Can't get your startup funded in Silicon Valley? Think Minnesota

Minnesota's entrepreneurs are fiercely loyal to the North Star State and proud of its non-cutthroat, collaborative atmosphere. They also say it's easier to attract investors there.

Terry Collins Staff Reporter, CNET News
Terry writes about social networking giants and legal issues in Silicon Valley for CNET News. He joined CNET News from the Associated Press, where he spent the six years covering major breaking news in the San Francisco Bay Area. Before the AP, Terry worked at the Star Tribune in Minneapolis and the Kansas City Star. Terry's a native of Chicago.
Terry Collins
7 min read

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To the tech entrepreneurs who've set up shop on the Silicon Prairie, there's no better place to be.

Silicon Valley ideas get meshed with Midwestern values, resulting in a low-key and collaborative community of startups in Minnesota that stands in sharp contrast to the in-your-face, cutthroat lifestyle in California.

Entrepreneurs are also convinced they have a better chance to get funding because there are fewer businesses to compete with for investors. The number of tech startups in the North Star State has doubled in the past five years, to more than 500. Venture capitalists invested almost $203 million in 2014 in companies 5 years old or younger, according to research firm PitchBook.

Minnesota ranked 20th in the country last year in receiving venture funding for those types of startups, PitchBook said. The state trails Oregon, Utah and Arizona by mere percentage points. California is ranked No. 1.

Many early startups in Minnesota work out of COCO, a popular tech hub in Minneapolis known for its collaborative atmosphere. COCO

"We're definitely not Silicon Valley," said Tom Kieffer, CEO of Virteva, a suburban Minneapolis-based IT consulting firm. "You can get a deal done here."

Startups occupy old warehouses and historic buildings across Minneapolis, neighboring St. Paul and office parks throughout the state. Many are early-stage companies making medical and health care software. They revolve around the area's big businesses, including the Mayo Clinic, medical instruments company Medtronic and a subsidiary of UnitedHealthGroup, the nation's largest health insurer.

But new kinds of businesses spring up every day. Matt Ronge and Giovanni Donelli, two engineers who met at Apple, launched Astropad, software that turns iPhones and iPads into graphics tablets for drawing, painting and photo retouching. Their 7-month-old startup, Astro HQ, just won a contest seeking Minnesota's newest and most innovative creations.

Clay Collins, whose 2-year-old LeadPages software company helps businesses find new customers, says he's received nearly $40 million in venture capital funding -- all without Valley backing.

"I've lived in both California and Minnesota and have found it easier to raise funds here," Collins said.

The North Star State's evolving tech

When people think of Minnesota, they may think of frigid winters, the massive Mall of America or all that water -- the state is also known as the Land of 10,000 Lakes. Many Fortune 500 companies, including Target, Best Buy, 3M and General Mills, are headquartered in Minnesota, and the state is also home to longtime "Medical Alley" tech companies including Boston Scientific and St. Jude Medical. The biggest tech company is Optum, a data services subsidiary of UnitedHealthGroup.

Less well known is its role in hosting next-generation tech firms like Code42, which specializes in cloud-software backup, and JAMF, a software developer for Apple products. There's a growing list of successful startups, including LeadPages; Learn to Live, which offers online programs to help people deal with social anxiety; Sport Ngin (pronounced "engine"), which makes software for sports league websites, and education-video-sharing startup Vidku, which was launched at the University of Minnesota and raised $17 million in 17 days earlier this year.

This week, Minnesota startup founders pitched their businesses to investors during Twin Cities Startup Week. Workshop topics varied from increasing the number of women and minority tech entrepreneurs to "Don't F*** Up Your Startup: Some Lessons to Avoid Legal Headaches."

The startup event also hosted the MN Cup, one of the largest statewide venture competitions in the country. Astro HQ, a finalist in the high-tech category, won the $50,000 grand prize for Astropad. About 65,000 people have downloaded the app, said Ronge, and the company is currently working on updating the app for the soon-to-be-released Apple iPad Pro.

Astro HQ believes that with its current staff of four, those dollars will stretch further in Minnesota than in other, more prominent tech locales. "We're a profitable company now. We couldn't say that if we were based in the Bay Area or the Valley. It would be really tough," Ronge said. "We'll be able to grow our business faster here."

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Some of COCO's more than 1,000 members, juggling devices and wrangling code. COCO

There were a record 115 startup deals in Minnesota totaling $577.82 million last year, and the state is on pace to surpass those figures in 2015, said Alex Lykken, a senior financial reporter at PitchBook. Nearly half the deals were related to health care, followed by information technology. Comparatively, Silicon Valley had over 2,300 startup deals -- more than half were information technology-based -- at $28.45 billion, PitchBook reports.

Lykken acknowledges that Minnesota is unlikely to have the influence the Valley has. But its low-key approach and local values offer a different model for startup success.

"Places like Minnesota have got it right," Lykken said. "There's room for growth for local investors."

Part of that success can be seen at COCO, a popular tech hub whose name is short for "Co-working and Collaborative." Dozens of startups are nestled inside the Minnesota Grain Exchange, a historic landmark in downtown Minneapolis. Engineers and designers run around working on a project for one startup and then rush to participate with another startup.

The hub's space isn't all that different from the brainstorming centers you'd find in Silicon Valley. The room is filled with whiteboards, soft sofas, open-space workstations and bicycles. Coffee is free.

The Grain Exchange's old electronic trading board remains in use, after some members hacked it. Instead of commodity pricing, the board now features the latest tweets from COCO members, a Google calendar of upcoming events, and the titles of Spotify-streamed songs piping through overhead speakers.

"This was the temple for the old economy," said COCO co-founder Kyle Coolbroth. Similarly, COCO's 1,000 members "want to belong somewhere with like minds going on similar journeys."

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A COCO member gets in the swing of things. COCO

COCO has even caught Silicon Valley's eye. While in town to give a talk, Google Executive Chairman Eric Schmidt took notice of COCO's buzzy workspace and made the hub a partner in the Google for Entrepreneurs network. It's one of nine such tech hubs in North America.

COCO's popular downtown space also prompted the Minnesota High Tech Association, (MHTA), a trade-advocacy group for about 250 tech organizations, to relocate from its suburban headquarters to be closer to the entrepreneurs they support. COCO has since expanded to three other locations across Minneapolis and St. Paul.

Incentives and support

The evolving scene comes as no surprise to MHTA chief executive Margaret Anderson Kelliher. Her organization wants Minnesota to be a top-five technology state. The state currently ranks between 6th and 13th, based on various surveys, the organization said.

Anderson Kelliher says the MN Cup, the competition Astropad won, has helped many startups through lean times. More than 9,000 Minnesotans have participated in the competition since it began in 2005 to help startups that generate less than $1 million in annual funds.

Cup finalists have raised almost $170 million in funds for their companies, according to Anderson Kelliher. "The Cup has helped many startups get through the growth cycle with investments," she said, "so they can stay here as well as help put Minnesota on the map."

Minnesota also has an Angel Tax Credit program, which offers investors a 25 percent tax credit on money they put into startups less than 10 years old. Minnesota's tax credit is on par with those of about 10 other states, said Marianne Hudson, executive director of the Angel Capital Association, a nonprofit collective of angel investors. Two states, Oregon and Maine, offer more than 50 percent in angel tax credits to spur investment, she said.

More than half of the $16 million in Minnesota's angel tax credits for 2015 has already been allocated, according to state officials. The remaining amount is being reserved to encourage investing in women- and minority-owned startups through the end of September.

Still, some startup owners in Minnesota wonder if there's enough support. A spirited online debate recently took place on the popular local website tech.mn, about whether local startups could become successful. Many entrepreneurs complained about a lack of investors. Some even questioned whether they should cut their losses and go elsewhere -- maybe even to Silicon Valley?

Collins of LeadPages doesn't buy it.

"If you don't like it here, please move to San Francisco so all your imagined excuses for failure can be taken off the table," he told the group. "If you've got traction, it doesn't matter where in the United States you are, investors will find you."

Ties that bind

SmartThings, a Minneapolis startup that makes smart-home controllers, was acquired by Samsung for a reported $200 million last year. SmartThings' technology helps consumers control their appliances with their smartphones, smartwatches and other Internet-connected devices. The acquisition has been viewed as key to Samsung's efforts around the Internet of Things, the idea that sensors can collect data on anything and share that info over the Web.

Though SmartThings moved a bulk of its operations to Silicon Valley, a development team remains in Minneapolis.

The ties that bind are hard to break.

"Everyone here is just a couple generations off the farm," said Elwin Loomis, a software engineer director at Target who's worked in the Minnesota tech scene for nearly three decades. "There's a real down-to-earthiness feel here that I really like."

With strong local ties and an expanded reach to investors nationwide, a lot of Minnesota tech companies say they aren't interested in leaving the state.

Many of Minneapolis-based Code42's employees worried that the cloud-software company, which counts Uber and Expedia among its clients, would move after investors poured $52.5 million into it three years ago, according to co-founder Mitch Coopet.

"We were very clear that we wanted to stay right here," Coopet recalled. "We didn't want to leave the Twin Cities."

Correction, September 23 at 1:40 p.m. PT: This story incorrectly stated the amount venture capitalists invested in 2014 in companies 5 years or younger. Venture capitalists invested $203 million in 2014 in companies 5 years or younger.