According to the U’s own business development people (see link to Powerpoint presentation at bottom), the 20-year success record of the U’s technology company spinoffs is only half the university average nationally — and less than one-fourth the success record of the nation’s premier schools. What’s more, in one recent year (2004), for example, the U of MN spun off only one company compared to 14 at the University of Michigan and 16 at the University of Illinois. Why I am focusing here on spinoffs? Well, because, according the U’s own business development people, creating university spinoffs is “much more profitable than licensing (revenues)” to the school.

And, besides, the largest source of the U’s licensing revenues will run out soon. That was the focus of a recent Sunday feature in the StarTribune by my friend Thomas Lee, entitled U’s Transfer Problem: The University of Minnesota needs more eggs … and more baskets. With time running out on its royalty income stream, the U is scrambling to find the next Medtronic. An excerpt:

Judging from the university’s recent track record of converting its vast reservoir of research into cash, the U faces an uphill climb. The school that’s known for inventing the pacemaker, the heart valve and one of the Web’s first Internet browsers is desperate for a hit.

At a time when the state’s economy is slowing and its medical device sector is maturing, the U’s long commercialization slump has attracted the urgent attention of lawmakers, venture capitalists and others concerned about where Minnesota’s next Medtronic or St. Jude will come from.

The next day, we find this look at innovation at the U is a two-part series in the StarTribune, with another article appearing by Thomas Lee, this one entitled: His Job: Magician – The University of Minnesota’s research VP brings his experience honed in Madison to jump-start innovation in the Gopher state. In this piece, we hear about specific programs the U has undertaken since 2005 in an attempt to make up for the expected drop off in licensing revenues, starting next year.

One of Mulcahy’s first priorities when he arrived in Minnesota was to recruit industry professionals like former Honeywell executive Jay Schrankler to run the Office of Technology Commercialization. The office traditionally had been staffed with academics who had little or no business experience.

In the past, many of the university’s start-ups failed because the school lacked the business talent to fully develop the ideas before it sought outside capital, experts say.

The school hired a half dozen “strategy managers” with experience in fields like software, pharmaceuticals and medical devices to determine if faculty research or technology can be licensed or spun out into new companies. The Venture Center, under former investment banker Doug Johnson, launched a “CEO in Residence Program” in which outside entrepreneurs and business people regularly examine potential start-ups, mentor MBA students and help structure deals.

The article says the U has set some lofty goals compared to the numbers I cite in my first paragraph above. To wit:

Schrankler and Johnson say their goal is to spin off three companies a year, including one that has the potential to go public in five years with at least a $250 million market value. They also hope to generate $50 million to $60 million in royalty income annually.

Johnson said, “There is plenty of world-class technology at the U.” He cited a company called Orasi Medical, which the U recently spun out, and another university medical startup that several VC firms are interested in. He also cited the work of a medical researcher at the U, Dr. Doris Taylor, which recently received wide attention:

• Here’s the story as published by UMNnews: Researchers Create a New Heart in the Lab: Work Opens a New Path to Replacement of Hearts and Other Organs.

• The day before, the doctor’s work was published by the journal Nature Medicine: Technical Report abstract – Nature Medicine 14, 213 – 221 (2008).

• And here’s how the New York Times reported the breakthrough that same day: Researchers Create New Rat Heart in Lab.

Dr. Taylor will be the keynote speaker May 29 at the U of M Alumni Association’s 2008 Annual Celebration, being billed as “The Heart of Discovery,” and the featured guest is Earl Bakken, the founder of Medtronic. Tickets are available to the general public at the alumni association web site.

What’s the take of the investment community to the U’s latest initiatives in technology commercialization? Well, one VC gives the U a big thumbs-up. David Spreng is a Minnesota native (and U of M grad), and is now based in Palo Alto, CA, as Managing General Partner of Crescendo Ventures. On his blog, called “Lightbulb,” he wrote an upbeat blog post citing Doug Johnson’s CEO-in-residence program: The University of Minnesota May Have Cracked the Code.

(By the way, here’s a link to the Powerpoint presentation I mentioned at the beginning of this post, actually a PDF: A Presentation on Industry/Academic Partnerships, by Doug Johnson, Office of Business Development, University of Minnesota, which is dated May 2006.)

What’s your take on the U of M as a source of technology innovation? What about the Institute of Technology — are you aware of any promising new technologies coming out of the computer science and EE programs? Is medical technology sucking all the oxygen away from IT and Internet startups in Minnesota? And do the innovations that really matter happen outside the walls of academia, anyway?

Speak your piece in the comments.

The Latest on U of M Technology Innovation and Commercialization is a post from: Minnov8 and published under a Creative Commons license.

The capital needs of early-stage companies used to be served well by VC funds, but the aforementioned gap has been growing ever wider in recent years as most VCs have moved toward later-stage deals. Since the beginning of time, individual angel investors have been a factor in helping young companies with their capital needs. But never before have they had to step up as an organized force to address such a big problem as we now face in our country, and right here in Minnesota.

The good news for all you entrepreneurs out there is that angels remain your best friends, because they’ve been banding together increasingly in groups to better fuel the capital needs of emerging companies.

So, why is this such an important issue? “If we’re not investing enough as a society in growth capital, we won’t grow jobs,” says Pete Birkeland (pictured here), CFO of St. Paul-based RAIN Source Capital. And his firm, the biggest little Minnesota investment firm you’ve never heard of, is doing much to innovate the process. Other members of RAIN’s management team are listed here.

Get this: RAIN Source is now the largest network of managed angel funds in the country, coming a long way in recent years in case you haven’t been watching. “We’re on the cutting edge,” said Birkeland. RAIN Source now numbers 24 funds in its network (including three licensees), across Minnesota, Iowa, North Dakota, South Dakota, Montana, and Idaho. And it already has its expansion sights clearly set on Oregon, Washington, and Florida.

The company’s RAIN Funds® are made up of angel investors interested in supporting growing companies. It helps organize these angel groups, providing part of of the capital for their funds, as well as legal templates, a process for due diligence, management support, access to deal flow, and other resources. The individual funds share expertise, deals, and experience between and among the other funds (angel groups) across RAIN Source Capital’s multi-state network. These groups range in size from seven to 61 members, with each pooling from $500,000 to $2 million in their own fund. The RAIN Source network currently has more than $25 million invested in 43 companies across its entire multi-state presence. At current count, RAIN has $17 million in available capital. And, since members can make side investments in any of RAIN’s deals, it estimates that at least another $17 million is available for investment.

RAIN Source supports and advises its RAIN funds, each of which makes its own investment decisions, typically by majority with quorum, and seeks to make a return of 25 to 50 percent. Local investors pledge an aggregate minimum of $500,000 to start a fund, at which point RAIN Source invests an additional 10 percent, up to $100,000, and assists with legal formation. RAIN Source furnishes deal structure templates tailored for individual RAIN funds, performs initial screening of business plans, administers a business plan database, and shares best practices across the network.

A typical investment by RAIN Source is in the range of $400K to $1 million, with each fund participating in the deal contributing $150-200K. The process for the firm to evaluate an investment opportunity and close on funding currently averages 90-120

days. Birkeland said RAIN Source has 15 deals in the due diligence pipeline at the present time.

The Minnesota Stats

So, what specifically is RAIN Source doing in Minnesota, its home state? Since inception, its angel groups have funded no less than 42 Minnesota-based companies. That’s counting from 1998, when the organization was formed (first calling itself Min Corp., later adopting the name RAIN Source Capital). Of that number, 17 are still independent firms, while 12 have been acquired.

In 2006, RAIN Source funded only two Minnesota-based companies. But in 2007, that number jumped to five. When I asked what the projection was for the number of Minnesota deals it will fund in 2008 (meaning initial investments), Birkeland said six to eight.

Within the state of Minnesota, RAIN now has 12 angel groups, or individual RAIN Funds. Birkeland expects the firm will add one or two new funds in the state this year. A full list of all the RAIN funds may be viewed here.

Of its more than 400 individual angels members, approximately 225 are in Minnesota. Funds are closed to new members once fundraising is completed. (Members, of course, must be accredited investors.) But, once a fund is fully invested, the members may choose to start a new fund.

Is There a Role for Government?

The history of RAIN Source Capital has been an evolution. It first operated inside Minnesota Technology Inc. (MTI), which is a state government-funded entity. When more funding was needed in 1998, RAIN’s founders, Steve Mercil and Joan Wurzer, spun the company out to become Min Corp. So, the RAIN people know something about state government involvement in funding early-stage businesses.

An article by Thomas Lee in our own Star-Tribune a few days ago looked at a current attempt to get our state government involved directly in helping fund new startups: Proposal Would Invest Pension Funds in Start-ups. It speaks of another in a long-standing string of attempts to get the Minnesota State Board of Investment to dedicate just a small portion of its funds to funding promising startups. As the article implies, don’t hold your breath.

RAIN’s Birkeland thinks he has at least part of the solution. “Look at the Oklahoma model of using contingent tax credits to create a statewide ‘fund of funds’ in a state,” he said. “The company that did that in Oklahoma is Cimarron Capital. Their approach creates a pool of capital that is managed by a third party. The state is on the hook if the returns of the ‘fund of funds’ are below the tax credits, but Oklahoma has not lost money on this program in eight years.”

He continued: “Someone should track venture activity and state economic growth. I think such an analysis would show that states with lively business growth and private investing are better protected from downturns than those relying on large businesses that are global in scale.”

So, is Minnesota a leader or a laggard in angel investing? “I think we’re in a second tier after Silicon Valley, Southern California, and Boston,” said Birkeland. “I’d put us on par with Seattle, Atlanta, and Austin. Our medical device industry will keep us near the top of angel investing.”

Raising Minnesota

And what can be done to advance angel investing in Minnesota? “We need that state ‘fund of funds’ program.” Birkeland reiterated. “That would help create a greater VC presence, and some of those funds should be used to set up a statewide ‘angel capital network” with both angel funds and a central fund to invest side-by-side. The goal should be to get deals through to the levels where national investors can then come to town and invest.” That would of course include large VC funds, which now do only a minimal amount of investing in our state — certainly in early-stage deals. Again, Birkeland said our state’s leaders “should look to Oklahoma as a key example of how to develop this statewide model through the use of tax credits.”

RAIN Source Capital has some relationships with VC firms, “but we’re not currently on their radar screens for deal flow,” Birkeland said. “We do have good relationships with the local brokerage firms, such as Feltl and Athelon. We just closed a deal that a local investment bank led, and our funds and members were significant investors.”

But related to that point is an interesting, recent development with a Minnesota angle. David Spreng, Managing General Partner of Crescendo Ventures, is the new NVCA liaison to angel groups. (That’s the National Venture Capital Association.) David, who’s based in Palo Alto, is from Minnesota, still visits here often, and is quick to point out his firm’s continuing interest in investing in Minnesota. (Full disclosure: Crescendo has been a client of mine.) So, Minnesota’s impact as a center for angel investing may be getting even more attention nationally in the coming year. For more on David’s take on the improving relationship of angels and VCs, check out this article he co-authored in the current issue of the Venture Capital Journal: Angels and VCs Find Common Ground.

For a further look at the topic of driving growth through angel investing, here’s a just-published report from the National Governors Association, Center for Best Practices: State Strategies to Promote Angel Investment for Economic Growth. RAIN Source is cited in the report, as are current efforts by various states. One can only assume Governor Tim Pawlenty will be giving this one a good read.

The Role of Technology in the Process

One way RAIN Source is helping to contribute to a standardization in the process of angel investing, which national investors certainly expect, is its adoption of a software platform that is specifically designed for angel group management. More than 200 angel groups nationally now use this software to manage their deal flow and facilitate effective collaborate among their members. That software is from AngelSoft, a firm based in New York City. It recently announced that RAIN Source had adopted its platform for its entire multi-state network of funds. The way the process works for companies that successfully pitch RAIN Source is this: the startup is given access to a private, secure portion of the AngelSoft web site, where it enters key information about its company and uploads its business plan — all of which is immediately available, on a confidential basis, to the members of the specific angel group or groups to which it was given access.

The Innovation Continues

RAIN Source’s impressive expansion proves that angel investors can indeed be found and organized in small towns and rural areas. By the way, RAIN originally stood for Rural Angel Investor Networks, but the company began substituting “Regional” for “Rural” when it found itself establishing more of its angel groups in metro areas, including the Twin Cities.

Minnesota can indeed be proud that it’s home to a firm that is leading the charge to have angel investing carry more of the load in financing promising young startups to drive economic growth, both here in our state and across the country.

Innovation in Early-Stage Investing? You Bet! And MN Firm Is Major Player is a post from: Minnov8 and published under a Creative Commons license.