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Minnesota start-ups seeking venture capital suffer disastrous 2009

The state did finish the year strong with 12 companies attracting $90.7 million in the fourth quarter, a significant improvement from the previous quarter when only six companies raised $26.4 million. But that wasn’t enough to salvage a year marked by a weak economy and nervous investors choosing to focus on current portfolios instead of financing new deals.

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MINNEAPOLIS, Minnesota — Local companies seeking venture capital better hope 2010 will be much better than 2009. It couldn’t get much worse.

Minnesota start-ups, mostly medical device firms, raised $255.5 million in 2009, down a whopping 40 percent from the previous year of $426.5 million, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

The state did finish the year strong with 12 companies attracting $90.7 million in the fourth quarter, a significant improvement from the previous quarter when only six companies raised $26.4 million. But that wasn’t enough to salvage a year marked by a weak economy and nervous investors choosing to focus on current portfolios instead of financing new deals.

Minnesota’s dismal performance largely mirrors the nation. Venture investments in 2009 fell 37 percent to $17.7 billion, the country’s lowest level since 1997.

“The venture capital industry had no choice but to slow the investment pace in 2009,” said Mark Heesen, president of the National Venture Capital Association. “The weak exit environment resulting from an unstable public market combined with a challenged limited partner base sent a strong message to the venture community to pull back the reins — and VCs listened.”

But a closer look at Minnesota’s numbers shows the state is in deep trouble. Dollars flowing into the country’s medical device industry fell  27 percent to $2.5 billion in 2009. Data on Minnesota device companies receiving money last year was not immediately available but historically, more than two-thirds of the state’s venture capital goes to such start-ups.

That means Minnesota will feel a greater sting from a national pullback in medical device investments because the state is so dependent on the industry. So if Minnesota’s total venture investments dropped 40 percent, it’s a safe bet the state did far worse than the rest of the country in medical devices.

Minnesota’s decline is also accelerating at an alarming rate — from 13 percent (2007-2008) to 40 percent (2008-2009). Experts, however, predict 2010 will be much kinder to start-ups.

“Now that the economy has begun to show signs of improvement, we expect to see dollars flow more freely back into those sectors that offered the most promise before the recession began — clean technology, life sciences and information technology,” Heesen said.

Nevertheless, the report should give supporters of a proposed angel investment tax credit more ammunition when two House committees convene a joint hearing on Feb. 9 to discuss the legislation and an alternative grants bill.