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Medical (Back) Alley?
By Bill Catlin
Minnesota Public Radio
May 23, 2002

Minnesota's a world leader in medical technology, right? After all, the state is home to giants like Medtronic, St. Jude Medical, and a slew of smaller medical device companies. So why does the trade organization Medical Alley think Minnesota's medtech industry needs to raise its visibility? Just ask the investors who flew to Minneapolis this week.

Don Gerhardt, president and CEO of Medical Alley says efforts to raise Minnesota's visibility as a center for medical devices are overdue.
(MPR Photo/Bill Catlin)

The goal of Medical Alley's Medtech Investing conference in Minneapolis was to help small and emerging medical technology companies gain access to capital. The conference drew venture capitalists and investors from the East and West coasts, and abroad—some with very deep pockets.

Paul Haycock heads the European health care team for APAX Partners, which provides investment advice or management for a portfolio of more than $10 billion. Was Haycock aware of Minnesota's global leadership in medical technology? Not really.

"I had a vague notion this area has a relatively high percentage of tech companies ... but no more than that," he says.

Robin Bellas, general partner with Morgenthaler Ventures in Menlo Park, Calif., which manages over $2 billion, says Minnesota's giants like Medtronic sometimes buy the firms in which Morgenthaler has invested. But Bellas says Morgenthaler sees only a "modest stream of [investment] opportunities" from Minnesota.

"I think this place has always held the opportunity. We've just never mined it as well as we should," Bellas says.

That's all too common, laments Harlan Jacobs, head of Genesis Business Centers, Ltd., a high tech, for-profit business incubator program in the Twin Cities. He says Minnesota's medtech strength just doesn't register with enough investors from out of state.

"If they weren't watching a movie on the plane, they'd look down from 35,000 feet and say, 'Hmm, look at all those lakes,' and then they'd just go back to what they were doing. So, here in fly-over land, we've had a problem," Jacobs says.

Medical Alley sponsored the conference in part to address that problem, says Don Gerhardt, president and CEO of the trade organization. He says such efforts to raise Minnesota's visibility as a center for medical devices are overdue.

"We've been too Minnesotan about it," according to Gerhardt. "We tell ourselves about it but no one else. We invite no one else in. Or we may be a little too reticent to extend our hand. So, we're extending the hand."

Gerhardt says the conference presenter, International Business Forum of New York played a key role in drawing big players to Minneapolis. IBF, which conducts a variety of business- and investing-related conferences, draws from a broad list of contacts.

Gerhardt says his goal is to strengthen the network of connections—both to sources of capital and technical expertise—that can help emerging medical technology companies save time and bring a product to market sooner. After a stint in Vermont, where he witnessed the entrepreneurial ferment of the Boston area first hand, Gerhardt says Minnesota's process is too "random." Companies trying to find money and help are too often forced into a search comparable to "Blind Man's Buff."

Gerhardt says the conference is one part of an effort to ensure Minnesota maintains its franchise as a medtech leader.

"Thirty years ago, Minnesota was the hotbed for software and hardware in IT. With Cray, Unisys, Control Data. Guess where that is now? It's on either coast. That's not going to happen this time around. We're here to make sure of that. And we think it's worth a battle and worth some major effort."

One effort to make capital available locally has fallen victim to the state budget axe. BICI, the Biomedical Innovation and Commercialization Initiative, was structured to invest a combination of state and private dollars in promising technologies. Buzz Benson of US Bancorp Piper Jaffray Ventures says it would have been a good step to help companies in early stages of development.

"There's early stage funding needs for biotech companies; there's early stage funding needs for medtech. The medtech is much more established. It's earlier to raise early stage medtech dollars than it is [for] biotech. And I'd like to see more done [for] biotech," Benson says.

Venture capitalists have not completely ignored Minnesota—far from it, lately. In the most recent PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey, Minnesota ranked 9th in the US. Venture capital investments in Minnesota firms jumped by nearly one third in the first quarter of 2002, while they declined by nearly one quarter nationally. Nearly 40 percent of the investments in Minnesota went to medical device companies.

Still, Jerry Okerman, CEO of the Twin Cities based Sota Tec Fund, says Minnesota generally does less well.

"The statistics indicate that we have received about 1 percent, sometimes less, of the money being invested by venture capitalists in the country. And on a statistical basis, population-wise and technology-wise, I certainly think we're deserving of a larger portion," Okerman says.

Mark Wan, co-founder of Three Arch Partners in Portola Valley, Calif., which has invested in some Minnesota firms, says it's simply more convenient for venture capitalists to stay close to home.

"It's a lot easier for us in California, where I think it's still the case that most of the money resides, to kind of look where the light post is. We're looking under the light because it's real easy to look there in California. It's a little harder, it takes more time and effort to get out here to Minnesota," Wan says.

But in the aftermath of 9/11 and the bursting of the Internet bubble, many observers say there's renewed investor enthusiasm for the health care sector, and there's a lot of money looking for investments. Wan says California investors are looking beyond the rim.

"To some extent California is overserved. And too competitive. And the sense is there are good opportunities here and perhaps not quite as well attended to," says Wan.

Still, he adds, convenience remains a big issue. "To put it crudely, the thing that makes it work here in Minneapolis or other areas, is good access from California. Because what people won't do is they won't make investments where they can't get to the companies within a reasonable time frame of travel."

And Wan says people are another important consideration.

"As much as anything, what makes an area a good investment opportunity for a venture capitalist is people who are wiling to go to work for startups. If you ask me what makes Silicon Valley work, it's not simply that there's a good university and venture capitalists and lawyers, because those exist in a lot of other places," Wan Says. "In Silicon Valley when somebody does a start up and they come home and they say to their wife, I'm thinking about joining a startup, or they tell their neighbor, 'I'm going to go to this startup,' and the reaction is, 'Oh, that's great! That's really exciting.' And in a lot of places in the country that's not quite the case. So there's a real culture and a willingness to get involved and join a startup. Which is key, because we can put money into a great idea but if there aren't people there, then there's no company."

Harlan Jacobs of Genesis Business Centers says he's encouraged by the presence of investors like Wan in Minnesota. "We're still in a significant prolonged drought with respect to seed capital," he says. Seed capital is typically the first investment in a fledgling business by investors outside an entrepreneur's circle of friends and relatives.

"When venture capitalists from London and the West and East Coasts of the United States, when they come to Minnesota to look at companies and opportunities here, that's a good sign. I think the rain clouds are gathering, and in this sense rain is good. It'll help us a lot," says Jacobs.

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