gorman asks. “It seems to me that the strongest teams and opportunities are funded.”

Show Me the Tax Credits

Many investors lament the loss of the state’s Angel Tax Credit Program, which offered a 25 percent credit on investments for certified investors backing a certified business in the state. The program ended at close of 2017. State records show that $421.5 million in qualifying investments were made from 2010 to 2017. In the program’s final year, 752 investors received credits. It arguably helped draw investment to Minnesota companies; roughly half of the certified investors in 2017 were nonlocal.

Gov. Tim Walz’s budget proposal calls for restoring the program. The Minnesota High Tech Association, Economic Development Association of Minnesota, and the Medical Alley Association have all voiced support.

“We’re optimistic about the angel tax credit coming back,” says investor Joy Lindsay.

Number Crunching from PwC/CB Insights MoneyTree Report

  • Minnesota garners less than 1 percent of all venture capital invested nationally. Just three states—California, New York, and Massachusetts—attract nearly 80 percent.
  • For Q418, Minnesota ranked ninth among states for total dollars invested; the Twin Cities ranked 10th among metro areas.
  • Minnesota had 62 venture backed deals in 2018, its most active investment year in the last 10.

Source: PwC/CB Insights MoneyTree Report. Includes equity rounds raised by U.S.–based, VC-backed startups, including seed/angel rounds where a VC, CVC [corporate venture capital], or Super Angel [seasoned serial investor] invests in a company in the seed or subsequent round.

Burl Gilyard is TCB’s senior writer.