Originally appeared in The Enterprise: Focus, August 2-8, 2004
Reprinted with permission

By Debbi Taylor
Staff Writer

Just as the state can begin collecting tax credits for the $100 million venture capital Fund of Funds, PricewaterhouseCoopers MoneyTree Survey reported that $57 million in venture capital was secured by Utah companies in the second quarter of 2004.

While the figure is well below the $330 million in venture capital that Utah companies raised in 2000, it is an encouraging sign for the future compared to the $31 million that was raised during all of 2003 and a substantial increase from the $17 million raised in the first quarter of 2004.

Under the state's Venture Capital Enhancement Act, passed by the Legislature in 2003 and amended in 2004, the Fund of Funds is intended to be a financial intermediary that will act to provide greater stability in Utah venture capital markets and provide increased access to equity capital by Utah start-up companies. The legislation provides $100 million in contingent tax credits to assist the Fund of Funds in seeking new capital investment.

"The legislature has created an entity that potentially facilitates investment in venture capital companies in Utah," said fund chairman Will West. "It provides incentives that allow for venture capital to come into the state of Utah."

The $100 million in contingent tax credits will be used as a backstop for investments in the Fund of Funds. Essentially, the tax credits will be used as leverage to underwrite a return to investors in the Fund of Funds and allow the Fund of Funds to seek capital from companies whose risk profile would normally not be considered investments for venture funds. The contingent tax credits will insure investors a return on their investment if the initial investment returns are not met.

"It is extremely unlikely that the fund would lose money because the nature of the fund is to invest in a broad variety of venture capitalists, venture capital companies or venture capital funds," West said. "What we're trying to do build all the components that allow business, especially the high paying tech business, to flourish. Capital is a critical component to that."

The Fund's goals are to provide more capital for Utah's venture industry by recruiting new venture capital funds from outside the state to establish a working presence in Utah, investing in already established Utah venture capital funds, and assisting start-up companies in Utah to find necessary equity capital.

To help accomplish that goal, the state has formed a five-member Utah Capital Investment Corp. board to administer the fund. Leading the Investment Corp., will be West, Frank Trumbower, Gary Crittenden, Richard Nelson and Geoff Woolley.

"We're responsible for taking in the investment and deploying it to the venture capital companies and we will be deploying it to venture capital companies that have a strong commitment looking at deals within the state of Utah," West said. "We'll talk to the banks in Utah and offer them the opportunity to invest in the Fund of Funds. It's a reasonable investment for them. We'll give them a low market rate. We will then take those funds and place them with a venture capital company who are looking to raise their next fund."

As venture capital companies begin investing their money in Utah companies, West said it is anticipated that the companies will set up offices in the state and continue to look at Utah businesses in which to invest money. With a presence in the state, it is more likely that a company using venture capital money will be able to stay in Utah rather than having to move to where there is more venture capital money to keep going.

"The great thing is that when you get a venture capitalist to invest in Utah it's not just $1 of investment, because what they do is put together syndicates," West said. "They never like to invest by themselves. They will bring in investments from other venture capital partners of theirs, typically outside the state. So there is a very strong multiplier effect in terms of the effect on the economy in a big way."

Typically, $1 invested in a Utah technology company turns into a $6 benefit into the economy, West said.

"Historically, venture capital returns are between 16-26 percent," West said. "All the Fund of Funds needs to do is return 3 percent to the investors so the only way that we would ever have to draw on tax credits is if we invested into a whole bunch of venture capital companies who invested in a whole bunch of portfolio companies that were all bad."

In the past, Utah technology companies have moved out of the state, taking with them jobs and money, because the only venture capital money they could find was out of state and the investors wanted the company closer to where they were located.

"There have been a lot of great companies that have started in Utah but have been unable to continue in Utah for want of capital, so they move out of state along with all those valuable jobs that go along with it," West said. "So if we can just get capital to support those great companies then we will be able to not only keep jobs in Utah but grow headquarters locations in Utah."

By bringing venture capital into the state, West said it will be more possible for entrepreneurs with great ideas to start businesses, create jobs and generate revenue.

"I think we'll see investments in biotech companies, we'll see investment in software companies, in consumer products, hardware and electronics companies, we'll see some investment in companies that are more traditional," West said. "The important thing is investment in companies that need capital to grow. They now will have greater sources of capital to be able to do that, and that, inherently, will create jobs."

The key to attracting venture capital companies to Utah is to promote the investment opportunities that are available in the state.

"We want venture capital companies to recognize that Utah is a highly educated state, has great technology and that there are great technology companies in Utah," West said. "If they [venture capitalists] are not working deals in Utah they're missing out and that's happening more and more. There are a number of really good Utah technology companies that are making investors a lot of money."

Most venture capitalists are looking for returns of 30 percent per year or more for three to five years and typically invent $1 million to $10 million at a time.

"If you're going to take $5 million and turn it into a 30 percent return on that money over three to five years annually you have to have an opportunity that has a real high profile," West said. "Venture capital isn't appropriate for everybody. Venture capital is appropriate for very high-growth opportunities. You give up an enormous amount of equity in exchange for that capital."

But that capital, West said, will keep a business going. In the meantime, the business, the venture capital company and the state al win.

"A lot of people have no idea know how to get it and part of the reason they don't know how to get it is because there is very little venture capital in Utah," West said. "We already have some financial institutions that have expressed interest [in the Fund of Funds] and we have venture capital companies that have expressed interest."

West is also quick to point out that the Fund of Funds is not a handout to any business looking for venture capital.

"Businesses need to approach venture capital companies that are willing to do business in Utah and make their case," West said. "If they don't have a good idea, if they don't have a good company, if they don't have something that will provide a significant return to investors, they won't get any money. We [the Investment Corp.] are not in the business of picking winners and losers in terms of individual entrepreneurs and companies. We're investing funds of venture capital professionals who have a proven track record of identifying successful entrepreneurs."

The key, West said, is to get venture capitalists from outside the state to make commitments to looking at deals within Utah. The Investment Corp. will then decide how much money to place with which venture capital company.

"This is one of the most important economic incentive programs that the Legislature has passed in many years," West said. "It's an exciting program, I don't know anything like it. It will likely cost the government no money. I think it is marvelously creative and impressive action taken by the legislature."