U of M / MOJO ‘Tech Transfer’ Discussion Reveals Deeper Issues

by Curt Prins

facepalmRoughly 100 from the business community turned out for the ‘tech transfer’ event arranged by MOJO Minnesota last Wednesday at the University of Minnesota. The panel discussion featured representatives from the U of M  OTC / Venture Center, clean tech, the medical device industry, Mayo Clinic and one lone SaaS entrepreneur.

Despite the hype, it was a relatively mundane ‘few to many’ conversation focused on the basics of tech transfer, albeit with a little personality sprinkled on top. The UMN moves too slow; there’s a greater supply of intellectual property than entrepreneurs capable of commercializing it; especially galling was the notion that, that when IP gets commercialized, it heads to the Bay Area or Boston — pulling jobs and tax revenues away from the home that birthed it.  All are valid and correctable complaints that we’ve heard before.

What’s most telling was this:  the High Tech, IT and SaaS genre of technology was largely ignored throughout the entire show. In fact, void of CaSTT’s fresh spinout from OTC, I have to wonder if the sector would have been represented at all that night?

We’ve all  heard that the Twin Cities is the “silicon valley of medical devices” and the U of M is known for its biotech research, but the Q4 2010 MoneyTree Report reveals some startling statistics about “slipping” industries:

“Compared with the fourth quarter of 2009, Life Sciences venture funding decreased 42 percent in Q4 of 2010 to $1.1 billion. This decline marked the largest year-over-year decrease since the first quarter of 2009 and the lowest level of funding for the sector since the first quarter of 2003…The Life Sciences share of total venture capital dollars invested shrank to 28 percent during 2010 from 33 percent in 2009.

In 2010, Biotechnology investing grew by a modest 3 percent in dollars and 8 percent in deals, with $3.7 billion going into 460 deals. The Biotechnology industry, which led all industries in 2009 in share of total dollars invested, slipped into second place during 2010 behind Software, which captured $4 billion in 834 deals.  Medical device investments fell 9 percent in dollars from 2009 to 2010 and finished flat in terms of deals. With $2.3 billion going into 324 deals, the Medical Device industry ranked behind Software, Biotechnology, and Industrial/Energy in dollars invested.”

Not a good sign for a state that typically puts all it’s eggs into a few baskets.  Our politicians and U of M administrators who allocate our tax dollars need to kick their expensive biotech and volatile medtech habits.  What will it take for these stakeholders to adjust to the times and focus more attention on the growing community of Minnesota tech entrepreneurs that are starting new companies in the IT/High Tech and SaaS spaces?

How about more attention towards commercializing the portfolio of tech IP they already own, while ramping-up production with the CS/EE school?

Allow me to throw out some ballpark numbers: it takes at least $100m just to effectively become a market ready biotech startup, $50m for your average medtech firm, and less than $1m to launch an tech startup. Again, rough.

If $1m for a tech startup sounds unrealistic, let me break it down. Half of that might be allocated to costs associated with minimal staffing, legal, marketing, travel and product development. Another quarter could be allocated to hosting, application and metered usage of third-party apps/services — no one codes everything from scrap these days. And the remaining funds can be banked to help ride out the launch phase.  Actual startup costs always vary and $1m is really more of an approximation used to illustrate the extreme disparity between the startup costs in different industries.

What if, instead of gambling on a few big money/big risk med device or biotech startups, that same $50 – $100m was reallocated and diversified into 50-100 different high tech startups over the next 5 years? Would there be some healthy returns? What kind of ripple-effect would that have on the local industry and the state’s economy as whole for decades to come?

As an added bonus, a SaaS startup can go to market considerably faster — from idea to commercial product in less than six months. That’s roughly the same time it takes for an FDA decision these days.

Many investors and politicians are too quick point to the immature nature of SaaS and other modern information technologies, the lack of IP and no local blockbusters as excuses not to dive a damn. Well, the dot com era ended a decade ago, and with it went the crazy business models and the hyperbole that hardly existed much in the Twin Cities, relative to the big picture.  About IP —  if you’re investing $50M+ into a startup, patents are critical to protect that investment. The $100k-$1m that’s invested in SaaS startup is roughly legal fees for your average patent infringement. Consider some SaaS in the email business — ConstantContact, ExactTarget or MailChimp — all of which are multi-million dollar firms with similar technology applied to different markets without a patent between them.  There are countless other examples.

True, not every IT startup is going to be as successful — thus the nature of risk — but tech startups never have to contend with FDA regulators and the ongoing liability risks; years of hard work could never be killed by FDA delays or rulings, which caused Plymouth-based Disc Dynamics to close its doors after accepting over $65M from investors.  As a related excerpt from the Money Tree Report notes:

“One possible reason for the drop-off in funding for the life sciences sector during the last half of 2010 was an increasingly challenging regulatory environment. “During the fourth quarter, we saw tremendous uncertainty relating to FDA approvals, including the 510(k) process for medical devices, which is thought to have affected venture capitalists’ outlook,” said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC. “Until we get more clarity as to the regulatory pathway not only for medical devices, but also for drugs and other biotech products, venture capitalists are expected to be cautious with deals.”

In terms of local success, let’s look at Compellent Technologies. Founded in 2002, Compellent took in $48M in four rounds of investor capital, closed a $65M public offering in 2009, and was promptly acquired for $960M less than two years later by Dell while generating over 400 jobs locally.  Additionally, Minnesota’s only IPO last year came from SaaS company SPS Commerce, and the largest Minnesota M&A deal was  Tyco Electronics $1.25b acquisition of ADC Telecommunications.

High Tech/IT/SaaS companies in Minnesota tend to fly under the media radar, but there is a burgeoning early stage market in our own backyard right now. Excluding Cymbet’s $31m round, over $3om was invested into approximately 35 different tech startups in 2010, and 2011 has already seen about $10m into seven startups.  Is there currently that much startup diversity and activity in the bio and medical spaces combined?

Our tech startups and the entrepreneurs behind them deserve greater attention from our Minnesota legislators, U of M administrators and private investors.  Minnesota cannot afford to miss these opportunities at this juncture.

Thanks to MOJO for coordinating the event and opening more eyes to the heart of the matter.

Comments

  • http://twitter.com/zacksteven Zack Steven

    Great post Curt! I was at the MOJO event and understand the focus on med tech, but I have to agree about the opportunity for local High Tech/IT/SaaS. A lot can be done (and quickly) for less than $1MM and the local market is ripe with ideas and talent. Things are bubbling up in the community and I'm excited about where they're headed. Thanks for advancing the conversation.

    Zack

  • http://twitter.com/UniqueVisitor Jeff Pester

    Nice piece Curt. I think one of the biggest challenges is that there's no clear leadership/representation for the non-MedTech companies in MN. Lots of “leaders” talk about wanting to effect change, but their inability (year after year) to make anything meaningful progress speaks volumes.

    Don't get me wrong, they're fine people – but their lack of progress indicates to me that they just don't realize what the missing pieces of the ecosystem are and/or how to begin to put the pieces of a complete ecosystem together in order to give MN startups a fighting chance. Might be time for new leaders who can make shit happen.

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