Minnesota Device Firms Received $130 Million in Venture Funding in Q3

Medical devices start-ups powered Minnesota to the best quarterly venture capital (VC) performance in eight years just as a sagging economy curbed venture spending across the country.

Minnesota companies attracted $220.8 million in the third quarter, the first time the state crossed the $200 million mark since 1999, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

Seven medical device firms, led by CVRx Inc. and Cardiac Concepts Inc., captured $130 million, or 59% of overall investment.

Year-to-date, the state’s total VC investments have already surpassed all of 2007’s. Minnesota is also on track to post its best annual numbers since 2000, when $1.03 billion flowed into local companies.

While Minnesota’s performance was certainly strong — the state ranked seventh nationally– it will likely not last, said Jay Hare, a partner with PricewaterhouseCoopers in Minneapolis. Faced with a prolonged economic slump, venture capitalists across the country are starting to pull back: Investments in the third quarter totaled $7.1 billion, an 8% drop from the previous quarter and a 9% dip from the same period a year ago.

“I think it’s great for the state to have a blowout quarter dollar-wise,” Hare said. “But it comes at a time there is clearly some concern about future funding. Minnesota will trend with the rest of the country.”

While venture capital is generally considered a long-term endeavor, investors are reluctant to fund new start-ups at a time when they are preoccupied with their current portfolio of companies, experts said. Given the country’s credit woes and volatility of the stock market, companies are opting to wait out the crisis or seeking financing from private investors rather than go public.

Earlier this year, Transoma Medical Inc., an Arden Hills-based maker of remote heart monitoring devices, pulled its planned IPO. Instead, the company raised $5 million in the third quarter from a slew of investors, including Affinity Capital Management, Canaan Partners and Cross Creek Capital.

There were no venture-backed initial public offerings in the second quarter, the first IPO-less quarter since 1978, according to a recent MoneyTree report.

‘Safe Haven’

“The exit slowdown will likely lengthen the VC-backed company life cycle, with VCs extending follow-on financing for later-stage companies that might otherwise have been ripe for exits,” the MoneyTree report stated.

The good news for Minnesota is that medical devices will continue to “remain a viable category,” Hare said. Investors see medical devices as a “safe haven,” especially when other industries like software and biotechnology start to retract in a soft economy, he said. That’s because medical devices represent unique technology that saves people lives, a proposition that never goes out of favor with investors, Hare said.

The medical device companies that received funding in the third quarter represent the old and new. CVRx, a Brooklyn Park-based company that makes a device that treats high blood pressure, raised $84 million on top of the $200 million investors have already poured into the company.

Cardiac Concepts’ first-round financing totaled a hefty $21 million. Affinity, Accuitive Medical Ventures and Three Arch Partners are backing the Minnetonka-based start-up.

Other notable deals: Proto Labs Inc., a Maple Plain-based maker of injection molded products, attracted $67.2 million from investors, including North Bridge Venture Partners. Sage Electrochromics Inc. of Faribault raised $13.3 million from Rain Source Capital Inc. and H.B. Fuller Ventures. Sage, which makes glass that influences building temperatures, previously won $16 million in venture financing.