Investment by venture capital firms doubles

10/24/2006

Medical firms, especially, lured more funding in Minnesota.

Susan E. Peterson,
Star Tribune
Last update: October 24, 2006 – 12:01 AM

Minnesota’s historic strength as a hothouse for medical device start-ups once again drove venture capital investments in the third quarter.

For the July-through-September period, 11 state companies received a total of $110.2 million in venture funding, nearly double the $55.7 million received by nine companies in the second quarter. But nearly three of every four venture capital dollars invested here went to fund medical products companies. And one of them accounted for $45.2 million.

The state’s third-quarter rebound contrasted with national figures for the period that showed an 8 percent drop in total investments to $6.2 billion and a 12 percent decline in the number of deals, to 797, according to the MoneyTree report being released today by PricewaterhouseCoopers and the National Venture Capital Association. The report is based on data from Thomson Financial.

As previously reported, EnteroMedics, a St. Paul firm that makes an appetite-control device, received $45.2 million in its fifth round of venture financing in the third quarter. That accounted for a big chunk of the state’s increase, but the results still were impressive, said Jay Hare, a partner at PricewaterhouseCoopers in Minneapolis.

“Clearly this was a very strong quarter for the state,” he said, noting that the $110 million in investments was Minnesota’s highest quarterly total in almost three years. He said there were four deals of more than $10 million, also a sign of a healthier venture capital climate for Minnesota firms.

Hare said he’s also encouraged that in each of the past two quarters, three of the venture fund recipients have been first-timers, as opposed to companies getting multiple rounds of follow-on investments.

“Those two back-to-back quarters [of active first-round deals] show that we’re getting some vibrancy back to this area that’s been missing for a while,” he said.

After the collapse of the dot-com bubble in 2000-01, venture firms were forced to put money into the later-stage companies they had sponsored to keep them going until the market improved enough for a public offering, buyout or other “exit strategy.” That dried up much of the funding for early-stage companies, which have been scrambling until recently.

Of the state’s 11 third-quarter deals, one was an early-stage company, five were in expansion mode, including two that got first-round money, and five were later-stage firms.

Nationally, Hare said, “there were 90 start-up and seed deals—the highest level in that category in six years. ... It’s good to see companies raising money at that stage.” He said such trends tend to “happen nationally a few quarters before they happen here.”

Despite the national fall-off in dollars and deals from the second quarter, the June-through-September quarter marked the third period in a row with more than $6 billion in venture capital invested. That puts venture funding on pace to reach $25 billion for the year, up from about $22 billion in each of the two previous years, Hare said.

In a conference call discussing the national report, Tracy Lefteroff of PricewaterhouseCoopers said one surprise in the quarter was a big jump in funding for telecom firms, particularly those in wireless and Internet communications. The telecom sector had its best quarter since 2002, he said, accounting for four of the quarter’s top 10 deals. The industrial/energy sector also showed a big increase, he said, particularly in ethanol and biodiesel projects, which require large amounts of capital to build production plants.