The Dire Straits Of Publicly Traded Tech In Minnesota [Part 1]

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WTFYou’ll hear a lot about the ‘Fortune 500’ in Minnesota wherever you go, but aside from #72 Best Buy (which has “turned around” by losing 6 billion dollars in value since 2010) there are are no actual tech companies on that current list of 17 headquartered here.

Looking beyond that roster for our state’s top tech firms — the true  leaders, the anchors of industry, the globally competitive — what do we have here?

In seeking answers to the above, an alarming trend has surfaced around the class of publicly traded tech firms in Minnesota:

The picture is not just a changing landscape, it’s rapidly a disappearing one.

Here’s a list of former Minnesota public tech companies that have moved headquarters, gone private, or just died since 2010:

  1. Digital River  – Acquired ($840m) and privatized by NY HQ Siris Capital in 2015
  2. Wireless Ronin – Merged and privatized by NJ HQ Creative Realities in 2014
  3. Digital Angel – NASDAQ delisted in 2010
  4. Navarre – Merged with Speed Commerce and moved HQ to Dallas in 2013
  5. Lawson Software – Acquired and Privatized by Infor & Golden Gate Capital for $2b in 2011, moved HQ to New York.
  6. Hickory Tech – changed name to Enventis in 2013, acquired by Illinois HQ Consolidated Communications in 2014
  7. MakeMusic – Acquired by Peaksware ($15m), privatized, and moved HQ to Colorado (-120 jobs) in 2013/2014
  8. Hutchinson Technology sold to TDK for $126m
  9. Analysts International – bought for $35m in 2013 by Georgia-based ACS
  10. XRS/Xata Road Science – Acquired and privatized by Dallas HQ Omnitracs in 2014 ($178m)
  11. Multiband – Acquired and privatized by Texas HQ Goodman Networks in 2013 ($116m)
  12. FICO moved to San Jose, CA in 2013 ($1.5b value then, $2.6b value now)
  13. Imation plans to “wind down Minnesota operations” in 2016 (A $1.5b multinational with 1,500+ employees in 2008)

In contrast, list of local tech companies that have gone public since 2010 include:

  1. Proto Labs (2012)

While that 12:1 ratio sinks in, let’s pause and look back at 2015 to get a snapshot of the current status with what is still left here.

2015 was a terrible year overall terms of market cap valuation as a combined ~$6.5 billion dollars was lost over the last 12 months by some fifteen public tech firms.

The three biggest losers include Best Buy down 23% with a $3b+ loss, Stratasys lost $2.8b at a 70% toll to value, and Capella lost $346m or 40% of its stock value last year alone.  Proto Labs, the only tech IPO since 2010, was also down $82m, or 5% of value.  Qumu (formerly Rimage, a $300m tech firm in 2007) took the largest hit last year as a  percentage — 80% or one hundred million dollars gone in 2015.

What real growth there was in 2015 goes to B2B omnichannel retail software maker SPS Commerce, the biggest winner, up 35% from $909,150,000 to $1,233,000,000 — no small feat. The next closest was IoT firm Digi International, which realized a 29% gain from $223,500,000 to $287,910,000.

But aside from these two, the rest were relatively flat, as you can see below sorted by market cap from high to low at EOY 2015:

Why is this happening?

How much revenue and jobs are we losing?

Will there be more tech IPO’s here in the future?

What does this mean in the grand scheme of things? 

These are all good questions to consider going forward…

Comments

  • Zach Robins

    This theme shouldn’t come as a surprise – for a host of reasons it makes little sense for a small/micro-cap company to remain public. The costs are outrageous (legal, accounting, compliance, reporting, stock transfer, etc.), the shares may be thinly traded, substantial restrictions exist on insiders, transparency can get in the way of strategic moves, outside influence on financial performance…and the list goes on. On the other hand, large private equity firms have the size, appetite and capability to take these companies private. And soon (crossing my fingers) venture exchanges may prop up allowing for the benefits of liquidity without the aforementioned costs and associated negatives.

    • http://tech.mn Jeff Pesek

      Hi Zach – what do you consider to be small/micro cap?

      • Frank Jaskulke

        Jeff – Micro cap is usually thought of as less than $300 million and small cap is below $1 billion
        SOX regulations and lower broker commissions make it hard to be small cap and REALLY hard to be microcap. SOX means you pay more money to be public and small broker commissions (which are the result of technology! :)) means banks can’t make money covering microcaps. Getting analyst coverage for small tech companies is really hard.

        • http://tech.mn Jeff Pesek

          If that’s the case, and it varies by source, then our lot of public tech firms is even smaller than they seem…

          • Frank Jaskulke

            Yes indeed! The broker commissions have really done a number on microcap and even small cap. You can’t make money working on thinly trade stocks so you just ignore them.

  • Katie Eggert

    Interesting article that highlights a change in pure technology leaders in MN, but it is important to note the strength of technologies developing within a wide variety of public and private companies locally. For example, our regional medical industry is leveraging emerging technologies to develop products that push the limits of our imaginations and building market value in the process. Medical Alley Association is a leader in helping Fortune 500 and start up companies keep the value in Minnesota.

  • Frank Jaskulke

    Jeff,
    A couple of comments:
    – I disagree that Best Buy is the only tech company on the 17 fortune 500’s HQ’ed in Minnesota. First, I think of Best Buy as less of a tech company than 3M or St. Jude or UHG. Best Buy sells technology, they are a retailer in my mind. 3M is a major tech firm. And manufacturing firm. St. Jude develops advanced health technology. UHG’s optum business is certainly a tech company. And I don’t care what the legal documents say, Medtronic is HQ’ed here :) If Stratsys counts then those companies count.

    – I agree with Zach, the cost of being public is significant. I suspect it was one factor why Ability Networks did a recap of $500 million instead of going public. I have clients that are $10 million/year companies that are public – cost them $500 thousand/year to be public.

    – Also, the public markets were dead for a number years through the recession. They came back strong for biotech a few years ago a little bit medical device. We had one device firm go public in 2010 – Kips Bay Medical (since closed) and Entellus Medical went public in 2014 (and is doing well)
    I don’t disagree with the general statement that the number of public firms has declined. I would submit it has more to do with markets than with Minnesota.

    • http://tech.mn Jeff Pesek

      Frank, I’ve always appreciated your willingness to have a position and put it out there!

      “I disagree that Best Buy is the only tech company on the 17 fortune 500’s HQ’ed in Minnesota. First, I think of Best Buy as less of a tech company than 3M or St. Jude or UHG. Best Buy sells technology, they are a retailer in my mind. 3M is a major tech firm. And manufacturing firm. St. Jude develops advanced health technology. UHG’s optum business is certainly a tech company. And I don’t care what the legal documents say, Medtronic is HQ’ed here :) If Stratsys counts then those companies count.”

      Well, it depends on how tech is defined… and as a regular reader/commenter, you probably know our general definition is: IT/SaaS/Web/Mobile/Hardware/Ecomm. We’re not about hard sciences/nano/material, med device, cleantech, biotech, etc – the analysis above is biased towards a certain genre of tech by design.

      I can see what you’re saying about Best Buy as they are first and foremost a consumer electronics retailer. And in doing so, they play an incredibly important role in the tech world: distribution. Best Buy sells the tangibles that allows people to experience the apps, saas, media, etc.

      They do about 3/4 of a billion dollars in ecommerce rev annually, about 2 billion in geek squad services, is in the IoT connected car business (zubie), backs (not enough) tech startups, and dabbled in SMB IT consulting (RIP mindshift 2013). Consider that if you were to carve + combine their ecommerce and geek squad biz, they would become the largest pure tech company in this state by revenues.

      Again, I’m not suggesting they are pure play tech but to exclude them from the tech narrative locally as well as within the big picture ecosystem would be amiss, in my opinion. But take em or leave em in this analysis!

      3M is tech, although not how we’d define it ($MMM is down 15% YoY from ~$104b to $86b) and St. Jude is tech, but med device first ($STJ -16% from $18b to $15b YoY). UHG has a lot of different tech and actually grew last year unlike the other two suggestions! It would be fun to break down their business sometime to see just how much is tech by our defition – so no more comment on UHG right now ;)

      “I agree with Zach, the cost of being public is significant. I suspect it was one factor why Ability Networks did a recap of $500 million instead of going public. I have clients that are $10 million/year companies that are public – cost them $500 thousand/year to be public.It sounds like one thing we can agree on is the situation is bleak…and I’d posit our energies would be better applied towards deconstructing such questions as: what is disappearing, does it matter, and will it return?”

      And I agree with you two, it’s certainly a factor in some situations (why would a $10m/year company be public makes no sense to me?) However it doesn’t explain those public companies that are above the sensible threshold and still struggling & dying on the vine. I don’t think it’s as relevant to the situation as suggested, though, but I could be wrong!?

      “Also, the public markets were dead for a number years through the recession. They came back strong for biotech a few years ago a little bit medical device. We had one device firm go public in 2010 – Kips Bay Medical (since closed) and Entellus Medical went public in 2014 (and is doing well) I don’t disagree with the general statement that the number of public firms has declined. I would submit it has more to do with markets than with Minnesota.”

      I’m fully aware that there have been some IPOs in Minnesota in areas outside of our scope of tech, but one true tech IPO since 2010 is not consistent with the overall tech market nationwide whatsoever.

      Thanks for comment, it’s good to be challenged in our ways of thinking, to discuss and learn. I’m really curious to understand as much as possible what this means in the big picture of things, what the systemic/core causes are, as well as what the future could look like. I have (some) thoughts on these as I’m sure you and many others do…

      • Frank Jaskulke

        Replying in kind. Editing down for clarity.

        – I love putting thoughts out there and double love that this site generates so many. Reminds of my youth on BBS’s without the swearing.

        – I do think BBY is a tech company. My point was more that others were excluded.

        – I know you define tech that way – I think you should start saying IT instead of just technology. St. Jude is a technology company. It is even a computer company (seriously, pacemakers are implanted computers and you use custom built laptops at the doctors office to program them).

        “It sounds like one thing we can agree on is the situation is bleak…and I’d posit our energies would be better applied towards deconstructing such questions as: what is disappearing, does it matter, and will it return?”

        I don’t agree that things are bleak unless we define the world as only public. Which is the point of your piece. I actually don’t care about public/private, just about companies – how many, how big, how fast growing?

        But it is important to understand why they declining. And I would suggest that Zach’s first comment is the primary reason. Being public is expensive because of SOX and lack of analyst coverage. That is not a Minnesota problem, that is a US problem. Check out the ASX or TSX. Tons of small companies go public on their exchanges because you can. We have a handful of small medical device companies that went public on the ASX to raise capital. Would never have happened if they did it here.

        “I’m fully aware that there have been some IPOs in Minnesota in areas outside of our scope of tech, but one true tech IPO since 2010 is not consistent with the overall tech market nationwide whatsoever.”
        I don’t know about that. Our IPO market has been small for a long time. I in the last 6 years could be consistent with the trend in the post SOX world. If you took IPO’s from San Fran, NYC and Boston out of the mix, how does the rest of the country look and how do we compare to that?
        I’d think (but don’t know) that San Fran is such an outlier that it would throw the data off.

  • Thompson Aderinkomi

    With certainty if you go upstream you will find what is polluting the river. I am guessing if you look at the 10 years that precede the period Jeff analyzed in the article you will find that the number of early stage tech companies (as defined by Jeff) funded or started in MN is well below the national average, I have not done such an analysis. Supposing its true, it may be in part largely due to the poor early stage funding environment in our state for early stage tech companies. As for why the massive loss of value in public tech firms, it may be a market issue as the life cycle of technology is short and MN firms may be falling behind in the newest tech, in the period Jeff analyzed. The three companies in the list above with market cap gains are all in growing sub-sectors of tech. The cure low numbers of public MN tech companies with increasing value is for their to be more early stage tech companies based in MN that are working in growing sub-sectors of tech.

    • Frank Jaskulke

      Thompson (and others) if you have any thoughts on what NAICS codes would cover the tech sectors defined by Jeff I can find out what the rate of NewCo formation was over the last 10 years.
      Assuming there are NAICS codes – some of these sectors there may not be.
      We do this analysis in biotech and medical device annually for exactly the reason you describe – can’t have public companies if you don’t have startups.
      One caveat – in that 10 year period is the global recession which saw a near collapse of the IPO market for all industries for a few years. That would skew data, but likely could be corrected for

      • http://tech.mn Jeff Pesek

        Hi Frank…how useful do you think the NAICS codes are in this case? I’ve explored them in the past but found it to be an archaic sytem limited in present day value.

        What kind of results are you seeing around the biotech/medical device space in terms of accuracy and thoroughness of the source data?

        Might be worth a second look…

        • Frank Jaskulke

          Jeff, the data in medley and biotech is pretty good. Quarter to quarter it has a moderate error rate but the trends over time have been solid and the census bureau does a big revision every 5 years that is very good.

          It is from this data that we found that the annual rate of startup formation in medical device has tripled starting around 2007. Follows with the increase in funding and runs counter to what most people in the device community thought (we know one of the reasons for the disconnect – new entrepreneurs).

          You are right on archaic – they tend to be slow to keep up with new industries. I’m looking through the computer and IT related codes to see which ones might represent parts of the tech sector as you describe it. From those I’m going to pull some data just to see what is out here. Will share with you.

          Unlikely that we will have something 100% descriptive but I bet we find some useful nuggets.

  • http://tech.mn Jeff Pesek

    Found another one from this past November: Hutchinson Technology Purchased by TDK for $126m: http://tech.mn/news/2015/11/02/hutchinson-technology-purchased-by-tdk-for-126m/

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