The hot healthcare tech scene bubbling up north in the Twin Cities

If funding were all that mattered, Kyle Rolfing would have based Bright Health somewhere other than Minneapolis.

But for Rolfing, president of the consumer-oriented health insurance company, says success starts with talent.

And Minnesota, with a well-established medical industry led by insurance giant UnitedHealth Group in Minnetonka, healthcare system Mayo Clinic in Rochester, and device maker Medtronic in Minneapolis, among others, provides both inspiration and manpower and is leading the Midwest in terms of venture capital funding of tech startups.

So in 2015, Rolfing and two others, all with ties to Minnesota's UnitedHealth Group, launched Bright Health in the Twin Cities.

“We live here, is one thing,” he said of the decision to start a company in the area long known as “Medical Alley.” “But we also have roots here related to the entrepreneurial healthcare side.”

In just two years, Rolfing's Minneapolis-based startup has come a long way. Last year, Bright Health was the best funded healthcare startup in the state, drawing in $80 million, more than half of all the venture funding that went to the digital health industry in the state. The company last year partnered with Centura Health's hospitals and doctors to bring insurance to the Colorado market after UnitedHealthcare and Humana quit the state's individual insurance exchange.

Bright Health's bright star shines a light on the growing healthcare startup industry in Minnesota—particularly in the Twin Cities. Though the coasts still dominate both the overall and healthcare startup scenes, Minnesota has made a name for itself, drawing not only on larger healthcare companies like UnitedHealth Group and Medtronic but also on companies with scientific bents, like 3M.

“Minnesota is a pretty incredible state in the healthcare sense,” said Glafira Marcon, one of the organizers of Healthcare.mn, a community of more than 1400 members related to healthcare startups. In Minnesota, there are more than 430,700 people employed by the healthcare and related industries, according to state data.

Tech startups in the state as a whole doubled between 2010 and 2015 to more than 500, according to research firm PitchBook. Last year, 98 health technology startups raised $420.28 million, according to trade group Medical Alley, outdoing all of their Midwestern neighbors. (BioEnterprise, a business accelerator, puts that number a little higher, with Minneapolis alone raising $422.38 million last year). The area hit a high point in 2015, when companies raised $456.3 million, according to trade association Medical Alley, contributing to nearly $2.75 billion since 2009.

Most of the money is flowing into and around the Twin Cities, where healthcare startups that make everything from mobile apps to sleep-apnea devices to innovative healthcare payment plans are thriving on the banks of the Mississippi River thanks to an influx of venture capital dollars and a spirit of innovation that's stereotypically-and falsely-assigned to the coasts.

The state of Minnesota also offers the Angel Tax Credit program, which gives investors a 25% tax credit on funding that goes to Minnesota-based startups younger than 10 years old (or 20 years old for medical devices and pharmaceuticals).

The majority of money raised last year went to medical device startups, which received $252.2 million. That makes sense, given the historical strength of the medical device industry in the area. The state ranks second only to California in total medical device employment, which has been steady from 2012 to 2015, with about 360 jobs added during that period, according to the U.S. census.

Digital health companies in Minnesota are hard on the heels of device makers, with an 80% increase in funding from 2015 to 2016, when they raised $127.3 million. It's not just that there are more digital health companies-it's that each company is also raising more money. The median first round of funding for digital health companies was five times greater last year than it was in 2012.

Along with Bright Health, other digital-health winners in Minnesota last year included telehealth company Retracehealth and Mednet Solutions, which makes software for managing clinic studies. Retracehealth found support from both near and far, with a $7 million round of funding from Minnesota's Lehmi Ventures, Blue Cross and Blue Shield of Minnesota and HealthEast Care System as well as California's McKesson Ventures. Mednet, which works with Medtronic, Novartis, and others, raised $16.5 million led by Santa Monica-based Arrowroot Capital.

Though Mednet's funding happened in the fourth quarter of the year, overall investments slowed in the period, due in part to the post-election uncertainty around the repeal of the Affordable Care Act. Fourth quarter investments in Minnesota's healthcare companies were $83.7 million in 2016, compared to $194.6 million in that quarter a year earlier.

And there are several draws to attract talent to Minnesota. For one, Healthcare.mn's Marcon said, it's politically progressive, and the cost of living is relatively low, at least when compared with other startup hotbeds, like Silicon Valley. According to Medical Alley, average compensation in the health technology industry as a whole was $122,000 in 2015. But the cost of living in Silicon Valley, where the average healthcare startup salary is $105,000, according to AngelList, is 65% higher than in Minnesota.

John Robertson, president and CEO of MedNet Solutions, said local talent has provided his company with excellent, relevant work experience gained while working at other Twin Cities-based healthcare companies.

“It's given us a great resource pool,” he said.

Indeed, in Minnesota, Medtronic employs more than 8,000 workers, Boston Scientific has 5000 employees, and St. Jude comes in third with 4,000. 3M Health Care, Smiths Medical and Optum also employ significant numbers of science-and tech-savvy folks.

And the usual trajectory is from larger companies to smaller, more entrepreneurial ones, Rolfing said, not the other way around. But sometimes people end up back in bigger endeavors when startups get bought, as was the case when Rolfing's insurance company Definity Health was bought by UnitedHealth Group in 2004 for $300 million.

Smaller organizations also can leverage their talent to serve larger companies. As a partner with Treehouse Health, a healthcare innovation center started by former UnitedHealth Group executive Dr. John Blank and Jeffrey Blank in 2013, Blue Cross and Blue Shield of Minnesota both shares and gains insight into the transforming healthcare industry.

“The ecosystem that we have in this marketplace, I believe, rivals that of the coasts,” said Laurie Healy, director of marketing and communications of Coco, a group of coworking spaces that are home to about a dozen healthcare startups. “There's a really strong entrepreneurial backbone here to help these companies grow."

In the Twin Cities, “there are industry leaders in virtually every sector of healthcare,” said Jeffrey Blank, managing director of Treehouse Health, adding that his goal is to create a community. The group has funded companies such as diabetes app creator Pops Diabetes Care and software company Carrot Health. Last August, Treehouse announced a partnership with consulting firm Accenture, which will help guide Treehouse's startups.

Minnesota may lead the Midwest in funding healthcare tech startups, but it's still a small market compared to Silicon Valley and Massachusetts. Yet what it lacks in the number of companies, it makes up for in the concentration of patents: Minnesota leads the country for health technology patents per capita, with 55.72 patent grants and applications for every 100,000 people, followed by Northern California, according to Medical Alley.

Minnesota also makes up for it in expertise, Blank said. “Many of the entrepreneurs that we work with oftentimes have deep sector expertise and understand how healthcare is delivered and paid for.”

“There's not necessarily the same volume of healthcare companies as in other markets,” Blank said, “but the quality of companies that are coming out of here is as good as anywhere.”