Minnesota has an opportunity to build on recent momentum and accelerate startup formation, investment and growth in the coming years. Doing so will require a clear focus on what objectives should be prioritized and how the state’s various entrepreneurship initiatives can play a role in achieving these goals. Below are three primary objectives that should guide future action, along with nine strategies to illustrate how Minnesota can make progress in these critical areas. 

Objective: Sustain increased business formation rates beyond the pandemic.

Strategies:

1. Foster sustained population and workforce growth and a healthy business climate to create the underlying conditions for entrepreneurship.

2. Capitalize on the surge of new business applications during the pandemic by focusing direct outreach and resource promotion to the newest wave of entrepreneurs interested in starting a business.

3. Create more pathways for people, from students to mid-career professionals to retired business leaders, to explore entrepreneurship and gain the skills and networks to test their ideas in the market.

Objective: Build on recent improvements in startup capital; make capital more inclusive.

Strategies:

4. Build on efforts to activate more angel investors and expand access to early-stage funding.

5. Attract and build more venture capital funds.

6. Help founders navigate alternative sources of funding, from small-scale crowdfunding to public offerings.

Objective: Help high-growth startups stay and expand in Minnesota.

Strategies:

7. Leverage business retention and expansion programs to help high-growth startups stay and expand in Minnesota.

8. Create more spaces (virtual and physical) to facilitate connections and knowledge spillover across firms.

9. Support high growth-potential startups across industries, while also targeting sector-specific solutions to build Minnesota’s next innovative industry clusters.

Objective:

Sustain increased business formation rates beyond the pandemic.

Minnesota is full of people with innovative skills, ideas and ambitions. More of them are needed to test the waters of entrepreneurship.

The data are clear. Minnesota has among the highest success rates for entrepreneurs in the country. While fewer than half of all new businesses in the U.S. make it past the five-year mark, the inverse is true in Minnesota. In 2020, Minnesota led the nation with 56% of businesses surviving past their 5th year. The state perennially ranks among the top five in this measure.

Minnesota also ranks high in total venture capital investment raised by startups. This is a positive indicator that Minnesota is fostering the type of startups that have the capacity to drive innovation and economic growth.

Yet, the state has seen declining business formation overall in recent decades and consistently ranks in the back third of states for new business starts. Minnesota ranked 31st overall for the number of new employer startups per capita in 2019 and trails the U.S. in growth of nonemployer businesses over time.

Minnesota’s entrepreneurial performance can be compared to a basketball team that has among the best shooting percentages in the league but trails in total points per game. The team simply needs to take more shots from the field.

This is important for two reasons.

First, more new businesses mean a larger pool of entrepreneurs who can potentially succeed and take their business to the next level. While many startups fail or remain small-scale ventures, others gain traction and grow over time. Minnesota’s history shows that star businesses can come in all shapes and initial sizes. Not all take the same path – many have started in humble origins only to grow over time and become household names.

Second, even businesses that start small and remain small offer sizable benefits to individuals, communities and local economies. Entrepreneurship can provide meaningful opportunities to those with barriers to employment or who seek greater flexibility and autonomy in their work. Small businesses offer needed local goods and services, add vibrancy to main streets, create jobs and wealth, and contribute social capital to their communities.

Accelerating the number of new businesses in Minnesota would thus promote both economic growth and community vitality.

There is no magic formula to increase the rate at which people form new businesses. But three things can help.

Strategies:

1. Minnesota must foster sustained population and workforce growth and a healthy business climate to create the underlying conditions for entrepreneurship.

Growing Minnesota’s population and workforce and creating a competitive business climate are the essential ingredients required for long-term gains in startup activity. Achieving these aims is not easy, however. The Minnesota Chamber Foundation’s Minnesota 2030: A framework for economic growth outlined the basic building blocks of growing Minnesota’s population and workforce over time. These include:

• Improve net migration with neighboring states and leverage the state’s relative affordability to compete with high-cost population hubs in coastal regions.
• Improve retention of Minnesotans aged 18 to 24, a key demographic responsible for up to two-thirds of overall net migration losses.
• Coordinate statewide immigration advocacy efforts and help local communities attract and integrate international talent.
• Accelerate housing supply by addressing regulatory and market cost-drivers.
• Develop both supply and demand-side solutions to improve child care availability.
• Double-down on efforts to provide digital connectivity throughout the state, using traditional and alternative solutions to deliver high speed internet to residents and businesses.

While these efforts may seem secondary to entrepreneurship, the research literature reveals a direct link between overall population and labor force growth and the rate of new firm formation.

Minnesota’s tax and regulatory policies should also be addressed to create a more favorable environment for startup investment and growth. Evidence suggests that local and state policies play a role in startup activity, impacting job creation levels of young firms, migration patterns of star inventors and capital investment decisions from sole proprietors. And while research is still evolving, state tax policy appears to play a role in inter-state migration patterns more broadly, influencing states’ ability to attract the talent needed for startups to scale and grow.

Finally, greater efforts should be made to help entrepreneurs navigate the array of regulations that can inhibit startup investments and job creation. For example, one focus group participant noted that complex regulatory issues – such as various local labor mandates like sick and safe time ordinances – can increase the difficulty and perceived risk for entrepreneurs to hire employees. Some entrepreneurs may choose to avoid such compliance risks altogether by using contractors or doing more tasks themselves instead of hiring staff. Lowering this barrier may involve hands-on assistance programs to consult new businesses on relevant regulatory issues, as well as efforts to provide greater simplicity and consistency in Minnesota’s overall regulatory regime.

Addressing these structural conditions can help foster more new businesses and startup investment over time.

2. Minnesota can capitalize on the surge of new business applications during the pandemic by focusing on direct outreach and resource promotion to the newest wave of entrepreneurs interested in starting a business.

The COVID-19 pandemic created a surprising spike in new business applications across the state, signaling a rising level of entrepreneurial interest. New business applications rose by a staggering 26% during the pandemic, with 59 of 87 counties seeing overall increases.

Minnesota should use this window of opportunity to promote resources and direct outreach to the Minnesotans who are seeking to start a new business. Comments from focus groups and interviews with entrepreneurial support organizations revealed that new business owners are often unaware of the programs that exist to help them or become overwhelmed by trying to navigate the web of resources on their own.

Efforts are already underway to address this. Launch Minnesota has facilitated regional collaboration hubs throughout the state that help entrepreneurs navigate resources in their area. Forge North’s Resource Compass helps users build custom searches to find targeted resources. The Secretary of State’s Office is partnering with the University of Minnesota to inform entrepreneurs about the MN Cup startup competition when they submit their new business filing. These are a good start.

However, more should be done to promote and scale such efforts, using social media and other digital platforms to reach entrepreneurs where they are and providing hands-on assistance whenever possible to help founders navigate the dozens of organizations and programs that exist to support their success in Minnesota.

3. Minnesota should create more pathways for people, from students to mid-career professionals to retired business leaders, to explore entrepreneurship and gain the skills and networks to test their ideas in the market.

Minnesota possesses a vast infrastructure of institutions and programs that equip individuals to navigate careers as paid employees in the workforce. Far fewer mechanisms exist, however, to help individuals consider entrepreneurial pathways, whether for students, mid-career professionals, or adults later in their careers. This is an area for further exploration and innovation. For example:

• High schools and postsecondary institutions could devote greater attention to both in-school curriculum and community partnerships that provide students with entrepreneurial awareness, skills, and networks. Such efforts could expand beyond helping students experiment with traditional youth-oriented businesses and introduce them to startups that are driving innovation in their communities. Local programs such as ILT Academy and Kandiyohi CEO are already advancing this work in Minnesota. Such models could be further explored and scaled in schools around the state.
• Private businesses and partnering organizations should consider how they can create opportunities for existing employees to engage in entrepreneurial-related activities, enabling them to test new ideas and explore the commercialization of new products. This can take the form of corporate spin-offs, which have a long history in Minnesota. Mayo Clinic is one of the most prominent examples of how existing organizations have begun to institutionalize this model to spur new startups. Accelerating corporate spin-offs could generate a high economic impact, as research suggests that former employees of existing firms outperform other new ventures due in part to their deep industry knowledge and experience. Alternatively, businesses can encourage employees to act as entrepreneurs from within the business itself – creating dedicated mechanisms for employees to test new business ideas that can be adopted and commercialized within the existing firm. This can spur innovation within existing businesses while giving employees entrepreneurial skills and experiences that can be utilized to start their own business later in their career.
• Finally, counter to common perception, entrepreneurship is not exclusive to individuals in their early or even mid-careers. Economists find that the success rate of new ventures improves with age. As Miranda et al. state: “Conditional on starting a firm, a 50-year-old founder is 1.8 times more likely to achieve upper-tail growth than a 30-year-old founder.” With Minnesota’s baby boomer population exiting the workforce in large numbers, entrepreneurial programs and resources should target this potentially untapped source of new business ventures. For some, retirement may just be a new chapter for starting their own venture, bringing their experience, networks and financial resources with them.

Objective:

Build on recent improvements in startup capital; make capital more inclusive.

Startup capital is increasing in Minnesota. But early-stage seed funding remains a key challenge, and greater access to startup capital is needed for BIPOC and rural entrepreneurs.

Minnesota startups raised more venture capital from 2016 to 2021 than it did in the preceding decade. Venture capital investment accelerated particularly fast during the pandemic, with Minnesota startups raising a record $1.5 billion in 2020 and completing a record 175 venture capital deals in 2021.

This increase in venture capital activity is occurring on both the supply and the demand side of the equation. The number of new venture capital firms in Minnesota has proliferated in recent years, many of which are targeting strategic segments of the entrepreneurial population. Take, for example, the following Minnesota-based venture funds founded just in the past five years:

• Brown Venture Group was founded in 2018 with the objective of unlocking the door to startup capital for Black, Latino and Indigenous founders in emerging technologies.
• Bread & Butter Ventures was founded in 2017 and focuses venture capital funding to startups in sectors aligning with Minnesota’s core sector strengths, such as food and ag, health tech and enterprise technologies.
• Great North Ventures, also founded in 2017, invests in tech startups across the Midwest and has developed efforts to generate startup activity in Greater Minnesota communities, helping spur additional programs like the gBeta Greater Minnesota – St. Cloud accelerator program.

This increase in venture capital activity has occurred alongside other efforts to improve capital access for early-stage companies. Such initiatives include:

• Groove Capital began in 2020 to build a network of angel investors in Minnesota and early-stage institutional capital for startups.
• The Department of Employment and Economic Development created Launch Minnesota in 2019 to build regional collaborative networks of entrepreneurial support partners and provide grant funding to innovative early-stage companies.
• The Southern Minnesota Initiative Foundation developed two separate equity funds to provide early-stage capital for entrepreneurs in the region.
• In early 2022, Greater MSP’s Forge North program published the Forge North Enterprise Playbook to help the region’s existing large enterprises identify ways that they can support and invest in local startups.

This list goes on. Taken together, these efforts are shifting the landscape for startup capital in Minnesota and creating an opportunity to accelerate entrepreneurship in coming years.

However, insights from focus groups and interviews with founders, funders and business support organizations make clear that gaps in startup funding remain.

Access to early-stage seed funding continues to be a core challenge for startups in Minnesota. Founders describe a chicken-and-egg dilemma, whereby investors require prototypes, feasibility plans and proofs-of-concept before investing in new businesses; yet, founders need the capital to clear these important milestones in the first place. Bridging this gap is a barrier for even highly innovative and promising startups.

Seed-funding may be particularly challenging for founders who lack access to the investor community. Startups outside the Twin Cities metro and BIPOC founders often start at a disadvantage, lacking the personal networks that can provide trusted referrals to angel investors and venture fund leaders.

The good news is progress in this area can be cumulative. As more startups form, raise capital, hire employees and spin off new companies, the networks and relationships that are activated in the process begin to strengthen, widening the community of stakeholders that can provide referrals to other founders in the future.

So, what can be done to build on recent gains and continue filling in gaps for startup funding in Minnesota?

Strategies:

4. Build on efforts to activate more angel investors and expand access to early-stage funding.

Interviews with founders and leaders within the startup ecosystem revealed that: early-stage capital is absolutely critical to getting innovative new businesses to the starting line; angel investment is perceived to be harder to access in Minnesota than other startup hubs on the coasts, particularly for founders without existing connections to the investor community; and there is increasing awareness of this issue and steps being taken to increase seed funding in the state.

Minnesota should build on this recent momentum to recruit individuals who want to invest in new companies and open more doors for startups seeking funding. This could involve numerous components, including:

• Leveraging Minnesota’s existing demographics to reinvest wealth into now firms. As noted, Minnesota’s aging demographics present an opportunity to connect retirement-aged individuals into the entrepreneurial ecosystem, whether as investors or founders of new companies. Many individuals are simply unaware of the opportunity to invest in new companies and wouldn’t know how to get started if they wanted to. Continuing to build awareness and create pathways for individual investors should be a priority going forward.
• Better connect regional angel investment efforts. Efforts are taking shape across the state to recruit more angel investors. Better connecting these disparate local and regional initiatives could build a broader statewide awareness of angel investment as well as de-risk investments by bringing more investors into individual deals.
• Create greater stability in the Angel Investment Tax Credit. Minnesota’s Angel Investment Tax Credit is an important incentive for early-stage investment. However, the program faces perennial funding shortfalls, creating uncertainty for investors and limiting the potential impact of the tool itself. Making the tax credit permanent – and assessing other reforms to increase the usability of the credit – could produce positive returns for the state’s economy.

5. Attract and build more venture capital funds.

Venture capital is reaching a critical threshold in Minnesota. The recent emergence of new VC funds and the widening pipeline of companies seeking investment present an opportunity going forward. As one venture leader described, there is room for more VC funds to stake out niche segments and reach underserved founders. Venture capital leaders described ample deal-flow and volume of viable businesses to invest in. The opportunity is to build more capacity on the supply side.

Increasing venture capital is largely a private sector imperative. However, some states have leveraged public sector resources to increase venture funding for local startups. Fund-to-fund programs like the Illinois Growth and Innovation Fund use state investment dollars from the Treasurer’s Office to invest in local companies. Such models could be further studied and assessed in Minnesota.

Regardless of the mechanisms, Minnesota’s startup support stakeholders should continue the effort to recruit and build more VC funds in the state in coming years. Doing so could help propel Minnesota past a critical threshold and position the state as a Midwest alternative to crowded startup hubs in large U.S. metros.

6. Help founders navigate alternative sources of funding, from small-scale crowdfunding to public offerings.

Despite the important role of angel investment and venture capital, these are by no means the only sources of funding for new businesses. Startup support organizations can help new businesses diversify their funding by looking to alternative vehicles. For some, this may mean pursuing crowdfunding platforms. For others, particularly those in high-tech sectors, government grant funding such as the Small Business Innovation Research (SBIR) program may be a viable path. And counter to common perception, public markets may also offer a way to raise growth capital for young firms. Programs to help new business leaders navigate these various funding channels can leverage capital from outside the state and maximize total investment in Minnesota companies.

Objective:

Help high-growth startups stay and expand in Minnesota.

Minnesota’s economic formula has long been to retain and grow its high performing companies overtime. To sustain this into the future, Minnesota must focus resources on helping high-growth firms navigate challenges and expand in the state.

Helping new businesses get started and access funding is rightly a priority of entrepreneurship development efforts. But what happens after a company launches and raises capital may have an even greater impact on overall economic activity.

The economic research literature reveals an “up or out” phenomenon where a small subset of all new firms generates a disproportionate share of new jobs, innovation and output.

This is where Minnesota has traditionally thrived, as demonstrated both by its high business survival rates and its venerable list of homegrown companies that started here and steadily grew over time.

A brief story illustrates the point.

In 1978, Minnesota had 14,700 startups in their first or second year of business, ranking 21st highest among all states and 29th highest per capita. Like today, Minnesota was in the middle of the pack for pure startup volume.

Yet, of those 14,700 early-stage businesses, one of them was a new health insurance company, UnitedHealthcare, that emerged amidst a growing cadre of innovators in medical research, health care delivery, and medical technologies. The sustained retention and growth of these relatively small number of firms helped build what would become one of the leading health innovation hubs in the U.S. and continues to shape Minnesota’s economy today.

This story represents a broader pattern of entrepreneurship that has defined Minnesota’s economic past. Such examples can be found across various industries and regions of the state; from the far reaches of Warroad in northern Minnesota to Winona in the state’s southeastern Mississippi River bluffs.

Minnesota’s newest wave of innovative startups presents an opportunity to capitalize on emerging technologies and activities that align with the state’s historical industry strengths.

Sustaining this model into the future is not inevitable, however. Minnesota must take strategic steps to ensure that innovative companies not only start here but stay and grow here as they cross important stages in their business life cycle.

Strategies:

7. Leverage business retention and expansion programs to help high-growth startups stay and expand in Minnesota.

Programs like Grow Minnesota! – a partnership between the Minnesota Chamber of Commerce and dozens of local chambers and economic development organizations around the state – can be leveraged to identify common challenges among innovative young firms and provide hands-on assistance to help them stay and grow in the state. This may be particularly important as companies approach transition points in their business life cycle. For example, firms may be more likely to relocate their headquarters or operations in conjunction with a merger, acquisition, or initial public offering. Collecting insights from these firms and connecting them to the networks of resources, talent pipelines and peer businesses may help improve their retention and growth as they cross these critical milestones.

8. Create more spaces (virtual and physical) to facilitate connections and knowledge spill-over across firms.

Startups face many of the same basic business challenges as their more established counterparts. Yet founders and their often-small workforces have limited time and resources to navigate the wide range of issues they face. Business support organizations can support the performance of young firms by creating more spaces for dialogue and knowledge spill-over across firms. For example, these efforts could seek to:

• Connect startups to professionals in functional roles within more established businesses. Small firms typically lack dedicated staff to perform the various functions of the business. When they do, it is often limited to just one or two employees who are responsible for the entirety of activities within their respective area, whether in finance, marketing, IT, sales, etc. Startups could benefit from opportunities to learn from experienced professionals in these functions at existing companies. This could help young companies troubleshoot commonly-shared problems, as well as connect mature firms to innovative startups who may have novel solutions that could be applied in their own business.
• Create shared back-end services for startups that lack the resources needed to gain the services they need. Peer-learning opportunities are valuable, but some tasks require dedicated expertise from professional service firms and other vendors. Affording these vital services is challenging for many early-stage firms, however. Programs to create pro bono or pooled services in areas such as accounting, legal and logistics could yield significant benefits to young companies. While programs like LegalCORPS offer pro bono services to very early-stage entrepreneurs, similar programs aimed at post-revenue firms could provide a positive impact to startups while also helping participating vendors build a pipeline of future customers.
• Better connect startups across regions of the state. There has been significant progress in recent years to foster collaborative networks of startups and entrepreneurial support organizations within regional economies in Minnesota. Similar efforts to connect businesses and organizations across regions are beginning to form as well. For example, Launch Minnesota recently collaborated with MN Cup – a prominent startup competition held by the University of Minnesota each year – to establish feeder events in each region of the state and increase participation by Greater Minnesota startups. Such efforts can leverage the unique strengths of Minnesota’s regional economies while better integrating Greater Minnesota entrepreneurs into the dense startup ecosystem of the Twin Cities metro. Multiplying these types of cross-regional efforts could help alleviate disparities in regional economies and improve startup activity statewide.

9. Support high growth-potential startups across industries while also targeting sector-specific solutions to build Minnesota’s next innovative industry clusters.

Minnesota is producing innovative startups across a wide range of sectors. The state’s diverse industry base continues to replenish and reinvent itself through successive waves of new companies who benefit from its existing strengths in areas like food and ag, health care, financial services, manufacturing and corporate headquarters. Venture capital data from Pitchbook show that Minnesota ranks high nationally in areas where new technologies and products are applied toward these more mature industries.

Minnesota ranked in the top 20 states for total number of venture capital deals between 2016 and 2021 in verticals such as ag tech, edtech, advanced manufacturing, 3D printing, wearables and supply chain tech. Most notably, Minnesota’s strength in health care is generating significant investment in new startups, ranging from digital health and biotechnology to medical devices and insurance.

Capitalizing on these opportunities involves greater promotion and awareness of Minnesota’s advantages in these verticals, as well as sector-specific solutions to unlock the development of emerging industry clusters.

For example, Minnesota’s growing biotechnology sector may have unique needs relative to specialized skillsets and facility offerings (i.e., lab space) to support further growth. Similarly, food and ag startups often require access to copacking facilities, regulatory assistance, and specialized transportation and storage services. FinTech startups may face barriers related to regulatory risks that inhibit their speed-to-market and thus create greater challenges gaining early-stage capital.

Such illustrations merely scratch the surface. Minnesota must find ways to identify these types of industry challenges and tailor solutions to address them. New industry initiatives have formed in recent years to meet these needs. Programs like Medical Alley Starts, Mayo Clinic Ventures, Grow North and MBOLD offer services to help startups in health, food and agriculture-related sectors. Accelerator programs like Farm to Fork, OnRamp Insurance Accelerator, and gBeta Medtech offer additional opportunities for startups in these sectors.

Building on these efforts while expanding new offerings to other emerging sectors can help Minnesota foster the industry clusters that will shape the state’s economy in coming years.

Conclusion

Minnesota has faced unprecedented challenges over the past couple of years, but what remains true to our state, and our culture is the tenacity and innovation to move forward and emerge stronger. The state’s entrepreneurial spirit and success is rooted in Minnesota’s history and a key to our economic future. We must work to ensure that more individuals from all walks of life have access to resources and capital to turn their ideas into thriving businesses, and some of those businesses will be the corporate headquarters of tomorrow. Every business, whether a sole proprietor or the next Fortune 500 company plays an important role in Minnesota’s economy. We look forward to leading Minnesota toward a more prosperous future.

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