Pumping the Startup in Minnesota – The Minnesota Investment Network, known as MinCorp

The St. Paul-based Minnesota Investment Network is designed to help fledgling businesses grow by running an equity fund that has put money into 25 small businesses.

A few weeks after Steve Mercil joined Minnesota Technology in 1992, he discovered a plan for financing new businesses buried deep under piles of paperwork.

By:
Dave Beal
St. Paul Pioneer Press

http://www.nasvf.org/web/allpress.nsf/pages/9468

The plan, drawn up by longtime St. Paul venture capitalist Buddy Ruvelson, called for the creation of seed capital funds across the state. These entities would pump private investment into promising startups, help them generate jobs for their communities and produce ample returns for the funds’ investors.

"I didn’t know who Buddy was," says Mercil. "I called him up. He educated me. We kicked around my ideas and some of his."

Today, their dreams are coming true. The Ruvelson-Mercil concept — a network of investment networks — is about to blanket Minnesota and Iowa, could soon reach into Wisconsin and perhaps spread to other parts of the country.

Mercil is president and chief executive of the St. Paul-based Minnesota Investment Network. He and associates Joan Wurzer and Cliff Smith have run the operation for years. Brian Johnson, who remains a general partner at the Pathfinder venture firm, joined them on July 1 as chief operating officer.

The network was born as an independent entity in 1998 when it was spun out of Minnesota Technology and privatized. That same year, a group of Alexandria, Minn., investors launched the first of the network’s RAIN (short for rainmaker)funds http://www.rainstreet.com/index.html — Lake Ventures I.

Since then, investors have started three more: Lake Ventures II, also in Alexandria; Prairie Capital in Worthington, Minn.; and Northstar in Grand Rapids, Minn.

Another four are expected to be going by early next year, two in the northern part of the state and two in southern Minnesota.

The Minnesota Investment Network, known as MinCorp, is set up as a nonprofit designed to help fledgling businesses grow. It runs an equity fund that has put money into 25 small businesses, most of which are outstate. The network has also invested in the four RAIN funds.

The network provides legal work for the RAIN funds, helps them with due diligence and provides them with a variety of other services.

The satellite funds are designed as moneymakers. Generally, they seek returns of up to 50 percent on seed investments, up to 40 percent on second-stage financing and up to 30 percent on later-stage investments.

The RAIN funds bring together "angels" — professional accredited investors with a net worth of at least $1 million.

Angels can be heaven on earth for small business. In small towns, they typically have a good sense of the risks inherent in financing local businesses because they know the entrepreneurs well.

All too often, though, they lack the expertise that MinCorp offers. Also, operating alone, they tend to miss out on the wide range of investment opportunities that MinCorp provides.

One of the network’s most promising investments — AbbeyMoor Medical near Alexandria, Minn. — illustrates the promise of MinCorp and its RAIN funds.

AbbeyMoor makes a temporary prosthetic stent designed to help men with prostate problems.

Its roots go back to the late 1980s, when SciMed Life Systems manager Lloyd Willard decided to move to rural Miltona, Minn. Willard purchased a 160-acre farm there, set up a research facility in one of the farm buildings and persuaded SciMed CEO Dale Spencer to lease the equipment and building for a research center.

"It was truly clandestine," says AbbeyMoor chairman John Reid.

In the mid-1990s, the arrangement ended. Then Boston Scientific acquired Maple Grove-based SciMed.

Willard joined Reid, who had co-founded Urologix earlier in Plymouth with venture capitalist Mitch Dann, to start AbbeyMoor in Miltona.

Raising capital for such startups can be a gargantuan task if the company is located far off the beaten path. Like in Miltona.

By 1999, AbbeyMoor had its first round of financing from MinCorp, a handful of angels and two small funds.

Then Lake Ventures I got organized, and took a stake in the company.

More recently, the second Lake Ventures fund got organized. It, too, invested in AbbeyMoor.

Now Prairie Capital has also put money into the company.

All together, this network — MinCorp, the two Lakes funds, Prairie and related angels on their own — has provided AbbeyMoor with more than $1.6 million. Overall, the company has raised $10.5 million, but much of the network’s investment came early on.

The company is still small, with just 23 employees and likely sales of about $100,000 this year, but investors have good reason to hope it will succeed.

AbbeyMoor’s stents, in clinical trials since late 2002, could be approved for commercial use by next year.

Reid, who is also chairman of Lake Ventures II, says "it would have been infinitely more difficult" to get this far had not the MinCorp network and the RAIN funds backed the company. "They had a profound impact on AbbeyMoor Medical," he says.

It’s too early to tell whether the RAIN funds will be able to deliver on their promise of big returns. But their committed capital and investments are growing, and their concept has picked up key backers beyond Minnesota.

Lake Ventures I raised $510,000. Lake Ventures II has raised $730,000, Prairie Capital $650,000 and Northstar $460,000.

All together, they have invested in 19 companies.

MinCorp has trademarked the RAIN name.

Two years ago, MinCorp licensed its template of legal agreements and other features to the Iowa Department of Economic Development. The department has made that package available to two seed capital funds. One, in Mason City, Iowa, has raised $1.7 million from 61 investors; the other, in Cedar Falls, Iowa, has raised $1.6 million from more than 30 investors.

Up to 12 more Iowa funds could be created soon, says Jamie Zanios,director of the John Pappajohn Entrepreneurial Center in Mason City. "I think it’s a great story and it has really been driven by Minnesota," he says.

James Hanke, manager of the Chippewa Valley Angel Investors Network in Chippewa Falls, Wis., says that this fall, his group will look closely at building ties with MinCorp.

Hanke says Wisconsin has several angel investor groups, but lacks the "deal flow pipeline" and due diligence services that knit the groups together.

Meanwhile, MinCorp is about to tell the world about what it’s been up to.

It is planning its first annual "RAINmaker angel conference" for Oct. 21-22 at the Arrowhead Resort in Alexandria. Glen Taylor, founder of the $1.5 billion Taylor Corp. empire, will deliver the keynote address.

Thanks to all the groundwork, it seems likely that MinCorp will be staging many more such meetings in the years ahead.