Lack of tech giant means Minnesota loses its start-ups

The two-year-old start-up SmartThings recently became the latest Minnesota-born tech company to sell to one of the giants of technology for a big price.

In some ways, the sale to Samsung for a reported $200 million is a success for the local tech community. The deal spotlights a Twin Cities hub at the cutting edge of the so-called Internet of Things, a particularly hot technology space at the moment. Samsung will keep the 30 Minneapolis employees in place and hire more people here.

But the sale also lays bare a troubling trend: The best new Minnesota tech companies keep leaving the state.

SmartThings' core is moving 2,000 miles away, to a new headquarters in Silicon Valley where the company is already advertising job openings. By selling to Samsung, SmartThings joins a roster of Minnesota start-ups including Retek, Compellent and Stellent that ultimately became part of distant tech empires.

"We give birth to the engineers, to the product, to the ideas, but ultimately they end up being sold outside of Minnesota," said Matthew Dornquast, founder of Minneapolis-based Code42, a data backup software firm that many view as a prime acquisition target.

Minnesota's economy has outperformed much of the nation in recent years partly because of its strength in diverse industries like medical devices, health care and food. Giants such as Medtronic, UnitedHealth and Cargill regularly acquire smaller companies in their industries for hundreds of millions of dollars.

No such giant exists in Minnesota when it comes to tech, an obstacle to growth in an economy that is becoming ever more digital.

Seattle has Microsoft and Amazon. Silicon Valley has Google, Facebook and Apple. But the absence of a large, consolidating technology company in Minnesota has become an impediment to the state's economic future.

"Who would Code42 sell to today, if we wanted to exit, in Minnesota? There's nobody here," said Dornquast, whose firm employs 450 people and does business with Harvard, National Geographic and NASA. "I think that our current diversification is not as future-proof as it used to be, and what we're missing right now is tech. Tech is becoming too important to the economy, and we're behind."

SmartThings, in retrospect, should have been an attractive investment for Minnesota venture capitalists.

The company makes software and a hub that looks like a white router, which allows any household device equipped with sensors to take instructions from a smartphone via the cloud. Customers can remotely turn off lights, lock doors, start the furnace, coffee maker — anything.

The platform is open. More than 5,000 independent developers have registered with the firm and created more than 1,000 connected devices and 8,000 apps that work with SmartThings.

CEO Alex Hawkinson got the idea after a pipe burst in his family's cabin in Colorado when no one was there, flooding the place.

"It struck me how insane it is that I could do a lot of sort of useless things from my phone, from anywhere, but my house was still entirely disconnected," said Hawkinson, who grew up in south Minneapolis and Wayzata and spends summers in Minneapolis.

In the spring of 2012 he and six other founders decided to focus not on building automated home devices but on developing the overarching infrastructure of a connected home. SmartThings hired developers in Minneapolis that first summer and then launched a Kickstarter campaign that netted $1.2 million from donors worldwide.

By the time the firm set up a headquarters in Washington, D.C., and raised a seed round of $3 million from a who's who of Silicon Valley investors that December, it may have been too late for Minnesota capitalists to get in. Hawkinson said he was never approached by Minnesota investors.

"I never got contacted by anybody locally, even though I know there are some, even as we started to get our stride," he said. "We didn't really see a robust venture community there."

The company moved from idea to acquisition way faster than most start-ups, in part because it won traction in a hot industry.

Samsung, Apple and Google are jockeying for position in a potential future where most household objects will have sensors and can be controlled by smartphone. The SmartThings platform — its community of independent developers and their hundreds of compatible devices — became a coveted weapon.

The company's decision to put the headquarters in Washington may have scared off Minnesota investors, but investors elsewhere were also likely quicker to recognize the value of the company, said Michael Gorman, managing partner at Split Rock Partners, one of the few local venture capital firms with a tech portfolio.

"There were probably other investors who had a more prepared mind for what they were doing at SmartThings than they may have found here," Gorman said.

Thanks to initiatives like Minnov8, Minne*, and the work of Jeff Pesek at TECHdotMN, the community of software developers in the Twin Cities is growing fast, said Paul DeBettignies, a Twin Cities headhunter for technology firms.

Pesek maintains a calendar of events and user groups where developers share ideas, which has helped galvanize the tech community, DeBettignies said. In April, the annual Minnebar tech conference (the first one was organized in 2006 by SmartThings' co-founder Ben Edwards) attracted a crowd of 1,200 at the Best Buy campus. Another initiative, Healthcare.mn, aims to promote health care tech entrepreneurs.

And dozens of Minnesota start-ups are growing into successful companies. The new generation includes ThisCLICKS in St. Paul, which automates time cards for small businesses; Sport Ngin in Minneapolis, which makes software for sports organizations; Mobile Realty Apps in Minneapolis, which sells to multiple listing services; and Lead Pages in Minneapolis, which makes software for marketing companies.

But successful technology companies are nothing new for Minnesota. Many fly under the radar because — unlike SmartThings — they don't sell directly to consumers. In the past 10 years, business-to-business tech firms Retek, Compellent and Stellent alone were sold to Oracle and Dell for a combined $1.9 billion.

DeBettignies and Gorman hope successful Minnesota entrepreneurs, even those who relocate to Silicon Valley, will return, start new companies and invest in new Minnesota start-ups. Aaron Kardell at Mobile Realty Apps and Doug Berg at TrackIf are both examples of serial entrepreneurs who are at it again.

"That's how this thing happens," DeBettignies said. "If we are only going to rely on our investors in our town to make this happen, I think it's going to take a while."

Most successful start-ups are acquired and never go public, however, Gorman said.

Minnesota tech firms will continue to be sold to companies elsewhere until the state grows a publicly traded tech company with gravitational pull of its own.

Gorman sees prospects in the current field of companies. SPS Commerce, Proto Labs and Stratasys are all leaders in growing industries — cloud-based supply chain, advanced manufacturing, 3-D printing.

"These companies are at a stage where they have absolutely earned their leadership position, but they still have a ways to go," Gorman said. "What we'd hope to see in Minnesota, looking down the road, is more companies building and scaling and realizing their potential as headquartered companies here."

Adam Belz • 612-673-4405 Twitter: @adambelz