We're only halfway through the first month of 2019, so it's difficult to know just what the next year will hold for Minnesota startups.
But to get an idea of where the scene is headed, Minne Inno talked to venture capitalists, accelerator leaders and startup experts in the Twin Cities to hear what they think will happen next.
Everyone's answers were different, but many agreed that healthcare-related companies will continue to dominate the scene, and that Minnesota startups overall will continue to draw more capital and attention from coastal tech hubs like New York and Silicon Valley.
Below are five Minnesota startup predictions for 2019.
More Capital Will Flow in From the Coasts
Companies in large tech hubs like Silicon Valley, New York and Boston still receive the majority of venture capital in the United States, but in recent years, investors have started dedicating more time, attention and funds to startups in the Midwest.
Steve Case's Rise of the Rest Fund drew headlines in late 2017 when it landed $150 million to back non-coastal startups. Rise of the Rest established a permanent presence in Minnesota last year when it hired Mary Grove to serve as partner in Minneapolis. After Grove's arrival in May, Rise of the Rest quickly backed two local companies: St. Paul-based Structural and Minneapolis-based Dispatch.
Urban Innovation Fund, a San Francisco-based venture capital firm investing in "the future of cities" also arrived in the Twin Cities late last year. In June 2018, the firm announced that it had closed on $22.5 million for its first fund.
Grove believes that funding from larger tech hubs will continue coming to the Twin Cities 2019.
"There will be more capital flowing in from the region and coasts into Minnesota deals – whether it's firms establishing a local presence, or investing in deals here from coastal or regional funds," she told Minne Inno.
Twin Cities startup leaders and investors believe that this trend will continue.
"As we continue to see notable exits and funding rounds, it continues to reinforce the fact that this state creates impactful ventures," said Adam Choe, managing director of gener8tor Minnesota. "We've seen notable funds set up shop here with permanent and satellite offices in 2018, and I think 2019 will see more offices from other funds set up a presence."
Of course, funds from the coast aren't the only source of venture capital available to Minnesota startups. Many believe that the state's homegrown firms will surprise us in 2019.
"In 2019, four, perhaps five, Minnesota-based venture capital firms that focus on early-stage tech will announce they've closed new funds which will be unprecedented (and awesome) for Minnesota," Casey Allen, a local serial entrepreneur, said in an email.
Return of Minnesota's Angel Tax Credit?
Minnesota's Angel Tax Credit went out with a whimper in 2018, but some founders and investors hope that it will come back in one form or another.
The Angel Tax Credit program provided income tax credits to investors who backed eligible Minnesota startups. In 2017, 500 investors participated in the program, providing just over $44 million in total funding to 101 Minnesota companies, according to the Minnesota Department of Employment and Economic Development.
Companies that participated in the program in recent years include tech startups such as enStratius (sold to Dell), food companies like snacks maker WholeMe, and biotech startups like Minnesota Cup winner StemoniX.
As the Twin Cities startup scene continues to grow, many believe that the state may consider reinstating the angel investing program.
"I have high hopes for the return and permanent stay of the Angel Tax Credit to further incentivize angel investors," Choe said.
Medical and Healthcare Startups Will Continue to Dominate
Minnesota's medical startups accounted for the majority of the state's venture capital in 2018 – and just about every year prior. They're a powerhouse, and that's not expected to change in the coming year.
But other areas of healthcare, such as mental health, are expected to receive record amounts of capital in 2019.
Investment in mental health companies rose sharply from 2014 to 2015 and has stayed high since then, according to PitchBook. VCs completed 30 deals with companies focused on mental health by June 2018 – almost five times the total for 2009. PitchBook estimates that investment in mental health companies could surpass $500 million in 2019.
Capita3, a local venture capital firm backing women-led healthcare startups, is one of the investors exploring this growing space.
"We see venture capital driving systemic change in the healthcare system, and consumers driving change in the options available to us for improving our health," said Capita3 Managing Partner Pam York. "We believe these trends will ramp up in 2019 with new breakthroughs in evidence-based wellness approaches, particularly in the microbiome and women's health areas."
More Corporate Involvement in Startup Scene
Minnesota's Fortune 500 companies have become increasingly involved in the local startup scene over the past several years through acquisitions, accelerators and other programs.
One major facilitator of these corporate/startup relationships is Techstars, which launched two Twin Cities accelerator programs in the past three years: the first with Target, and its second, Farm to Fork, in 2018 with Ecolab and Cargill.
Grove predicts that teamwork between startups and large corporate entities will continue in 2019, likely through "partnerships, growing innovation teams and supporting accelerator programs and community efforts."
Minnesota Will Continue to Produce Practical Startups
It's tough to predict the shift or movement of something intangible like culture. But it's impossible to talk about Minnesota's startup scene without discussing the often steady, level-headed, or let's be honest – the just plain Midwestern mindset many Twin Cities companies and investors apply to business.
Local startup leaders believe that as Minnesota's entrepreneurial ecosystem grows, founders will continue to prioritize problem solving when creating startups.
"If I were an investor on the coasts, I'd be much more concerned about the economic, political and regulatory risks on the inflated valuations in the tech sector [for coastal startups]," said John Stavig, director of the University of Minnesota's Holmes Center of Entrepreneurship. "Back in Minnesota, I think we have a much more grounded collection of startups addressing more fundamental and enduring problems."
