July 1, 2012

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Capital Gains

The Utah Fund of Funds Preps for a New Round of Investment

Brad Plothow

July 1, 2012

Imagine the ebbs and flows of the economic cycle are a storm system. Typically, one might connect foul weather to a sluggish economy, but the opposite is true in this analogy. The gales and torrents of a vicious cyclone represent the boom times—prosperity is raining down relentlessly, and nearly everyone is affected. In our scenario, the proverbial eye of the storm is the time when the economy breathes deep before the raindrops of economic activity start to reappear.

As the macroeconomic environment resets for a hopeful rebound, Utah’s financial infrastructure is preparing for a new flurry as well. One of the state government’s key tools in spurring financial health for Utah’s growing businesses is the Utah Fund of Funds, a quasi-public asset backed by $300 million in legislative commitments. Established in 2003, the Fund is restructuring into a leaner operation and readying to offer a second round of capital to investors with interests in Utah companies.

“We’re trying to increase the velocity of venture capital that comes into Utah on an annual basis,” says Tim Bridgewater, a career finance man and former senate candidate who signed on as managing director of the Fund in 2010. “We’re supporting entrepreneurs and trying to make Utah a more attractive place for investors and their capital.”

After committing more than $120 million to venture capital and private equity funds in 2006, the Fund will spend the next six months making the final preparations for a new fund that will come online at year’s end. In the meantime, Bridgewater and his team are zeroing in on funding partners and taking advantage of record-low interest rates to refinance the Fund’s finances with partner Zions Bank.

The Fund is moving toward its capitalization phase at a strategic time. The state’s central technology commercialization accelerator, the Utah Science, Technology and Research (USTAR) initiative, is reaching its commercialization stage after six years in existence, and Utah’s entrepreneurs are finding the confidence to toss their ideas into the marketplace. The missing piece: capital to fund all these endeavors.

What is the Fund of Funds?
By legislative mandate, the Fund doesn’t invest in companies directly. As its name implies, the Fund invests in other funds, which subsequently channel capital toward companies that show promise and, in many cases, are rooted in Utah.

The Fund received a $100 million commitment from the Utah Legislature in 2003 and another $200 million in 2008. These commitments aren’t hard appropriations but rather authority to borrow—authority the Fund hasn’t used yet in raising its first nine-figure sum and doesn’t plan on using in Round 2. The Fund’s goals are to provide a return on investment for the state and create connections between financiers and Utah startups.

Already, the Fund has played “a major role in helping increase the number of VCs paying attention to Utah companies and increasing the amount of money available for investment in Utah companies,” says Ragula Bhaskar, president and CEO of FatPipe Networks and previous board chair for the Governor’s Office of Economic Development. He says the Fund has helped several Utah companies obtain funding—and has even attracted new companies to the state.

The initial $121 million commitment went to 28 VC funds, and this broader portfolio of funds has raised more than $1.1 billion for 52 Utah companies. These companies have created nearly 2,000 new jobs with an average annual salary of $70,000. Beyond these direct impacts on Utah’s jobs picture, the Fund’s diversified investment portfolio serves as a kind of mutual fund for the state of Utah.

“We invest in good funds with good managers and good track records,” Bridgewater says. “Some of the companies that receive funding from our partner won’t stay in business, but some will really flourish and become truly successful, to the benefit of the company and the investors.”

The Fund’s first round helped connect venture capital to some of Utah’s most notable startups in recent years, including Skullcandy, the trendy headphone company founded by snowboarder Rick Alden, and Fusion-io, the storage memory innovator that attracted Apple co-founder Steve Wozniak to its executive team. These kinds of successes aren’t only good for Utah, they’re also the cash cows that carry the day for venture capitalists.

“You hit a lot of singles and doubles, with an occasional homerun like Fusion-io,” Bridgewater says.

Readying for Round 2
If operating the Fund seems similar to how you pick investments in your retirement account, that’s because part of its purpose is to provide a healthy return to the state. But the logic behind where Bridgewater’s team invests is unique in that it emphasizes connections to Utah’s growth industries.

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