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Minnesota lags in new business formation
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Kurt Thielen and colleagues went 18 months without pay to develop their wireless MP3 player, the Aireo. (MPR Photo/Bill Catlin)
Minnesota has a proud history of entrepreneurship. Pioneers like Curt Carlson, Earl Bakken of Medtronic, Bill Norris of Control Data, and Richard Schulze of Best Buy built billion-dollar success stories and created thousands of jobs in Minnesota. But lately the state's entrepreneurship is lagging, and that's raising concerns about Minnesota's future prosperity.

St. Paul, Minn. — Why should you care about something esoteric like new business formation?

Because, says Twin Cities Venture Capitalist Michael Gorman, all Minnesotans have a stake in it.

"We should all care that new businesses are forming, because at the end of the day those create jobs, wealth and opportunity for our friends and family," says Gorman.

Well, this is Minnesota—birthplace of Best Buy, Control Data, the Carlson Companies, Medtronic, and a thriving medical device industry.

No problem, right?

"In a state that likes to think of itself as above average, we're not quite there in the startup area," says Bob Isaacson, with the Minnesota Department of Employment and Economic Development.

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Image The start up rate isn't where we need it to be

Isaacson says Minnesota ranked 35th among the states in the rate of new business formation in 2000, a low ranking that's troublingly typical for the state. During the recession year of 2001, Minnesota bumped up to 25th, still below the U.S. average.

But the picture is decidedly mixed. Isaacson says Minnesota startups tend to have staying power.

"Businesses that start up not only survive, but they have a tendency to expand at a faster rate than in other states as well. So, the start up rate isn't where we need it to be, but once they do start up, they survive and they expand, and that's the good news inside the dark clouds," says Isaacson.

The good news is so good, the Twin Cities earned the top ranking in Entrepreneur magazine's latest survey of the best cities for entrepreneurs.

Why do Minnesota startups last longer and grow better? Ask someone who took the plunge: Kurt Thielen, who started Minnetonka-based SoniqCast after being laid off in 2001.

SoniqCast makes the Aireo, a gizmo about the size of a cigarette pack. It can download audio over a wireless internet connection, and then play it over your car stereo with its own built-in FM transmitter.

The Aireo won recognition at a major trade show, and SoniqCast has grown to 12 employees. Back when he started, Thielen was one of 70 who were laid off. Thielen says that talent base was one of the Minnesota strengths that helped SoniqCast get this far.

"Out of 70 engineers, I think we had 70 good engineers. I mean we didn't have the normal 10-, 15-, 20 percent of dead weight. And I just thought it was a waste not to utilize and capitalize on that capability that was just there," says Thielen.

In a state that likes to think of itself as above average, we're not quite there in the startup area.
- Bob Isaacson, Minnesota Department of Employment and Economic Development

Thielen and a few others perservered without pay for a year and a half to develop their product. Tenacity is not unusual in Minnesota startups, according to venture capitalist Michael Gorman.

"And I think that shows up in that they have staying power and they endure once they get up and running, because there is a real focus. Maybe it's a function of our Midwest culture and Midwest work ethic, that we're going to build something real, more than we're going to try to make a quick hit or do the latest sexy thing," says Gorman.

There's also plenty of assistance available in Minnesota. John Meyers heads Cyberensics, a two-man operation that scours computers for electronic records. Meyers says help was abundant.

"There's a lot of support networks willing to work with you, and there are a lot of businesses that are willing to bet on your success and work with you around certain financial arrangements to use their services as well," says Meyers.

So we've got talent, tenacity and support. Why does Minnesota lag in new business creation?

Back to Kurt Thielen of SoniqCast.

Thielen always wanted to start his own company, but held back until he was laid off.

"I've always been kind of conservative, in that I had a job. It was a good job, good paying job, good benefits, and it was always very difficult for me to even consider quitting to start a new company. That's the problem with having a good job. If you have a good job, you don't want to go out and take that step," says Thielen.

Minnesota's strong economy and job market during the 1990s may have kept other people from taking the risk of starting a company.

Bob Isaacson with the Department of Employment and Economic Development says other factors may be at play as well--Minnesota's major employers tend to be in mature industries, where there aren't a lot of big, untapped opportunities for new businesses.

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Image Lots of support for entrepreneurs

Others just see a lack of big ideas.

Former venture capitalist Doug Johnson now helps teach University of Minnesota business school students how to assess new business ventures. He sees a lot of budding entrepreneurs in his job. Are they shy of ideas?

"Yeah, I think they are. The ideas are small—smaller—they're not the big ideas," says Johnson.

He says Minnesota isn't getting as much venture capital as in the past. Lacking funding for hi-risk, high-potential ideas, Johnson says entrepreneurs are avoiding them.

"And settling on lower return, lower risk new business opportunities that are less likely to fail, but also less likely to produce what's called the gazelles, … the next Medtronics, Control Datas, etc," he says. A state survey of new businesses provides some evidence. Less than 40 percent of respondents were selling newly developed products or services. Though reasonably high, it wasn't the 50 percent or 60 percent state officials expected.

Is Minnesota's future prosperity threatened?

Johnson and others contend the state lacks a major presence in promising fields like nanotechnology and the biosciences, even though Minnesota is a leader in medical devices. Doug Petty of the Great North Alliance, an organization dedicated to ensuring the Twin Cities remains competitive, says fewer startups mean fewer potential high-growth companies.

"You're not going to have those high-growth companies unless you have companies. So the entrepreneurial spirit is very important, and most of the job growth in the country has come from smaller and mid-size companies," says Petty.

But others say Minnesota's entrepreneurship sets an example other regions want to follow. Dan Carr heads The Collaborative, a Twin Cities support organization for entrepreneurs. He says Minnesota is a hotbed of medical technology with a reputation for entrepreneurial success.

"In May, there were two delegations of CEOs that came. Fifty CEOs from Cleveland came in. Fifty CEOs from Pittsburgh came in the week before. Two very strong economies, but they came to Minnesota because they wanted to benchmark us. I was on panels, where they just wanted to know, 'How can we do what you do?'" says Carr.

Despite years of lagging in startups, Minnesota's prosperity is hardly flagging. In a key measure, income per person, Minnesota ranked 15th among the states in 1990, and rose to 7th by last year. Bob Isaacson with the Department of Employment and Economic Development says Minnesota's economic growth has been "phenomenal."

"The question is could we improve on that? I'm not sure. I think the bigger question may be, 'Do we have a startup rate that's sufficient to have that type of performance in the future?'" says Isaacson.

Is Minnesota going to miss another home run like Medtronic for lack of startups? Ultimately, the answer lies with people who do start companies, like Kurt Thielen.

"We haven't hit the grand slam, or anything. But we did get a single, we're on base, and we're shooting to get home," says Thielen.

Thielen plans to introduce the next generation Aireo this fall.

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