While the heartland of America is waiting to thaw out, the venture capital startup market has continued to burn with intensity throughout the past year.

Midwest healthcare startups attracted a record $1.2 billion in new investments in 2007, according to the Midwest Health Care Venture Investment Report, released by BioEnterprise (Cleveland). The total represents a 55% increase over 2006, outpacing the national venture industry growth and surpassing the 25% increase of the previous year. The previous full-year record for Midwest healthcare companies was $783 million in 2006 (Medical Device Daily, Oct. 31, 2007).

So what is it about this region of the country that is so attractive to new venture startups?

Baiju Shah, president of BioEnterprise, told Medical Device Daily: “The Midwest has always had a rich base of potential, whether it is a research university or it’s the extraordinarily large medical device industry from Minneapolis all the way to Pittsburgh. What has been missing for a long time has been the entrepreneurial infrastructure to convert that potential into what we are now starting to see in terms of the steady string of fast-growing, high-flying startups.”

Minnesota and Ohio led all Midwest states — companies in both states attracted $296 million. Both states had one major financing (CVRx in Minnesota, $65 million; Athersys in Ohio, $70 million) and several other financings exceeding $20 million each; Ohio, though, reported more transactions than Minnesota (44 compared to 29).

Following the leaders are Indiana ($135.6 million), Illinois ($125.5 million), and Western Pennsylvania ($101.4 million). Compared to 2006, notable investment increases also occurred in Kansas, Missouri and Wisconsin; decreases occurred in Michigan and Kentucky.

In terms of metro regions, Minneapolis ($296 million) and Cleveland ($241.8 million) led the way together, accounting for 44% of all activity in the Midwest. Those regions were followed by Chicago ($125.5 million) and Pittsburgh ($101.4 million).

By sector, the equity funding was allocated as follows (numbers in parentheses compared to figures in 3Q07):

• Biopharmaceutical companies: $687 million ($591M);

• Medical device companies: $329 million ($251M) ;

• Healthcare software and service companies: $208 million ($158M)

“The Midwest states have put into place a disproportionate amount of money to invest in some of the critical components translating ideas into companies,” Shah told MDD. “They invest in transitional product development (things that are at the brink of going from proof of concept to pre-production phase); and they invest in creating capital sources for entrepreneurs in all stages.

“There’s C capital within institutions, angel networks for regional entrepreneurs, also traditional venture and growth capital firms. They also create an environment for the companies that enable them to more easily access clinical collaborators, research resources within the state (whether they are state-owned or not), and federal labs.”

He added: “The states in the Midwest recognized during the 1990s that they were not participating in the venture economy similar to the West Coast, despite having all the potential of the area. It stems from this missed opportunity of the ’90s that many of the states put into place very progressive public policy programs that enhanced further by community and foundation investments to create the infrastructure to grow the pipeline that we see today,” Shah said.

The year saw several high-profile public biopharmaceutical offerings, including Eurand (Vandalia, Ohio), Athersys and Targanta (Indianapolis). Other notable public offerings in the Midwest included Enteromedics (St. Paul, Minnesota) and Tomotherapy (Madison, Wisconsin). In addition, several companies achieved success through acquisitions such as Renal Solutions (Pittsburgh) and MemberHealth (Solon, Ohio).

As for future startups in this region, especially with economic uncertainty, Shah told MDD that the U.S. economy “hasn’t really affected the venture industry. In all my conversations with venture capital firms, they are flush with capital and looking for opportunities to employ capital, so I don’t see a slow-down in ’08 in venture investment. The economic market doesn’t really affect the venture industry because they are not going on capital; they are not constrained by the cost of capital type of issues.”