B. Kristine Johnson, president of Affinity Capital Management
State should do more to support
venture capital investment in promising startups
A Civic Caucus
Focus on Human Capital
Interview January 16, 2015
John Adams, Dave Broden
(vice chair), Pat Davies, Paul Gilje (executive director), B. Kristine
Johnson, Randy Johnson, Sallie Kemper, Ted Kolderie, Dan Loritz
(chair), Paul Ostrow, Dana Schroeder, Clarence Shallbetter.
According to venture
capitalist B. Kristine Johnson, president of Affinity Capital
Management in Minneapolis, the State of Minnesota is not doing enough
to encourage risk capital to support startup companies at the front
end. She says Minnesota is falling behind, because other states are
using state dollars to invest in venture funds that back companies
located in their own states. She does not think, though, that the
state should pick which industries should get the investments. And she
believes that larger companies in Minnesota could also help make
capital available to small startups.
Johnson notes that Minnesota companies
receive less than one percent (0.9 percent) of all venture capital
investments in the country. In 2013, that amounted to $270 million in
investment in Minnesota companies. She says there are fewer, perhaps
half as many, venture capital firms operating in Minnesota compared
with 12 years ago, reflecting a national trend.
She points out that, nationally,
venture-backed companies skew towards medical technology (a key area
for Minnesota), biotechnology, IT and technology. Technology includes
software, hardware, telecommunications and new consumer and enterprise
applications. 2013 data show that venture capital investment
nationally is going largely to California, Massachusetts, New York and
other big states associated with technology investing. Those top three
states accounted for 70 percent of the total national venture capital
investment of $29.5 billion in 2013.
Johnson believes state support of the
University of Minnesota is critical, since it's the state's only
research university. But she says the Legislature shouldn't decide
which areas of research the University should pursue.
B. Kristine Johnson is
president of Affinity Capital Management, a health care focused
venture capital firm. Prior to joining Affinity in May 1999, Johnson
was senior vice president and Chief Administrative Officer (CAO) of
Medtronic. During her 17 years at Medtronic, she was also president
and general manager of Medtronic's vascular business and its
Tachyarrhythmia Management business. Prior to her time at Medtronic,
she spent nine years in various executive positions at Cargill.
Johnson was president of the Citizens League
in 1981-1982. She currently serves on the boards of directors of
several Affinity portfolio companies, as well as other for-profit and
nonprofit organizations. Since 2000, she has served on the Board of
Regents of St. Olaf College and is the current Board Chair, a position
she has held since 2013. She received her B.A. from St. Olaf College.
Since the Civic Caucus
released its statement on human capital in September 2014, it has
concentrated on learning more about the challenges of maintaining a
strong workforce in Minnesota in the coming years. The Civic Caucus
interviewed B. Kristine Johnson to get her perspective on the role of
venture capital in supporting the creation of startup businesses in
Minnesota, especially in the high-tech field, and helping them grow
Medical technology is a
key investment area for Minnesota. According to Affinity Capital
Management President B. Kristine Johnson, medical technology is one of
the key areas of investment for Minnesota and is a major interest of
Minnesota accounts for less than one percent
of all venture capital investments in the country. Johnson pointed
out that reporting on venture capital is uneven, because it's all
voluntary and venture capital is one of the least regulated areas of
investment. Small and large venture capital firms as well as angel
investors all get lumped together in the data. (An angel investor is a
person who supports a business financially, typically investing
private capital in a small or newly established enterprise.)
That said, according to the National Venture
Capital Association (NVCA), in 2013, Minnesota accounted for 0.9
percent of all venture capital investments in the U.S. Johnson called
that a reasonable amount. But she said that's down from its high this
century of 1.7 percent in 2004.The last year Minnesota was above one
percent was 2009. She noted that the percentage figure goes up and
down over the years, because Minnesota participates to a
disproportionately high extent in health care and medical technology.
If those fields are a big percentage of national venture capital
investments in a particular year, Minnesota will have a larger
proportion of those investments. Similarly, if those fields are a
smaller percentage of national investments, Minnesota's proportion
Venture-backed companies skew towards
medical technology, biotechnology, IT and technology. Johnson said
the U.S. is in a bit of a technology bubble currently. "There is a lot
of investment in consumer software and in tools used for social media
and online businesses," she said. "When that technology spending goes
way up, it tends to dwarf what goes on in medical technology."
NVCA figures show that nationally in 2013,
software was the leading sector for venture capital investment,
receiving 37.3 percent of total funding. Biotechnology came in second,
at 15.4 percent; media and entertainment were third, at 9.9 percent;
and fourth were medical devices and equipment, at 7.2 percent.
There are fewer, perhaps only half as many,
venture capital firms operating in Minnesota compared with 12 years
ago. "That may be cyclical," Johnson said. "But in a lot of
firms, people are retiring and the firms go away. Also, some of the
principals of the firms move out of Minnesota and then you don't have
a Minnesota-based firm. It's a fragile part of the business."
That reflects what's going on nationally,
according to NVCA data. In 2000, 1,050 firms in the U.S. invested
$105.1 billion, the largest annual investment amount on record, with
$951.7 million of that going to Minnesota. In 2013, the number of
venture capital firms was roughly half that, at 548 active firms that
invested $29.5 billion, with $270 million going to Minnesota.
Part of the Minnesota picture, Johnson said,
is that it's been very difficult to make money investing in medical
technology over the last decade. "The dollars required to invest have
gone up," she said. "The time to get an exit has been extended." Large
companies reduce their risk by waiting to acquire a small company
until after it has gained regulatory and reimbursement approvals.
Venture capital investment nationally is
going largely to California and Massachusetts and other big states
associated with technology investing. According to the NVCA, in
2013, the top three states accounted for 70 percent of the total
national venture capital investment of $29.5 billion: California (50
percent), Massachusetts (10 percent) and New York (10 percent). The
top 10 states together-California, Massachusetts, New York, Texas,
Washington, Maryland, Virginia, Pennsylvania, Illinois and
Colorado-accounted for 86 percent of the total national investment.
Thus, the other 40 states, plus Washington, D.C., accounted for only
14 percent of total venture capital investment.
In 2013, Minnesota companies received $270
million in venture capital investment. Johnson said some recent
data from LifeScience Alley show that in 2014, a much bigger figure
than that went into the state's life sciences sector alone. She said
part of the difference might be differences in what the NVCA and
LifeScience Alley include in their data, but 2014 was clearly a better
year. NVCA data show that 2014 was the strongest year for Minnesota
since 2008, with $368 million in venture capital invested.
She said historically, Minnesota and
Illinois have been the strongest states in the Midwest in venture
capital investments, ranking in about the top 15 states. But in recent
years, Ohio has moved ahead of Minnesota in terms of dollars invested
and both Ohio and Michigan have moved ahead in terms of number of
deals. She noted that there is a lot of debate over why Minnesota
doesn't have more venture capital investment. "Is it a lack of ideas?"
she asked. "Is it a lack of money?" She said there's a synergy that
makes it difficult to know which comes first.
Venture capital firms like to invest where
they are located.
in venture investing is that you're a hands-on investor," Johnson
said. "You're going to the board meetings and you're spending time
with the CEO as a mentor, counselor and advisor. Getting on a plane to
do that is more difficult."
She said, for example, that most of the
venture capital firms in Silicon Valley are located together. They
like to invest in companies that are no more than an hour's drive
away. "For the most part they can do that," she said. "The startup
environment there is hugely different than it is here."
Minnesota has always had a niche in medical
technology. That's a function, she said, of Medtronic and the
companies it spun off and of all the people who came out of Medtronic,
St. Jude, Boston Scientific and Guidant. "It's a matter of critical
mass," Johnson said. "Once you get enough people, you then build up
the support industries around them. So, we have regulatory resources,
reimbursement resources, and the human capital and leadership
available to support med-tech companies. Minnesota doesn't have that
in technology." She described technology as traditional software,
hardware, telecommunications and new economy companies that are
developing consumer and enterprise apps. "That's where tremendous
numbers of dollars are going," she said.
New companies are frequently built on ideas
that are generated by research. Johnson said that could come, for
example, out of universities or the work physicians do. "Somewhere you
need to get ideas and a floor for creativity," she said. "There are a
lot of universities that struggle with how to get the idea generation
into commercial applications. The University of Minnesota (U of M)
does that reasonably well, but not to the same degree seen at
Stanford. It's just a very different climate."
Historically, investment in medical
technology has been less subject to real highs and real lows than
investment in technology companies. "There's a certain amount of
money that's gone into medical technology," Johnson said. "When
technology companies are really hot, then dollars flow to them and
medical technology bounces along with a certain amount, but without
the highs and lows. Most people do not invest in med tech expecting
they'll get a 20-to-one payout. An exceptional payout is eight-to-one.
It is quite different."
Venture-backed companies look for people who
have skill in the areas they need and who are willing to take risks.
Historically, Johnson said, Minnesota has had a workforce with a high
level of skills, but perhaps less willingness to take risks. "It might
be the flip side of Minnesota having so many Fortune 500 companies,"
she said. "If you're looking for stability and don't want to take too
much risk, you'll work for 3M, Medtronic or Cargill. You're not going
to go to work for a venture-backed company that has 18 months of
capital and may or may not be able to raise more money. There's a very
different mindset in California, where people do that all the time."
Today's global economy influences the type
of local workforce new companies need. For example, Johnson's firm
has invested in a Minnesota company making an implantable device to
treat sleep apnea. The device is manufactured in Uruguay. "We need the
engineers, we need the designers, but we don't have a manufacturing
plant here," she said. "We have a prototype lab here. It's really a
different world. Lots of jobs are not where the creators of a company
The role of the U of M as a research base is
hugely important. "It's not a sufficient part of the equation,"
Johnson said. "But if you don't have the idea generation over time,
that's going to be a problem."
"I think the U of M is at the core," she
continued. "President Eric Kaler is committed to supporting company
and job creation. He is making it easier to do business with the
University. Really creative people won't stay in an environment that
doesn't allow creativity and reward innovation. No one thing will make
all the difference. It's a climate and a culture both at the
University and at the companies that will make things easier to do."
In the medical technology field, the U of M
Medical School has worked closely with industry, she said. In some
other areas of technology, the engineering side has come out of U of M
research. "I think Kaler really understands the importance of
interdisciplinary approaches," she remarked.
Having the state pick industries to support
is a bad idea. "Philosophically, I'm not comfortable with trying
to engineer the economy in that way," Johnson said. "Instead, I would
do whatever we can to encourage a diverse economy. We can do that by
encouraging research and education in areas that solve people's
problems. That's the real growth driver. Plant enough trees and over
time you'll get a forest."
"We need to train a workforce that can
provide knowledge-based labor," she continued. "We should try to do it
in a broad enough way that it's not just medical technology, but
across the board."
There is a certain amount of synergy when a
large number of similar companies are located in the same area.
Johnson noted that in the med-tech field, cardiac companies are all
located in Minnesota, while companies dealing with hips and knees are
all in Warsaw, Ind.
Minnesota is not doing enough to encourage
risk capital at the front end. We're moving further behind because
other states are doing more of that, Johnson said. There are numerous
existing and planned state programs, in myriad forms and sizes, aimed
at supporting venture capital and innovation. To date, Minnesota
is not one of them, but Indiana, Michigan and Ohio are among those
states with programs funded by state pension or other non-tax dollars.
The larger companies in the state could also
help make capital available, as they've done in Michigan, where
significant public and corporate money is supporting venture firms
that will invest in Michigan companies.
One alternative is that the state could take
some public dollars and match, or combine with private resources, to
create a venture capital fund or funds and delegate someone to manage
the investing. That fund would invest in venture capital funds,
with a focus of providing meaningful returns to investors and a
preference for venture capital firms headquartered in Minnesota or
with a demonstrated commitment to the state.
It's important to have small, as well as
large, venture capital funds in the state. Johnson said having a
fund in the $25 million to $75 million range is a hard spot to be.
"But if we don't have those smaller funds, we tend to miss the
early-stage, smaller investments and to migrate to later-stage, bigger
investments," she said.
Fund of Funds would make it easier for those small venture capital
firms to exist.
State support of the U of M is critical,
since it's our only research university. Johnson said the state
needs some level of accountability for such support, but it doesn't
make sense for the Legislature to decide what areas of research the
University should pursue. "Under President Kaler, the University has
shown a strong willingness to be transparent in where state funding
goes," she said. "But I don't believe that St. Paul should be deciding
on the areas of research. The U of M should get leaders in their
fields and develop areas of research that address society's major
Johnson said there's a whole continuum in
the area of medical research. The National Institutes of Health funds
research at the U of M to understand disease processes. "No company is
going to fund that kind of research," she said. Once a company gets
knowledge that could result in a product or process, then it will
invest, she said. The University can also help with the engineering
and in conducting clinical trials.
Minnesota's Angel Tax
makes it easier for people to take investment risks.
It provides a 25-percent credit to investors or investment funds that
put money into small startup companies headquartered in Minnesota. The
companies must be engaged in technological innovation in fields such
as nanotechnology, biotechnology, medical devices, pharmaceuticals,
food technology, energy efficiency and conservation, etc. A total of
$16 million in tax credits is available, with a maximum credit of
$125,000 per person, per year.
"The things we've done with the angel credit
are good," Johnson said. "Other areas of tax policy don't make a lot
of difference. Being a high-tax state doesn't necessarily prevent you
from being an effective place of business creation. Federal policy has
more impact on likely success than state policy does. But you don't
want a climate where it's not OK to make money."
There can be a role for venture capital to
encourage creativity in public-sector areas, if people can see a way
to disrupt the traditional system. Johnson said the venture
dollars being invested in education are going to places that are
competing with the public system. She noted that at the higher
education level, companies like Coursera are delivering course content
online through Massive Open Online Courses (MOOCs).
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Interview Group
includes persons of varying political persuasions,
reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
S. Adams, David Broden, Audrey Clay, Janis Clay, Pat Davies, Bill
Frenzel, Paul Gilje (executive director), Dwight Johnson, Randy Johnson, Sallie
Kemper, Ted Kolderie,
Dan Loritz (chair),
Tim McDonald, Bruce Mooty, John Mooty, Jim Olson, Paul Ostrow, Wayne
Popham, Dana Schroeder, Clarence Shallbetter, and Fred Zimmerman