December 1, 2011

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Con Wadsworth

Mark Tuffin




Utah Business Staff

December 1, 2011

BORGHETTI: The ability of entrepreneurs to give back is immensely valuable. Let’s see how we can bring in some great minds in the community and really approach it from a different perspective.

The part we’ve got to get away from in this community is saying, “Go get your deal ready and then bring it to me when it’s perfect.” That’s really what the investment community here is saying. Really what entrepreneurs need is to be steered in the right direction. By far the greatest value we can impart to entrepreneurs is to connect the dots and put people in touch with decision makers, get them in touch with prospective customers, prospective investors.

Luke, you have the enviable position to be not the only venture capitalist here, but probably one of the two with money.

SORENSON: I agree with everything that’s been shared. What’s happened in the venture capital community over the last five years is the industry has been hammered, and compounding that is the distribution of returns in venture capital is not a bell curve. You have top decile funds that do very well, and almost everyone else has done pretty poorly.

So you have a lot of firms that have assets under management, but they may or may not raise a fund. If they do, it will be very difficult for them to do so. They are motivated by fear. Deals are very hard to do, and the way they can justify doing a deal is by setting outrageous terms.

There is a lot more money that has come into Utah, but there are still significant gaps. It’s something that is frustrating for me, where oftentimes we will see a deal that may be a very good deal, but it’s not our investment mandate. So that good deal may not get done.

In Utah, we have gaps in terms of the size of funding from seed to late-stage growth equity. We also have significant gaps in terms of expertise. We have historically a little bit more software investing, and some life sciences, even medical devices could be much stronger in this state. Anything that is more industrial or manufacturing—we need a more well-rounded set. When you get those things, you have the result of good deals in Utah getting funded by backers in Utah.

BLACK: I have dozens of people walk in my office on a quarterly basis in the startup market. They are all frustrated with the lack of angel and seed money. As a matter of fact, one of them recently told me, “Everybody is willing to put a log on an existing roaring fire, but nobody wants to give me kindling.”

It’s not all bad news because they’ve been able to go to friends and family and get enough money to get something generated. The cool thing about the advancements in technology and APIs is today you can build a nice prototype that generates revenue for $50,000, whereas a few years ago you might need $300,000 or even a million. So people are able to self-fund through friends and family, and they’re sticking their nose up to the angels and saying, “I know you guys are looking for VC deals, so we’re going to do this on our own.” There’s been some frustration with where the Fund of Funds is.

There’s tax credits that have been unused, and there’s possibly some new action, new revitalizing of the Utah Fund of Funds. Tamee, can you comment on all that?

ROBERTS: There’s been a lot of talk about what the original intent of the Utah Fund of Funds was. I am happy to acknowledge any sort of original intent. I have heard the idea that we never intended to invest in any VCs in Utah because we want to attract venture capital into the state. One of the challenges of the Utah Fund of Funds is we are privately funded and state backed. There are no state tax dollars used. Our legislature has been very, very clear with us: do not ever cash those tax credits.

Everyone shifted up as we’re looking at our models and trying to avoid ever coming back to the state and cashing those tax credits. We’ve had to move further up the chain. This is mostly because of our debt structure with our first financing. As you can imagine, we could not raise an equity product right out of the gate. We had no track record. So we went and got a loan, basically a one-for-one on $100 million in tax credits, or $100 million from Georgia Bank, and with all the fees and interests on that, we will break even.

We have some speed bumps to overcome until we head into our next plan, which is to raise—either through equity, a bond, some sort of debt structure, some hybrid of that—a very much higher-leveraged fund against our last $180 million. We had $180 million in tax fund and leveraged that to perhaps $500.

If we had a $500 million investment fund, we could have a very small card out that would probably saturate the market here for angel and seed. That’s what we are working toward. We have to test the market. This is a strange machine, this tax voucher, this tax credit. We don’t know what we can do with it in an equity hybrid. We have to go to market with that and see what we can get.

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