Finance

VC doesn’t stand for “very common”… at least not yet

The struggle for startup capital in Minnesota tends to be a bit Darwinian

By Kevyn Burger

There’s a persistent chicken-and-egg conundrum for promising Minnesota startups looking to make a venture
capital match.

 

“Entrepreneurs say there’s never enough capital. Investors say there are never enough great companies with great teams that are ready to scale,” says John Stavig, who tracks the local startup scene as director of Holmes Center for Entrepreneurship at the University of Minnesota and as an advisory board member of Gopher Angels.

But some encouraging numbers show more venture capital is now filtering through the Twin Cities market.

“There’s a lot more activity than ten years ago. We talk to quite a few investors who see Minnesota as a vibrant market for startups, especially in healthcare, medical technology, food and ag-tech,” Stavig says.

According to the Minneapolis office of PricewaterhouseCoopers and CB Insights, venture capital funds made deals with 25 Minnesota companies to the tune of $290 million in just the first half of 2017. Compare that to the previous year, when there were 28 venture capital transactions totaling $341 million.

 

“The tech sector is as active as I’ve ever seen it, and I’ve been doing this for a long time,” says Joy Lindsay, who co-founded private venture capital firm StarTec Investments in 1998. It focuses on early-stage tech companies headquartered in Minnesota.

StarTec typically invests from $50,000 to $500,000. As of late, Lindsay has invested with several of Minnesota’s repeat entrepreneurs who’ve navigated previous successful exits and are starting anew.

“With these serial entrepreneurs it can be short window to invest. They get funded fast,” she notes. “But there are angel investors and venture funds that are interested in writing checks and funding new companies
in Minnesota.”

Rob and Ryan Weber are moving from hunting for investors with their hands out to being the deep pockets that other entrepreneurs come to in search of venture capital.

The 37-year-old identical twins are in the process of raising $10 million for their inaugural micro venture fund, Great North Labs, which will make early-stage seed investments in new startups. The brothers have already been active
angel investors.

“Our mission and our strategy is different than other funds,” says general partner Rob Weber. “We take a builder’s approach.”

While in college at St. Cloud State in 2000, the twins co-founded freeze.com in their dorm room; they sold their stake in the company to a private equity company in Boston for $16 million. Their next tech business, NativeX, sold for $25 million in 2016.

“We are operators ourselves. We can help these early stage companies because we’ve scaled companies and that makes us unique,” Rob says. “We can bring our point of view as advisors and be somewhat actively involved in helping them execute.”

Rob expects that Minnesota startups will take top priority, but says Great North is prepared to look beyond the state.

“We’re looking for tech companies that have the potential to grow at a fast rate for a decade,” he adds.

The niche for Arthur Ventures is narrower. Opening its Minneapolis office in 2013, the venture capital firm looks to invest in early-stage tech companies with momentum, but specifically in the B2B software arena.

With its second fund closing in 2017 at $48 million, the firm is working with individual and institutional investors with commitments ranging from $250 thousand to $5 million.

 

“We believe in being laser-focused. We know exactly what we’re looking for and we move fast when we see it,” says partner Patrick Meenan, 34. “We run a concentrated portfolio. Our philosophy is to invest in 20 product-led companies per fund and get an ownership position. When one of the businesses goes public or makes a big sale, we do well.”

With its first $45 million fund, Arthur Ventures invested in 20 companies including Minnesota startups Lead Pages, When I Work, Total Expert, Zipnosis and Flipgrid, but Arthur Ventures strategy looks beyond the state boundaries. The firm takes a national
approach, investing in startups from
coast to coast.

The only exception is Silicon Valley; they don’t bother fishing the cold Pacific waters of the Bay.

“Not investing in northern California companies is our number one differentiator. Entrepreneurship is alive and well outside the San Francisco area,” Meenan says.

The best news for the future is the number of Minnesota startups now getting funded. When (and if) those founders ultimately succeed and cash out, history would suggest that they will become investors themselves.

“It’s a Darwinian process,” Stavig says. “The strongest do tend to survive to go forward.”

“We believe in being laser-focused. We know exactly what we’re looking for and we move fast when we see it.”