Venture Capital Investments in Minnesota

Venture Capital Investments in Minnesota 1995215 John Dukich Minnesota High Tech Association April 216

Minnesota High Tech Association 216. All rights reserved. Contact John Dukich Director of Public Policy & Research Minnesota High Tech Association 4 S. 4th St. Suite 416 Minneapolis, MN 55415 jdukich@mhta.org 952.23.4535 About The Minnesota High Tech Association The Minnesota High Tech Association (MHTA) is a nonprofit association of more than 3 science and technology companies and organizations. Together, we fuel Minnesota s prosperity through innovation and technology. Our members include some of the world s leading corporations, midsized companies and startups. We are united behind a common vision to make Minnesota one of the country s top five technology states. Minnesota High Tech Association members represent IT, biosciences, advanced manufacturing, clean, green and edtech. Once a company or organization joins MHTA, all of its employees become members.

1. Introduction Venture capital plays an important role in funding early and latestage startup enterprises. The vitality of a state s venture capital infrastructure is an indicator of a state s economic and innovation competitiveness. As Minnesota looks to compete with other states around the country to attract and retain a talented workforce and attract innovative businesses, it is important to know how Minnesota compares to the nation, especially some of the most competitive states. It is also important to identify those industries that are particularly strong with respect to venture capital investments. Doing so can not only help better inform business leaders, investors, entrepreneurs, and policymakers, but also help identify possible synergies between industries. Academic and industrial research that cuts across traditional disciplines offers opportunities to discover or create new methods, technologies, or products that would not have been available to one discipline or another. This in turn can spur the commercialization of new products and lead to the development of new companies. That is why identifying particularly strong industries and promoting collaboration between them is important. While this report focuses on venture capital investments, particularly those in Minnesota, we should also keep in mind the broader context within which these investments sit. Investments by venture capitalists are in part a reflection of an economic environment that elevates certain industries over others. Minnesota, for example, has particularly strong investments in its medical device and equipment industry, which is not surprising given its history in that industry. This report, which draws on data from PricewaterhouseCoopers (PwC) and the National Venture Capital Association s (NVCA s) MoneyTree Report, aims to put Minnesota s venture capital investments in context, and identify industries that standout from the others. Minnesota s strengths especially within the medical device and equipment and software industries identified in terms of venture capital investments reflect broader economic strengths within those industries. These are the industries on which we should continue to build. Section 2 reviews venture capital investments at a national level and identifies those industries that received the most venture capital between 1995 through 215. Over this timeframe, four industries software, biotechnology, media and entertainment, and telecommunications received 55 percent of the total venture capital dispersed. Following the Great Recession, between 29 and 215, the software and biotechnology industries secured 48.8 percent of the nation s venture capital investments. Section 3 examines venture capital in Minnesota, and notes industries that are particularly strong in terms of investments from venture capitalists. Between 1995 and 215, the medical device and equipment and software industries accounted for 53 percent of Minnesota s venture capital investments. Between 29 and 215, the medical device and equipment industry accounted for 55.2 percent of Minnesota s venture capital investments, followed by the software industry at 2. percent, and the biotechnology industry at 9.6 percent. The strong shift to investments in the medical device industry may be more reflective of the high cost of entering the medical device space, and not that those companies are more valuable than software companies, for example. At a national level, venture capital investments have increased 1.8fold between 213 and 215. Within Minnesota, venture capital investments have increased 3.29fold between the first quarter of 215 and the fourth quarter of 215. While not conclusive, such a rapid increase could indicate an overvaluation of companies in the venture capital market. Section 4 concludes the analysis and makes recommendations for strengthening Minnesota s venture capital community, such as promoting collaboration between industrybased research and academic research. The aim here is to spur innovation that results in commercialization. 1

2. Overview of Venture Capital Investments Nationally Drawing on data from PricewaterhouseCoopers (PwC) and the National Venture Capital Association s (NVCA s) MoneyTree Report, this report reviews venture capital funding in Minnesota from 1995 through 215, in private emerging companies.1 According to the MoneyTree Report website: The report includes the investment activity of professional venture capital firms with or without a US office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing. Where there are other participants such as angels, corporations, and governments in a qualified and verified financing round, the entire amount of the round is included.2 The MoneyTree Report website provides additional details on definitions and the methodology used to gather the data. The data exclude debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies, among other forms of investment. Investments in seed stage companies, for example, are likely underrepresented since these tend to come from angel investors. This dataset, however, does provide a consistent metric over which to track investments; it is a series of partial snapshots of investments in Minnesota. The MoneyTree Report includes in its count of quarterly deals, transactions for which the investment figure was not disclosed. For example, between 1995 and 215, the MoneyTree Report includes in its data 45 deals in Minnesota of an undisclosed amount. For the purposes of comparison over time within Minnesota and nationally, and between states and nationally, these undisclosed deals have not been removed. While including deals of undisclosed amounts in the computation of various statistics, such as the average, yields biased estimates of investment statistics, their inclusion provides a lower bound on which to make inferences. Thus, many of the estimates in this report are likely conservative estimates of investments by venture capitalists. Since 1995 (the first year for which data is available from PwC) venture capital investments in U.S. businesses have skyrocketed from an average quarterly investment of 2. billion to 14.7 billion in 215 (in nominal dollars). Chart 1: National Venture Capital Investments (Q11995 to Q4215) 25 25,,, 2,,, 15 15,,, 1 1,,, 5 Deals 1. 2. 2 https://www.pwcmoneytree.com/ https://www.pwcmoneytree.com/definitions/definitions, accessed February 8, 216. Q1 215 Q1 213 Q1 214 Q1 211 Q1 212 Q1 21 Q1 29 Q1 27 Investment Q1 28 Q1 25 Q1 26 Q1 23 Q1 24 Q1 21 Q1 22 Q1 1999 Q1 1997 Q1 1998 Q1 1995 Q1 2 5,,, Number of Deals 2 Q1 1996 National Venture Captial Investment (U.S. Dollars) 3,,,

Indeed, as Chart 1 indicates, venture funding fluctuates from quarter to quarter. Perhaps most evident is the spike around the year 2 corresponding to the dotcom bubble, reaching its peak in the first quarter of 2 at 28.4 billion. As the bubble burst, venture financing levels declined from nearly 22 billion in the fourth quarter of 2 to 13.1 billion in the first quarter of 21. The chart also shows a dip in venture capital investments during the 2829 Great Recession, followed by a rebound. More recently, between 213 and 215, the chart shows a steep 1.8fold increase in venture capital investments. This increase in total venture capital investments might indicate an overvaluation of companies in the venture capital space and could be reflective of the increase in the number of unicorns (i.e. companies with valuations of more than 1 billion) nearly 15 in 215 compared to 8 in 214.3 15 5 1 Frequency 2 25 Chart 2: Distribution of National Quarterly Venture Capital Investments (Q11995 to Q4215) 5 1 15 2 25 3 Quarterly Venture Capital Investment (U.S. Dollars) The distribution of national venture capital funding is skewed to the right (i.e. the right tail of the distribution is longer than the left tail), with a mean of 8.1 billion and a median of 6.6 billion. This indicates that there are a few enterprises that receive significantly more sometimes an order of magnitude or more venture capital investment than other enterprises. 3 Eye on the Market, JP Morgan, February 17, 216, https://www.cbinsights.com/reports/eotmunicorns.pdf?=, accessed February 25, 216. 3

Table 1: National Venture Capital Funding by Industry (Q11995 to Q4215) Industry Number of Deals Total Investment Pct. of Total 24,953 181,2,36,1 26.8% Biotechnology 8,418 81,955,929,8 12.1% Media & Entertainment 7,521 55,55,765,9 8.2% Telecommunications 5,119 53,749,713,2 7.9% Medical Devices & Equipment 6,372 45,472,425,2 6.7% IT Services 5,747 43,983,64,4 6.5% Industrial & Energy 4,741 4,995,582,5 6.1% Networking & Equipment 3,148 39,875,739,6 5.9% Semiconductors 3,395 29,687,934,2 4.4% Consumer Products & Services 2,963 24,842,137, 3.7% Financial Services 1,93 18,753,27,3 2.8% Business Products & Services 2,323 15,944,91,3 2.4% Retailing & Distribution 1,553 12,419,926,4 1.8% Computers & Peripherals 1,451 11,765,248,4 1.7% Healthcare Services 1,737 11,261,1,7 1.7% Electronics & Instrumentation 1,338 8,261,367,9 1.2% Other 198 1,1,12,8.1% Breaking down the total venture capital investment by industry between 1995 and 215, the top four industries software, biotechnology, media and entertainment, and telecommunications account for 55 percent of the total investment from venture capitalists. At more than 181 billion in venture capital investments, the software industry accounts for 26.8 percent of all venture capital investments, and 3.1 percent of the number of deals, over this time period. The biotechnology industry, with nearly 82 billion in total venture capital investments, accounts for 12.1 percent of all venture capital funding between 1995 and 215. With 8,418 deals between 1995 and 215, the biotechnology industry accounts for 1.2 percent of all venture capital deals, nationally. The media and entertainment industry captured nearly 55.6 billion in venture capital investments (8.2 percent of the total investment) between 1995 and 215, and 9.1 percent of the total number of venture capital deals. The telecommunications industry, with more than 53.7 billion in venture capital investments between 1995 and 215, captures 7.9 percent of the total national venture capital investment, accounting for 6.2 percent of the total number deals. National Venture Capital Investments: 29215 As the housing market declined in 28 so too did investments backed by venture capitalists. Between 22 and 28, the nation yielded more than 178 billion in venture capital investments. During this time the software industry captured the greatest share of venture capital with 22.2 percent, followed by the biotechnology industry at 17.8 percent. 4

Table 2: National Venture Capital Funding by Industry (Q129 to Q4215) Industry Total Investment Percent of Total 82,231,6, 34.1% Biotechnology 35,353,19,1 14.7% Media & Entertainment 2,222,269,6 8.4% Industrial & Energy 19,759,28,8 8.2% Medical Devices & Equipment 18,176,89,2 7.5% IT Services 16,654,135, 6.9% Consumer Products & Services 13,85,264,1 5.4% Semiconductors 6,546,424,3 2.7% Financial Services 6,147,636, 2.5% Telecommunications 4,32,591,6 1.8% Computers & Peripherals 4,2,381, 1.7% Networking & Equipment 3,652,824, 1.5% Retailing & Distribution 3,3,779,4 1.2% Electronics & Instrumentation 2,814,71,8 1.2% Healthcare Services 2,454,255,8 1.% Business Products & Services 2,421,713,3 1.% Other 25,756,.1% As the nation began to come out of the recession, the funding landscape began to change. Between 29 and 215, the software industry captured 82.2 billion in venture capital funding, or 34.1 percent of the total venture capital investment in the United States. This was followed by the biotechnology industry at 35.5 billion (14.7 percent) and the media and entertainment industry at 2.2 billion (8.4 percent). Chart 3: National Venture Capital Investments (Q129 to Q4215) 14 18,,, 1 14,,, 12,,, 8 1,,, 6 8,,, 6,,, 4 4,,, 2 Deals Q1 215 Q1 214 Q1 213 Q1 212 Q1 211 Q1 21 2,,, Number of Deals 12 16,,, Q1 29 National Venture Capital Investment (U.S. Dollars) 2,,, Investment As the number and value of venture capital deals declined over the course of 28, they reached their minimum in the first quarter of 29 before reversing the trend. The chart above depicts the number and value of venture capital deals between 29 and 215. Between Q129 and Q4215, there were 28, venture capital deals totaling more than 241 billion. 5

3. Overview of Venture Capital Investments in Minnesota Minnesota has a long history of medical device and software/hardware innovation, from Medtronic to Cray Research. Indeed, these industries receive a significant share of the total venture capital investment in Minnesota. Between Q11995 and Q4215, Minnesota businesses raised more than 7.4 billion in venture capital across 1,177 deals. 4 2 1 Frequency 3 4 Chart 4: Distribution of Total Venture Capital Investment in Minnesota (Q11995 to Q4215) 5 1 2 3 Quarterly Venture Capital Investment (U.S. Dollars) Forty of the 84 quarters between 1995 and 215 yielded deals in the range of 51 million. The shape of the distribution of venture capital investments in Minnesota resembles that of the distribution of venture capital investments nationally. Indeed, the median quarterly investment in Minnesota is more than 75.4 million, while the average quarterly investment in Minnesota is more than 88.4 million. This suggests that there are some large deals (or at least one) that influence(s) the average. 4 Fortyfive (3.8 percent) of the 1,177 deals were of an undisclosed amount. 6

35 3,, 3 25,, 25 2,, 2 15,, 15 1,, 1 5,, 5 Deals Q1 215 Q1 213 Q1 214 Q1 212 Q1 211 Q1 21 Q1 28 Q1 29 Q1 27 Q1 26 Q1 25 Q1 24 Q1 23 Q1 22 Q1 21 Q1 2 Q1 1999 Q1 1997 Q1 1998 Q1 1995 Number of Deals 35,, Q1 1996 Venture Capital Investment in Minnesota (U.S. Dollars) Chart 5: Minnesota Venture Capital Investments (Q11995 to Q4215) Investment The chart above illustrates the number and value of venture capital deals by quarter in Minnesota. Similar to the national venture capital picture, Minnesota experienced an investment bubble around the year 2, succeeded by a collapse in 21. At the peak of the bubble, Minnesota generated nearly 32 million in venture capital investments in Q12. At 19.9 million, the fourth quarter of 215 had the highest level of venture capital investment since the third quarter of 28 when venture capital investment topped 216 million. Between the first quarter of 215 and the fourth quarter of 215, venture capital investments in Minnesota increased from 44.5 million to 19.9 million an increase of 329 percent. While Minnesota has yet to see its first startup valuation in excess of 1 billion, such an increase could indicate an overvaluation of some companies. This is consistent with trends at a national level. 35,, 25 3,, 2 15 2,, 15,, 1 1,, S&P Index 25,, 5 5,, Total MN VC Funding Q1 215 Q1 214 Q1 213 Q1 212 Q1 211 Q1 21 Q1 29 Q1 28 Q1 27 Q1 26 Q1 25 Q1 24 Q1 23 Q1 22 Q1 21 Q1 2 Q1 1999 Q1 1998 Q1 1997 Q1 1996 Q1 1995 Venture Capital Investment in Minnesota (U.S. Dollars) Chart 6: S&P 5 and Venture Capital Investments in Minnesota (1995 215) S&P 5 Closing 7

Chart 6 tracks total quarterly venture capital funding in Minnesota against the S&P 5 index. The grey bands denote the recession of March 21 through November 21 and the Great Recession from December 27 through June 29, as defined by the National Bureau of Economic Research. 5 Each series depicts the dotcom bubble around the year 2 and subsequent deflation of the bubble and recession of 21. Also evident in each series is the climb out of the recession between 22 and through 27. The Great Recession, beginning in December 29, appears as the S&P 5 begins its sustained decline through the second quarter (June) of 29. While the total level of venture capital investment in Minnesota appears to fluctuate wildly in the quarters preceding the Great Recession, it reaches a local maximum in the midst of the recession. It is not until after the recession that the total level of venture capital investments decline in Minnesota, before reaching a new local maximum in the fourth quarter of 215. A similar trend appears following the 21 recession as the S&P 5 declines after the burst of the dotcom bubble, the United States enters an economic downturn between March and November 21. Following the economic downturn, venture capital investments in Minnesota continue to ebb and flow on a downward trend through the fourth quarter of 24. 6 25,, 2,, 15,, 1,, Q1 215 Q1 213 Q1 214 Q1 212 Q1 211 Q1 21 Q1 29 Q1 27 Q1 28 Q1 26 Q1 25 Q1 24 Q1 23 Q1 21 Q1 22 Q1 1999 Q1 1998 Q1 1997 Q1 1995 Q1 2 5,, Q1 1996 Average Quarterly Investment in Minnesota (U.S. Dollars) Chart 7: Average Quarterly Venture Capital Investment in Minnesota (1995 215) Average Investment The chart above shows the average quarterly venture capital investment in Minnesota, between 1995 and 215, as calculated by dividing each quarter s venture capital investment by the number of deals in that quarter. The average quarterly venture capital investment in Minnesota has increased from 2.8 million in Q11995 to 17.4 million in Q4215, spiking at more than 21.6 million in Q328 during the midst of the Great Recession. There were 1 venture capital deals during the third quarter of 28, totaling more than 216 million, with two companies accounting for nearly 7 percent of the total investment that quarter. CVRx captured 84 million in venture capital funding during the third quarter of 28, and Proto Labs yielded 67.2 million in venture capital funding. 5 http://www.nber.org/cycles.html, accessed February 12, 216. 6 An interesting future exploration could focus on examining the statistical and economic relationship between stock indexes, such as the S&P 5, and venture capital investments. 8

Table 3: Minnesota Venture Capital Investment by Industry: Q11995 to Q4215 Industry Number of Deals Total Investment Pct. of Total Average Investment Medical Devices & Equipment 366 2,8,241, 37.7% 7,65,932 224 1,135,42, 15.3% 5,68,759 Media & Entertainment 81 594,517,3 8.% 7,339,72 Biotechnology 66 485,94,3 6.5% 7,349,914 Industrial & Energy 9 356,873,6 4.8% 3,965,262 Networking & Equipment 26 355,335,5 4.8% 13,666,75 Consumer Products & Services 62 341,558,9 4.6% 5,59,15 IT Services 36 286,69,1 3.9% 7,961,364 Business Products & Services 35 252,276,1 3.4% 7,27,889 Healthcare Services 37 218,39,2 2.9% 5,92,438 Retailing & Distribution 16 18,628,5 2.4% 11,289,281 Computers & Peripherals 44 139,782,3 1.9% 3,176,87 Telecommunications 35 138,366,1 1.9% 3,953,317 Electronics & Instrumentation 37 92,368,9 1.2% 2,496,457 Financial Services 2 51,491,.7% 2,574,55 Other 2 2,25,.% 1,125, Between 1995 and 215, the medical device and equipment and software industries accounted for 53 percent of all venture capital investments in Minnesota. With 59 deals (more than 5 percent of the total number of deals over this timeframe), these two industries generated more than 3.9 billion in venture capital. More recently, in 215, the medical device and equipment and software industries accounted for 87.4 percent of the state s total venture capital investment. Between 1995 and 215, the networking and equipment averaged 13.7 million per deal. The retailing and distribution industries averaged 11.3 million per venture capital deal over the same timeframe. With relatively few deals (26 for networking and equipment and 16 for retailing and distribution), the averages for these industries are likely influenced by one or two large deals. The medical device and equipment industry averaged nearly 7.7 million per venture capital deal between 1995 and 215, with the average deal in the software industry coming in at nearly 5.1 million. The difference between the average quarterly investment in the medical device and equipment industry and that in the software industry could be due to the potentially higher cost of entry in the medical device and equipment industry. The Brookings Institution notes that: Investment funding is also shifting towards less risky laterstage medical device companies instead of earlier stage ventures. The opportunity cost in [pursuing] earlystage medical device companies with unclear exit strategies and regulatory hurdles is high in comparison with software and information technology companies that often offer quick exits and low market barriers. 7 Between 1995 and 215, Minnesota s top three industries in terms of venture capital funding medical devices and equipment, software, and media and entertainment have experienced a number of swings in venture capital funding. Chart 8 shows venture capital funding by industry between 1995 and 215. From 1995 through 21, the level of funding flowing to each of the top three industries did not differ too severely from one another. 7 Biomedical Innovation: Identifying Challenges and Prioritizing Needs for Medical Device Innovation, September 214, http://www.brookings.edu/~/media/events/214/3/5biomedicalinnovation/nihdeviceinnovationmeetingsummary.pdf, accessed March 1, 216 9

14,, 12,, 1,, 8,, 6,, 4,, Media MedDevice Q1 215 Q1 214 Q1 213 Q1 211 Q1 212 Q1 21 Q1 28 Q1 29 Q1 27 Q1 25 Q1 26 Q1 24 Q1 23 Q1 22 Q1 21 Q1 1999 Q1 1998 Q1 1997 Q1 1996 Q1 2 2,, Q1 1995 Venture Capital Investment in Minnesota (U.S. Dollars) Chart 8: Venture Capital Investment in Minnesota by Top Three Industries (1995 215) Following the 21 recession, venture capital funding for the media and entertainment industry declined precipitately from 17.5 million in Q122 to zero in Q322, which remained at zero until Q325. Venture capital investments in the medical device and equipment industry declined from 44.1 million in Q321 to 4.8 million in Q421, but rebounded in 22 and became more volatile, and increasingly so during the Great Recession of 28 and 29. Venture capital investments in the software industry declined following the recession of 21, but not to the degree of the decline in venture capital investment in the media and entertainment industry. Chart 9: Minnesota Venture Capital Investment By Industry (1995 215) Telecommunications Retailing & Distribution Other Networkin & Equipment Medical Devices & Equipment Media & Entertainment IT Services Industrial & Energy Heatlhcare Services Financial Services Electronics/Instrumentation Consumer Products & Services Computers & Peripherals Business Products & Services 1 12 Quarterly Venture Capital Investment (U.S. Dollars) 1 8 6 4 2 Biotechnology

For a different perspective on venture capital funding in Minnesota consider the set of boxplots in Chart 9. The boxplot is a convenient method for illustrating the distribution of quarterly venture capital investments across industries. Recall that a boxplot is constructed by ordering a data set; identifying the median (midpoint, as illustrated by the center line in each of the boxes above) and the first and third quartiles (the first quartile is lower end of each box and the third quartile is the upper end of each box). The lower fence of each box plot (i.e. the tail extending in lower direction from each box) is plotted at Q11.5 IQR and the upper fence of each box is plotted at Q3+1.5 IQR, where IQR (interquartile range) is a measure of dispersion and is defined as the difference between the first and third quartiles. The dots illustrate outliers (e.g. particularly large investments). Perhaps not surprisingly, medical devices and equipment have the highest median venture capital investment, followed by software. The median quarterly venture capital investment in the medical device and equipment industry is more than 27 million, while the median quarterly investment in the software industry is more than 7.6 million. These industries are also the most volatile, as illustrated by the extended boxandwhiskers. In fact, the medical device and equipment industry had the highest level of quarterly venture capital investment at more than 12 million in Q328. Table 4: Descriptive Statistics: Quarterly Minnesota Venture Capital Investment by Industry (Q11995 to Q4215) Industry Average Median Biotechnology 5,774,932 25, 7,, Business Products & Services 3,3,287 194,5 Computers & Peripherals 1,664,75 1,3, Consumer Products & Services 4,66,177 4,312,425 Electronics/Instrumentation 1,99,63 5, Financial Services 612,988 Healthcare Services 2,599,883 2,175, Industrial & Energy 4,248,495 25, 4,5, IT Services 3,412,13 2,25, Media & Entertainment 7,77,587 1,375, 11,543,25 Medical Devices & Equipment 33,336,22 27,94,55 27,23,5 Networking & Equipment 4,23,185 Other 26,786 Retailing & Distribution 2,15,339 13,516,69 7,627,5 16,462,525 Telecommunications 1,647,215 153,75 IQR The table above summarizes some of the statistics describing quarterly venture capital investments in various industries in Minnesota. The medical devices and equipment industry has the greatest average and median quarterly investment of any industry, at 33.3 million and 27.1 million, respectively. This industry is also the most variable industry in terms of its venture capital funding, as measured by the interquartile range (IQR) statistic, with a spread of 27 million. The software industry has the next highest average and median venture capital investment, with an average of 13.5 million and a median of 7.6 million. The spread of the software industry, as measured by the IQR, is nearly 16.5 million. Each of the industries has a larger average investment level than median funding level, supporting the skewness evident in the set of boxplots and distribution of overall investment. A number of industries have null median funding levels, suggesting that, during at least 5 percent of quarters between 1995 and 215, those industries did not receive any venture capital investments. 11

1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% MedDevice Q2 215 Q3 214 Q1 213 Q4 213 Q3 211 Q2 212 Q1 21 Q4 21 Q3 28 Q2 29 Q1 27 Q4 27 Q3 25 Q2 26 Q1 24 Q4 24 Q2 23 Q4 21 Q3 22 Q3 1999 Q2 2 Q1 21 Q1 1998 Q4 1998 Q2 1997 Q3 1996.% Q1 1995 1.% Q4 1995 Share of Total Venture Capital Invested Chart 1: Share of Total Minnesota Venture Capital Investments by Quarter: Medical Devices & Equipment and Industries The software and medical device and equipment industries standout as two industries that each receive a significant share of Minnesota s total venture capital investment. The above chart plots the quarterly share of venture capital investment that each industry received between 1995 and 215. Prior to 22, there was not much of a difference between each industry s share of the state s total venture capital investment. Between 1995 and 21, the medical device and equipment industry averaged 18.4 percent of the total venture capital invested in Minnesota, while the software industry averaged 16.3 percent of the share of venture capital invested in Minnesota. Table 5: Share of Venture Capital Investment (U.S. Dollars) in Minnesota s Medical Device & Equipment and Industries Industry 199521 22215 2228 29211 212215 Medical Devices & Equipment 18.4% 5.8% 47.1% 6.4% 52.3% 16.3% 14.6% 1.2% 1.9% 3.5% Between 22 and 215, the average share of venture capital flowing to the medical device and equipment industry was 5.8 percent, with an average of 14.6 percent of venture capital directed at the software industry. Following the deflation of the dotcom bubble in 21, between 22 and 28, the share of venture capital directed at the medical device and equipment industry soared to 47.1 percent while the software industry s share declined to 1.2 percent. Immediately following the Great Recession, between 29 and 211, the medical device and equipment industry secured 6.4 percent of venture capital investments in Minnesota. During this same timeframe, however, the share of venture capital flowing to Minnesota s software industry declined to 1.9 percent before rebounding to 3.5 percent between 212 and 215. The share of venture capital directed at Minnesota s medical device and equipment industry declined, from 6.4 percent between 29 and 211, to 52.3 percent between 212 and 215. 12

12 8 6 4 2 Quarterly Venture Capital Investment (U.S. Dollars) 1 Chart 11: Minnesota Venture Capital Investment by Top Three Industries (1995215) Media & Entertainment Medical Devices & Equipment Consider further the top three industries in Minnesota with respect to venture capital investment, which together account for 61 percent of venture financing in Minnesota. The above boxplot illustrates the distribution of quarterly venture capital investments in these industries. The medical device and equipment industry has a higher median quarterly investment than the media and entertainment and software industries, but is also more variable than either industry. Table 6: Share of Minnesota s Venture Capital Investments (U.S. Dollars) by Company Stage Company Stage 199521 22215 2228 29211 212215 Seed Early Expansion Later 7.7% 19.8% 55.4% 17.1% 4.4% 21.% 29.4% 45.1% 4.6% 13.9% 3.8% 5.6% 7.1% 39.4% 16.2% 37.2% 2.4% 23.9% 34.5% 39.2% Venture capital investments in Minnesotabased companies vary across time by the developmental stage of companies (see the table above). Between 1995 and 21, Minnesota companies that were in the expansion stage received 55.4 percent of all venture capital investments, while shrinking to 29.4 percent between 22 and 215. Later stage companies, on the other hand, received 17.1 percent of all venture capital investments between 1995 and 21, and 45.1 percent of those investments between 22 and 215. In fact, between 22 and 28 later stage companies accounted for 5.6 percent of venture capital investments in Minnesota. This shift, following the economic downturn of 21, from investing in companies in the expansion stage to later stage companies, suggests that venture capitalists became more risk adverse, and directed their investments toward companies that have already achieved some level of success. While this argument seems to fit the narrative that Minnesotans are risk adverse, it does not explain why venture capital investments in California companies an area of the country that has a reputation for having an appetite for risk have consistently been directed toward later stage companies. 13

An alternative explanation one that hinges more on company characteristics and macroeconomic conditions instead of investor sentiment is that companies located in California are more likely to reach the expansion stage than companies located in Minnesota. In turn, California investors have more opportunity to invest in more mature companies. If Minnesota companies are not reaching the expansion stage or are being acquired prior to reaching that stage at a rate commensurate with those in California, then there are fewer companies at the expansion stage, relative to the total pool of companies, in which to invest. Average investments in Californiabased companies that have reached the expansion or later stage of development are significantly higher than average investments in Minnesota companies at the same stage. Between 1995 and 215, investments in Californiabased companies at the expansion stage averaged 12.7 million, compared to nearly 6.5 million invested in a Minnesotabased company at the expansion stage. Over this same timeframe, the average investment in a Californiabased company at the later stage of development was 13 million, compared to 6.9 million for a Minnesotabased company at the same stage. Minnesota Venture Capital Investments: 29 to 215 The Great Recession had an impact on Minnesota s economy as well as the nation s economy. While the total investment figures between 1995 and 215 are an important indicator of the progress that Minnesota has made with respect to funding emerging companies, there was an important shift in the state s economy following the Great Recession. Here we consider the investment profile within Minnesota between 29 and 215. Chart 12: Minnesota Venture Capital Investment By Industry (29 215) Telecommunications Retailing & Distribution Other Networkin & Equipment Medical Devices & Equipment Media & Entertainment IT Services Industrial & Energy Heatlhcare Services Financial Services Electronics/Instrumentation Consumer Products & Services Computers & Peripherals Business Products & Services Biotechnology 2,, 4,, 6,, 8,, Quarterly Venture Capital Investment (U.S. Dollars) Chart 12 illustrates the distributions of quarterly venture capital investments in Minnesota industries between 29 and 215. Notable here is the significant quarterly investment in Minnesota s medical device and equipment industry. Indeed, between 29 and 215, the medical device and equipment industry accounted for more than 55 percent of the total venture capital investment in Minnesota. The three most heavily invested industries medical device and equipment, biotechnology, and software accounted for nearly 85 percent of all venture capital investments between 29 and 215. 14

Two states which consistently rank as two of the most innovative states in the country, and which have some of the highest levels of venture capital investment are California and Massachusetts. California, for example, generated more than 13.5 billion in venture capital between 29 and 215. Massachusetts generated nearly 24.8 billion in venture capital during the same time period. Minnesota, on the other hand, generated 2 billion between 29 and 215. Table 7: Top Industries by Minnesota Venture Capital Investment: Q129 to Q4215 Proportion of Total Investment within State Industry Minnesota California Massachusetts Medical Devices & Equipment Biotechnology 55.24% 2.% 9.63% 6.42% 39.48% 11.5% 1.7% 22.21% 36.91% Despite Minnesota s lower absolute venture capital investment level, relative to its total venture capital investments the state has a particularly strong venture community with respect to medical devices and equipment. Indeed, the proportion of venture capital generated by Minnesota s medical device and equipment industry (55.24 percent) is significantly higher than that in California (6.42 percent) or Massachusetts (1.7 percent). The software industry in Minnesota accounts for 2 percent of the state s venture capital investments. While California s software industry accounts for nearly 4 percent of its venture capital investments, the share of the software industry s venture capital investments in Minnesota is comparable that in Massachusetts at 22.21 percent. The share of investments in the biotechnology industry in Massachusetts (36.91 percent) exceeds those in both California (11.5 percent) and Minnesota (9.63 percent). Venture Capital Investments in Minnesota by Company The successes within Minnesota s technology community are due to the strengths of the companies in which investors invest. Between 1995 and 215, 435 Minnesota companies raised at least one round of financing from venture capitalists. Chart 13: Top 25 Minnesota Companies to Receive Venture Capital Investment (1995 to 215) CVRx Inc 25,725,9 Optical Solutions, Inc. 148,24,6 Code 42 Inc 138,1, WAM!NET, Inc. 13,34, Cardiovascular Systems Inc 126,5,3 Techies.com 1,871, Acorn Cardiovascular, Inc. 98,254,4 Redbrick Health Corp 96,652,2 BioAmber, Inc. 94,55, Bluestem Brands Inc 93,819,5 Company Entellus Medical Inc 92,, Atritech, Inc. 91,817,3 Internet Broadcasting Systems Inc 91,795,1 Inspire Medical Systems Inc 9,74,8 Life Time Fitness Inc 89,8, Respicardia Inc 88,794, Nxthera Inc 84,927,1 84,,2 Torax Medical Inc 82,414,2 Monteris Medical Inc 82,15, Celleration Inc 76,447, CobornsDelivers.com 74,394,8 Coaxia Inc 74,338,8 Holaira Inc 73,96, Conventus Orthopaedics Inc 71,92,2 5,, 1,, 15,, 2,, 25,, 3,, 15

Chart 13 identifies the top 25 Minnesota companies to receive venture capital investments between 1995 and 215. CVRx raised the most capital at more than 25.7 million over seven deals between 21 and 213. The company with the next highest series of investments is Optical Solutions, which raised more than 148 million across eight investments between 1997 and 24. Fifty out of the 435 companies that raised venture capital between 1995 and 215 accounted for 5.3 percent of the total venture capital investment in Minnesota over this time period. More recently, in 215, the following companies received venture capital investments from institutional investors. These figures reflect only capital raised in 215; some of the companies noted in Table 8 may have raised additional capital during previous years. Table 8: Minnesota Venture Capital Investments in 215 by Company and Quarter Company Investment Quarter/Year Code 42 Inc 85,6, Q4215 Nxthera Inc 4,, Q4215 Field Nation LLC 3,, Q3215 Avenue 81 Inc 27,, Q2215 Conventus Orthopaedics Inc 23,428, Q4215 Cardionomic Inc 21,833,1 Q4215 Novu LLC 2,, Q1215 Insite Solutions Inc 16,815, Q1215 Ativa Medical 15,, Q3215 Neochord Inc 12,559,2 Q2215 Gravie Inc 12,5, Q2215 Amphora Medical Inc 12,14, Q3215 Zipnosis Inc 6,999, Q4215 Tenksolar Inc 6,, Q2215 Zyga Technology Inc 5,1, Q4215 Trackif Inc 5,, Q3215 Biogenic Reagents LLC 3,224, Q1215 Big Know Inc 3,, Q4215 Fitness On Request Inc 2,8, Q3215 Conservis Corp 2,65, Q1215 Aurora Pharmaceutical LLC 2,412, Q2215 Celcuity LLC 1,975, Q4215 Andarta Medical Inc 1,9, Q4215 MobileRealtyApps.com LLC 1,813, Q1215 Evidentia Health Inc 1,2, Q4215 Segetis Inc 965,1 Q2215 In 215, Code 42 received the most venture capital with more than 85 million in funding in the fourth quarter. Nxthera received 4 million in venture capital funding in the fourth quarter of 215, and Field Nation received 3 million in the third quarter of 215. As the table above indicates, a number of other Minnesotabased companies received a significant amount of venture capital funding in 215. 16

4. Conclusion Investments by venture capitalists play an important role in funding startups across the country. This report investigated investments by venture capitalists at a national level and within Minnesota. The aim in doing so was to identify industries with particularly strong investments by venture capitalists. At a national level, between 1995 and 215, the software, biotechnology, media and entertainment, and telecommunications industries received 55 percent of the total venture capital dispersed. Following the Great Recession, between 29 and 215, the software and biotechnology industries secured 48.8 percent of the nation s venture capital investments. More recently, national venture capital investments have increased by a factor of 1.8 between 213 and 215. Minnesota s medical device and equipment and software industries occupy a central place in the state s venture capital scene. Between 1995 and 215, the medical device and equipment and software industries accounted for 53 percent of Minnesota s venture capital investments. Between 29 and 215, the medical device and equipment industry accounted for 55.24 percent of Minnesota s venture capital investments, followed by the software industry at 2. percent and the biotechnology industry at 9.6 percent. The strong shift to investments in the medical device industry may be more reflective of the high cost of entering the medical device space, and not that those companies are more valuable than software companies, for example. Since 29, three industries medical device and equipment, biotechnology, and software accounted for nearly 85 percent of all venture capital investments in the state. In 215, the medical device and equipment and software industries accounted for 87.4 percent of the total amount of venture capital invested in Minnesota. Minnesota venture capital investments have increased 3.29fold between the first quarter of 215 and the fourth quarter of 215. While not conclusive, such a rapid increase could indicate that the venture capital market is overvaluing companies. As Minnesota, and the MinneapolisSt. Paul metro area in particular, further develops its reputation as a national technology hub, investments in its strongest industries medical devices and software will be important indicators of its economic and innovation competitiveness. Biotechnology is an emerging industry in Minnesota s venture capital scene and, provided its close relationship to the medical device industry, is an industry that offers potential for growth in Minnesota. Supporting investments in these industries is crucial. That is why fostering stronger relationships and collaboration between industries, such as Minnesota s medical device and equipment industry and its software industry, is so important. Stronger collaboration between industries and between university research and industry research can lead to the creation of innovative technologies that might not have been evident to those focused solely on one industry or another. This in turn creates more opportunity for investment in Minnesotabased companies. From Big Data to predictive analytics and artificial intelligence, the software industry is poised to help make breakthroughs in a number of industries. In Minnesota, the greatest promise of advancement is within the state s medical device and equipment and biotechnology industries. By leveraging the state s strengths within these industries medical devices and equipment, software, and biotechnology Minnesota can enhance its position as a leading science and technology state. Artificial intelligence and machine learning also have the potential to make an indelible impact on the retail industry. Big Data and predictive analytics already play an important role in retail, for example, with respect to predicting consumer behavior. With a number of large national retailers in Minnesota, such as Target and Best Buy, there is in an opportunity for Minnesota software companies to help shape the future of retail. Indeed, Minnesota has the secondhighest number of Fortune 5 companies in the nation, and by leveraging and leading the way in advances in artificial intelligence and machine learning, Minnesota software companies have the potential to help transform a variety of industries, from retail to medical devices and biotechnology to financial services and energy. Additionally, policies at both the state and federal levels should encourage collaboration between and within industries, as well as between industries and academia. This is particularly the case with industries and research areas that are poised for commercialization. As of March 216, Minnesota s research and development (R&D) tax credit consists of a twotiered system providing a tax credit of 1 percent to companies that invest up to 2 million in qualified R&D expenses and a 2.5 percent tax credit on qualified research expenses greater than 2 million. The credit is available for basic and applied research, but is currently not refundable (i.e. it is available only to businesses with a tax liability). Increasing the state s R&D tax credit for basic, universityrelated research (i.e. collaborations between universities and forprofit companies) and making the credit available to those entities, such as startups, without a tax liability can help spur innovation that leads to commercialization. The University of Minnesota, through its Office of Technology Commercialization, is making strides toward increasing the number of spinoff companies. However, more can be done to support research in some of the state s most promising industries. 17

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