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Keeping Ideas in Minnesota
by Bill Catlin
March 21, 2000
Second of two parts
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Minnesota has been the launching pad for many leading technology businesses in the past. But some entrepreneurs say the state is no longer a good place for high tech start-ups, and the state's share of the U.S. venture capital pie has gone down. Recently several local investors have formed new funds to target Minnesota and the Midwest. But many observers say the state needs to do more to promote high technology, including starting its own venture capital fund.

The many historic buildings bordering Saint Paul's Mears Park are home to a cluster of technology businesses informally known as CyberVillage.
DISEMBODIED MUSIC swirls through the evening air in Mears Park in St. Paul's Lowertown area. The many historic buildings bordering the park are home to a cluster of technology businesses informally known as CyberVillage. David Quimby is a Minnesota native who moved here after nearly two decades in Silicon Valley, including a stint as a technology vice president for Bank of America. He came back to develop new ideas for the Web.

"I really wanted to launch ventures that were creative and innovative and were Minnesota-based, and really show what this region has to offer," he says. "This is the place that spawned Medtronic and Cray Research and I really had the mindset that there's no shortage of entrepreneurial opportunity here."

After almost a year of looking for investors, Quimby says his view of opportunity in Minnesota may have been too rosy. He says investors are more conservative than he expected. He recently started looking back in California, something he initially wanted to avoid. And while he hasn't given up on Minnesota, he's concerned about what he's found here. "There's a mentality forming among the younger generation who are starting a lot of these Web businesses that 'I gotta leave home to make it in the world.' And that's dangerous."

Several high profile and successful ventures have left Minnesota, including Firepond, and Allaire, software firms which have market values around $2 billion.

Jay Hare, a partner with PriceWaterhouseCoopers in Minneapolis, tracks venture capital in Minnesota. "The two broadest reasons (for leaving) are a financing source typically says, 'If you want to get funded, you need to come to the coast,' or with the funding the expectation is that you would move to the coasts," says Hare. "The second is the company is unable to find as many talented workers in a particular area, here as on the coasts, or at least, so they're told."

PriceWaterhouseCoopers analyses show venture-capital investments in Minnesota have risen, but the state's share of national venture capital is down from nearly three percent in 1995 to 1.3 percent last year. The company estimates one sixth of the more than $356 million which Minnesota venture capital firms invested last year went to firms in the state.

Hare says one problem may be a lack of attractive opportunities for investment here. But he also says there is a shortage of capital for early-stage companies. "It would be interesting to see what the state might do with a state-funded venture capital fund, intended specifically for Minnesota companies, professionally managed," he says.

After almost a year of looking for investors, Quimby says his view of opportunity in Minnesota may have been too rosy. He says investors are more conservative than he expected.
Hare is among the growing number of voices calling on the state to use money from the projected $1.8 billion budget surplus to fuel high technology. The Minnesota High Tech Association has called for $200 to $500 million for tech-related investments and a cabinet-level agency focused on technology.

The dean of the University of Minnesota's Carlson School of Management has issued a similar call for funding. Others support the idea of putting state pension dollars into a Minnesota-oriented venture capital fund. Dennis Anderson is a Wayzata-based executive recruiter and investor specializing in Minnesota start-ups, and national chair of the 2,000-member Council of Growing Companies. "What other states are doing and we're not, is they're dedicating funds to lure technology companies to their state, as well as fund the talent that exists in their states," Anderson points out.

Governors and legislatures across the country are proposing big investments in science and technology, and some are dedicating public money to venture capital investments. In Pennsylvania, three public-private venture capital funds with taxpayer or public-pension dollars focus on investing in the state.

John Lane, chief investment officer of one of the pension plans says the first fund had returns on paper of 250 percent in about a year and a half, and invested in 20 Pennsylvania firms. "If we didn't set this fund up, a lot of the ideas would've gone by the wayside," Lane says. "But a lot of them would have went to California or Boston or other centers for internet and I.T. activity. I think we were able to keep what we had here and exploit that, and also attract some other ones into the Commonwealth."

Still, critics like Arthur Rolnick, senior vice president of the Federal Reserve Bank of Minneapolis, say such plans risk lower returns that could deprive pensioners of a more comfortable retirement. And Rolnick says it's just bad policy. "The fundamentals that make an economy grow well (are) education, low taxes on all businesses, (and) good public services," Rolnick says. "These are the things that make for successful economies; not governments trying to pick particular businesses or local businesses, or whatever, and trying to support them."

Several local investors are pulling together as much as $275 million in new funds focussed on Minnesota or the Midwest. That's more than half of the amount of venture capital invested in Minnesota last year. But to put it in perspective, even if every dollar had been invested in Minnesota last year, the state's share of all U.S. venture capital would still lag its 1995 level.

Even so, the new funds suggest growing investor optimism about Minnesota. Michael Gorman of St. Paul Venture Capital, says the firm may exceed its goal of investing 20 percent of its total in Minnesota this year. Gorman says he's seen a jump in promising business proposals in the last six to nine months. But he also says the state should not be complacent, and the idea of a venture fund with public money focused on Minnesota has potential.

Related Story
The high-tech revolution is fueling the American economy in ways unprecedented since the turn of the century. New major industries are growing overnight. Billionaires spring from nowhere. Cities that once were in the doldrums, are now capitals of high technology. Where is Minnesota's place in the high-tech revolution? Twenty years ago, Minnesota was at the cutting edge of high technology. Are we still? What can the state do to return Minnesota to the forefront of innovation? Read more in our special section, Minnesota in the .Com Age.
Gorman says two elements are important for any venture fund with state money: an understanding that venture capital is risky, and private-market discipline should determine the investment choices as much as possible.

Minnesota Commissioner of Trade and Economic Development Gerry Carlson has his doubts. Carlson says he's concerned good business ideas go wanting for funds. But he says it doesn't make sense for the state to plunge into the venture capital game without seeking consensus on how to address Minnesota's technological strengths and opportunities.

"The ball is first of all in the state's court," Carlson says. "We have a role in this. The University of Minnesota has a role in this. The industry associations have a role in this, and we are planning on bringing a group of these people together in the next few weeks."

Robert Heard, president of the National Association of State Venture Funds says the debate in Minnesota occurs as economic development experts increasingly view entrepreneurs as vital economic forces. "States that want to be in the game, have been asking themselves that question, 'How do we enable entrepreneurs to prosper, to have the resources that they need to grow,'" Heard says.

Heard says capital is only one component which entrepreneurs need to succeed. But he says state venture funds can be profitable for both a state's economic vitality and finances. Heard says in the best efforts, government leaders get programs launched and help set long term direction, but leave the investment decisions to carefully chosen professional fund managers.

Part One: The Digital Furnace | Part Two: Keeping Ideas in Minnesota