Minnesota to get new attention from venture funds

Jill J. Barshay / Star Tribune

At least five financiers are starting funds to finance young Minnesota companies, and one large venture fund is promising to step up its investing in the state this year.

The new funds, started by such well-known Twin Cities business people as investor George Kline, former General Mills executive Leslie Frecon and investment banker Michael Dougherty, are on the small side, less than $70 million each.

But their common interest in financing Minnesota firms is a change from recent trends in venture capital. The shift comes just as some in the Twin Cities business community have begun to voice worries that not enough money is flowing to new Minnesota companies.

"This is not a charity case," said Rick Brimacomb of Sherpa Partners, which was founded two years ago by the ex-CEO of Computer Network Technology, C. McKenzie "Mac" Lewis. "You get better deals here at lower valuations than in Silicon Valley. It's the equivalent of getting more house for your money."

Sherpa Partners launched its fund two weeks ago and is hoping to raise $40 million to finance early-stage Internet, software and communications companies in Minnesota.

The new funds are popping up after a year in which Minnesota was seen as lagging in the nationwide competition for financing. In 1999, Minnesota companies received 1.3 percent, or $461 million, of the nation's $35.6 billion in venture capital. Silicon Valley alone got 40 percent. Last week, the head of the business school at the University of Minnesota and the Minnesota High Technology Association called for public funds to promote high technology in the state.

Still, some observers say there is significant financing activity going on.

"In the past 12 years, I've never seen so many deals get done as I have in the past 12 months," said Dan Carr, president of the Collaborative, a venture capital association in Minnesota. "We're no Silicon Valley, and we need to do more. But there is a lot of activity here."

Longtime venture capitalist Brian Johnson left California-based Capstone Ventures at the end of last year when his partners decided to stop investing in the Midwest. Johnson now is setting up a fund with Stockwalk.com Group Inc. founder David Johnson, intending to raise $30 million to $60 million.

"Most of the larger venture capital firms have so much money, they're doing larger deals. They can't afford to spend a lot of time on small deals," Johnson said. "I disagree with that."

St. Paul Ventures, one of the nation's largest venture capital firms, is an exception. It still offers "seed" rounds of just $1 million to $2 million to young firms, hoping to get in on the larger rounds of $20 million or $30 million later. The firm has long been the largest investor in Minnesota. Still, most of the $100 million it invested last year went out of state.

That won't change, but partner Michael Gorman said he expects to invest more money this year in Minnesota than ever. Last year, he invested $22 million in the state.

In addition, St. Paul Ventures launched a new affiliate last year, Upper Lake Growth Capital, which is investing $35 million solely in the Midwest. It is headed by Dave Stassen, the former CEO of SpineTech, an Edina company that was bought out by Sulzer Medica AG and became a home-run investment for St. Paul Ventures.

Leslie Frecon, once the most senior financial officer at General Mills, is creating a fund to address two neglected markets: Minnesota and women. She is raising $20 million to $30 million for a venture capital fund that will invest in women-owned Minnesota businesses that serve female customers.

"Even though women own 40 percent of all U.S. businesses, they only access 2 percent of all private equity," Frecon said. "All this money is not trickling down to these businesses."

Edson Spencer of Affinity Capital Management raised $22 million in January to finance health care companies, primarily in the Midwest. With the benefit of a loan program, sponsored by the Small Business Administration, his fund can double its investment to $44 million.

Similarly, investor George Kline has teamed up with Michael Dougherty, the founder of Minnesota investment bank Dougherty & Co. They raised $22 million last week and expect to boost their fund to $66 million through the SBA program.

What will it take for the big venture capitalists to come to Minnesota and give out tens of millions regularly as they do in California or Massachusetts?

"Home runs," said Brimacomb of Sherpa Partners. "Minnesota has a lot of early-stage incubator companies. We need more home runs. And then they'll come."

-- Staff writer Susan Feyder contributed to this report.

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