November 5, 2013

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Industry Outlook: Technology Entrepreneurs

November 5, 2013

How did they find you? Or how did you find them?

SKONNARD: There were analysts who just saw press about us that reached out. Once we talked to a couple of them, the phones just started to ring. It’s almost like there’s this underground system where they all talk to each other.

I do think there’s a lot of firms around the country who are keeping their eyes on Utah for opportunities. The funny thing is, we never got a single call from any firm in Utah, which was interesting.

RICHARDS: The hot companies with good metrics and good traction, there’s no shortage of capital, but most of it’s coming from outside the state. And the best deals actually get kind of highjacked by out-of-state investors cutting out local investors that do want to get in. Because they come fast and hard. When they see the numbers, they get very excited.

At BoomStartup, there’s a couple of companies that are quadruple oversubscribed. Ron Conway, people like that are doing the deals and cutting back all the Utah people. And that’s just what happens. Success is easy. It’s easy to raise money.

GREEN: Yeah. I wouldn’t even know where to look for money in Utah.

JOHNSON: There definitely are firms that are here hunting in Utah. Very proactive. I keep in touch with a handful of them. And there are top-tier Bay Area firms that have people on the street here digging around. Why did we lose the deal? Well, we’re not being proactive.

Is there anything we’ve done as a state to encourage investment? How has the landscape changed in the past 10 years?

BHASKAR: Fund of Funds was a very deliberate measure that the state took to attract outside funds to Utah and increase the number of funds operating in Utah. That has its own snowballing effect on getting other people to look at Utah. It was a very good investment by the state.

WARNOCK: A lot of it stems from the economic conversation we had earlier and also the advent of technology and information. It’s so much easier to go on things like Angels List, Tech Crunch, Crunch Base, all these different things to figure out what’s out there, where the companies are, what they’re being funded at, and to find these arbitrage opportunities. Where in the past, Silicon Valley was its own little bubble. There was so much capital and not enough companies, and they were all competing, raising valuations. Now that they can see all the deals in Utah, it looks like everything is a great deal because the investors here didn’t have access to the same capital.

RICHARDS: The same deal gets a term sheet from Utah for $1.5 million and …

LUMAN: Silicon Valley gives $3 or $4 million for the same company.

WARNOCK: Exactly. So it’s because of that arbitrage that they’re able to just bring them out. Because it’s still a great deal in Silicon Valley terms, it’s just not a good deal in Utah terms. That’s one of the large drivers.

LUMAN: That’s part of why we left the state. So in fact, your comment about seeing the bigger picture, you come to the table and the term sheet’s got some hurdles in here and you’re going to have these gates and we don’t think you can do this, that and the other thing. Wait a minute. That’s not what I heard outside of here. And then the term sheet comes in at a much different valuation. So we were driven to go outside of the state.

WARNOCK: It’ll take some time for the Utah investors to understand this arbitrage and start doing deals that are more in line with Silicon Valley and the rest of the nation now that there’s this information availability.

 

SLOVIK: At the early stage, the really early Angel stage, there’s a little bit of the Groucho Marx thing—I don’t want to join any club that would have me as a member. It’s the economist walking down the street with his friend and there’s a $20 bill on the sidewalk. And he says, “Wow. A $20 bill.” And the other guy says, “It can’t possibly be. If it was, someone would have picked it up by now.”

These people say, “Wow. This can’t possibly be a good deal if it’s available to us.” Right? “Why aren’t they getting a lot of interest? If they can do what they say they can do, everyone would be knocking down their door.”

I see that kind of skepticism all along. And then a deal will get picked up by someone in the Bay Area and they’re like, “Oh, shucks. I knew that was a good deal.

SKONNARD: That’s exactly right.

WARNOCK: The economy and these opportunities have also generated some innovation in terms of funding mechanisms. Not only is it easier capital-wise to start up an internet business, but there’s also a lot of opportunities to gather different kinds of investing with crowd funding and whatnot coming around, and then revenue-based finance and a bunch of other models that have come up in the past couple years, largely because investors couldn’t make the same returns in other investment vehicles—the stock market and whatnot—and they were looking for innovative ways to lay it out into the economy.

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