Minnesota: High on talent but low on risk
Many people who are well read on technology and entrepreneurship are familiar with the traditional dynamics of a startup pitch to investors. Any casual fan of Shark Tank knows there is a basic set of questions to answer about the product, the market, the team and its traction. While that script alone does not guarantee funding, an entrepreneur can at least feel good about her chances if she’s got a compelling story.
What most entrepreneurs don’t have insight into is how those investors obtained their funds and the role macro-economic forces and geographical emphasis played on their fundraising success. Although they may operate on a different plane, it’s worth understanding how that environment may impact your own prospects for fundraising, as those forces often trump the merits of your own venture.
I was recently asked to give an assessment of the Minnesota tech ecosystem at the Kauffman Fellows Midwest Summit in Kansas City, Mo. In attendance were a number of institutional investors, fund of funds, pension funds and university endowment managers, who collectively manage billions of dollars, with a large portion dedicated to the venture capital asset class. They are facing a major dilemma in how to allocate their funds and are considering new ways to deploy it.
By historical standards, there is currently an extraordinary amount of capital sitting on the sidelines, exceeding even the cash-hoarding environment we saw in the wake of the financial crisis of 2008. Many pension funds are unable to meet their liabilities to retirees because of their large dependency on underperforming bonds. This has caused many of these fund managers to consider a change in allocation in pursuit of growth.
Naturally, venture capital gets a lot of attention because of its high-growth reputation. Investment managers are turning over new rocks, and areas like Minneapolis are one of those places people are looking at from the outside as a potential opportunity to deploy capital. While that’s a great opportunity for the region and its startups, everything in finance is a comparison to alternatives. Similarly, we must consider our startup environment as it compares to its peers, which is the way outside investors think.
In the assessment I gave on the environment for startups in Minnesota, I used a framework developed by Ernestine Fu, who has studied what makes Silicon Valley tick. Starting with the positives and rotating clockwise, I believe that TALENT is our greatest asset in Minnesota. We have top-notch educational institutions at all levels. People who do leave for school or work often come back with a well-rounded base of experiences which further enriches the region. The diversity of Fortune 500 companies attracts and retains a vibrant workforce. The people have a strong Midwest work ethic and are very loyal, all at a fraction of the cost of Silicon Valley. This makes talent a true competitive advantage.
In terms of a GIVE-BACK COMMUNITY, Minnesotans are naturally charitable. They are known for high civic engagement and a strong sense of community. There is a lot of fragmentation in the startup community; however, a more inclusive sense of community is growing, led by outstanding groups like Beta.MN and minne*.
INDUSTRY COLLABORATION is largely a missed opportunity. Some local corporations like Target and General Mills are starting to warm to the idea of working with entrepreneurs — gasp — outside their walls, but for the most part, large corporations still have an attitude of smug superiority. In the Valley, large firms are constantly working with entrepreneurs — not simply out of charity; rather they do it to gain insights into the disruptive trends that threaten their very existence.
For the most part, there is strong state GOVERNMENT SUPPORT for entrepreneurship. Both sides of the aisle care about job creation and small business growth, so it’s comforting, given the backdrop of a nasty presidential election, to see that some areas of government actually still work! MNvest, the equity crowdfunding program, was approved in 2014. The state also has an angel tax credit of 25%, and I can personally vouch for its ease of use. On the negative side, the state has high tax rates and Minnesota law enforces non-compete agreements, which are generally reviled in startup-land as they are biased towards large corporations.
Now for the bad news. It would come as no surprise to entrepreneurs that early-stage CAPITAL is scarce in Minnesota. Despite a recent rise in funding raised by local startups, the amount still lags behind similarly sized peer communities like Seattle, Denver/Boulder, Boston and Austin. Given how much wealth there is in Minnesota, it is especially embarrassing how little of it goes to early-stage startups. At least the trend is in the right direction as there are new funds in town and outside firms are setting up offices.
Now for the really bad news. The Achilles heel to innovation is our risk-averse CULTURE. There are pockets of exceptions of course, but as a general community, our culture is the antithesis of Silicon Valley. We think in big-company hierarchies and not in flat, agile networks. There is no bias towards action and no sense of urgency. We desire consensus and punish people for expressing dissenting views — even in the entrepreneurial community!
In closing, there is perhaps a once-in-a-generation opportunity right now for entrepreneurs to win big and to do it here in Minnesota. People with deep pockets are certainly watching; however, an inflection point is still needed to move them to become active participants. It may be an unfair chicken-or-egg proposition, but we need a catalyst in the form of a national, attention-grabbing success. I know, Minnesotans have always kept a tight lid on their successes, but they also hide their failures and everything in between — their hopes, their dreams and their big bold ideas. It’s a shame, because big ideas take an army of people to bring to fruition, and that can only happen when they are heavily socialized. It takes guts to do that and a willingness to suspend disbelief, believing instead that a crazy idea might just change the world.
Matt Otterstatter is an investor in early-stage companies and a partner at Vilicus Ventures. Matt has cofounded four companies and a nonprofit called Accel.MN to support local entrepreneurs. He is also a Kauffman Fellow, which guides his exploration of startup ecosystems.