First, here’s the good news: There are hundreds of millions of dollars in tax incentives for businesses—money that could increase the diversity and quality of capital available for startups and growth companies in the state. In fact, that fund, the Utah Fund of Funds, has up to $300 million in its coffers.
Now for the bad news: Wall Street. Turmoil, uncertainty about the dollar, the lack of a backbone to back that funding—it’s left a good portion of that $300 million in limbo, along with the mechanisms that could pump many more times that into Utah’s economy.
Consequently, venture capital activity in the Beehive State, like that in most of the nation, has dwindled to its lowest level in years. And there appears to be no short-term turnaround on the horizon.
In 2003, the state legislature passed HB 240, known as the Venture Capital Enhancement Act. Crafted by Rep. Peggy Wallace, along with the Utah Technology Council (it was known as the Utah Information Technology Association at the time) and other economic leaders, the bill led to the creation of the Utah Fund of Funds.
The program is structured to be self-sustaining, with funding provided by third parties, and is backed by refundable, transferable tax credits from the state. Only in the case of a shortfall would the state be required to actually place tax funds in the Utah Fund of Funds.
The fund was initially vested with $100 million of contingent tax credits by the legislature. It works with strong-performing venture capital/private equity firms which in turn, explore investments in Utah companies. Managing Director Jeremy Nielson says it “helps businesses get access to capital, and helps to identify ways for them to find and raise money.”
During its first five years, the Utah Fund of Funds proved a powerful player in business enhancement. It was so successful that the legislature approved an additional $200 million in further contingent tax credits in 2008. But getting that third party backing for the additional $200 million has been the rub.
The Utah Fund of Funds has already established a solid track record. As of last July, more than 30 Utah companies had received investment capital from the fund's portfolio funds. More than $640 million had been invested in Utah companies, including cash from the fund's syndicated partners. Nielson estimates that as a result, more than 2,000 new jobs have been created in the state with an average annual salary of $63,720, close to double the state average.
But as he points out, “venture capital is down 50 percent from 2007 levels throughout the United States. Venture firms are not performing as well as a group, and a number of them are dying or closing. Thirty percent have closed in the past two years. It is really, really hard to raise money right now.”
“Let’s call it a cataclysmic shock,” says Kevin Weise, founder and chief executive of Mid-Market CEO Ventures of North Salt Lake, in referring to the decline of venture capital activity. “VCs create funds, then manage them over a 7 to 10 year period, but the capital market is in turmoil. That’s where the money used to come from. They certainly are not operating very efficiently or effectively.”
Weise says the days of IPOs, those initial public offerings when a private company begins to sell stock and thus raise money, “have basically gone away. That’s making it harder for venture capitalists, and for those wanting VC money. Only one of a hundred ventures actually gets VC money today.”
Mid-Market’s focus, as indicated by its name, is to create more mid-market size companies, those with $50 million to $2 billion in annual revenues. Weise says the number of mid-market companies in Utah is very small, “so we want to see Jeremy’s efforts with the Utah Fund of Funds succeed, obviously. We want to see companies that create their own eco-systems, spin out other businesses and create more employment. We feel that if the state wants to create more economic growth, it starts with a cluster around the mid-market.”
He sees the Utah Fund of Funds as “the catalyst to attract and support that. They meet companies in the early to mid stages of their growth, the perfect time to work with them.”
The Utah Fund of Funds doesn’t invest directly into companies. Its efforts are to attract high level venture capital firms, inside and outside the state, to focus on investing in Utah companies and entrepreneurs. It doesn’t require portfolio funds to open an office in the state or even to invest solely in Utah companies, but it does require senior management from various funds to spend time here—meeting with company leadership.
Nielson feels “you cannot have strict rules or compliance requirements in return for your investment. We’ve looked at other locations with strict rules in place for exchange for an investment, and our economic development impact is stronger.”
Those required visits, however, are proving very successful.
“The ability to get company leadership to come here and see the state is critically important,” says Weise. “They can become familiar with all that Utah has to offer—from schools to real estate to our great workforce. They can start to form a connection here.” He credits those visits, in part, for the success that the Utah Fund of Funds, along with the Governor’s Office of Economic Development and the Economic Development Corporation of Utah, have enjoyed in recruiting new companies to move to, or invest in, the state.
There are 20 funds that the Utah Fund of Funds has invested in—about a third of them based in Utah. Thus far those funds, as a group, have invested $135 million into Utah companies. Close to 400 Utah companies have had contact or a visit with representatives from those 20 fund entities. All of that was accomplished with the initial $100 million approved for tax credits. No wonder everyone involved wants the additional $200 million to receive financial backing.
The new year did bring some good news to the Utah Fund of Funds, however. First, Zions Bank approved a $20 million round of financing, establishing a credit line it stated would help the fund “continue moving its economic development efforts forward with additional capital while it waits for the broader financial market to unfreeze.”
Nielson says the funding “is a good short-term answer, but nothing beyond that. We are widening our creativity for the type of funding we seek. We’re active and diligent in looking at new sources.”
And success at the University of Utah (U of U) must be considered good news as well. The U of U spun off 23 companies in fiscal 2009, surpassing the 20 from the Massachusetts Institute of Technology. A report from the university stated those companies filed for 119 patents, were awarded 33 and generated $26.2 million in revenue from licensing technology.
Those kinds of numbers add to the incentives Utah can offer potential investors who may also desire to relocate here.
Another piece of good news came from the state’s small business index, which was up from 82.5 in December to 88.7 in January (it peaked in 2005 at 121.1, but dipped as low at 70.3 in the first quarter of 2009). Still, unemployment remained high—6.7 percent as of the last report, and retail spending was still soft. It made for a mixed financial bag, something that doesn’t surprise Nielson.
“I think it’s going to take a couple of more years of staying afloat,” he says. “I don’t see a turn anywhere soon.”
Interest in the Utah Fund of Funds efforts remains high, however. As of last July, Nielson reported that 823 Utah companies had been reviewed by funds in its portfolio. In 2009, the Utah Fund of Funds was awarded the Best of State award, by Orem-based non-profit organization Best of State, in the economic development management category.
On receiving the news of that award, Nielson released a statement saying, “In the midst of these deeply challenging economic times, we still believe there is tremendous promise in Utah’s entrepreneurial community.”
Nielson says that now, if the financial institutions will get on the bandwagon and back new tax incentives, “the ride ahead might be enjoyable for everyone.”