Sherpa Partners $15 million fund will invest in technology start-ups

Steve Alexander / Star Tribune

A new Twin Cities venture capital fund is prepared to invest up to $15 million in Minnesota technology start-up firms over the next three years.

Sherpa Partners, an Edina venture capital fund, said it has raised $15 million for its Sherpa Trek I fund and hopes to increase that to $25 million later this year. The company had set its sights on raising $40 million last spring, but the decline in the stock market beginning last April made that impossible, said Steve Pederson, a general partner in the firm.

The limited partners who are providing Sherpa with the bulk of the $15 million are ADC Telecommunications of Minnetonka, the Curtis Carlson Foundation (the family of the late entrepreneur Curt Carlson) and California-based Silicon Valley Bank. There are other limited-partner investors, but Pederson said he could not disclose their names.

Last spring Sherpa began to create a venture capital fund that would be dedicated almost exclusively to investing in Minnesota companies. Such a fund is needed because venture capital generally is scarce for start-up firms in Minnesota, Pederson said.

Nationally, venture funds have looked elsewhere for their investments. In 1999, Minnesota companies received 1.3 percent, or $461 million, of the nation's $35.6 billion in venture capital. In sharp contrast, companies in California's Silicon Valley got 40 percent of the venture money.

What's more, it has been difficult for Sherpa to create its new fund in the current climate of economic uncertainty, said Mac Lewis, Sherpa's managing partner.

"But people do believe we have good investment opportunities in Minnesota, and that our fund managers have a good track record," Lewis said.

Sherpa, which was founded by Lewis in 1997, previously invested about $5 million from three partners in local start-up companies. Among its local investments are Eden Prairie-based Xiotech Corp., a network computer storage firm that was acquired by Seagate Technology, and marketing software firm Cognicity Inc. of Edina.

Using the new $15 million fund, Sherpa's average investment in a start-up company will be about $1 million, and the maximum investment will be $3 million to $4 million, Lewis said.

That means that as these companies grow, they will have to attract investment from venture capital funds other than Sherpa.

While Sherpa's fund managers hope to create long-lasting companies in the state, they concede that in the near term they are more likely to be funding start-ups which, if successful, will be acquired by larger, established companies in other parts of the country. Right now, the sale of a company is the best way for the original investors to recover their investment plus a profit because the stock market isn't favorable for initial public offerings.

Sherpa has been what Pederson called an "incubator stage" investor, but with the new fund it will wait until later in a company's life cycle to invest, he said. To qualify for the venture capital funds, companies already should have acquired good management, attracted some private funding or, in some cases, started selling a product.

But the best thing about the new venture fund is that will allow Sherpa to think about making bigger investments, Pederson said.

"Two years ago we would have had to scrape to raise $1 million to $2 million. Now we can offer a larger fund," Pederson said.

Steve Alexander can be contacted at alex@startribune.com

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Reprinted by permission.