If it sounds too good to be true, it probably is. Or maybe it’s the Utah Fund of Funds. The Utah Fund of Funds is a unique government program that seems to work flawlessly, please everybody and stimulate the economy, all while costing the state nothing. And the program is only expected to get better.
The Fund of Funds is a government-sponsored program that invests in venture firms which in turn, invest in startup companies. Because of the Fund of Funds, the state plans to bring in more than $100 million in tax revenue during the next 10 years. The money comes in the form of legislature-approved contingent tax credits, used as collateral to obtain financing from third-party Deutsche Bank. It is funneled to venture firms, which invest capital in Utah companies to create jobs and pay taxes. “[Utah Fund of Funds] doesn’t cost the state any money and the return on investment is incredible,” says Jeremy Neilson, managing director of the Fund of Funds. “Zero money goes in and we get millions back in tax revenue.”
During Utah’s 2008 Legislative season, the Legislature passed SB 11, which tripled the program, expanding its supported tax credits from $100 million to $300 million. Sponsored by Sen. Scott Jenkins, R-Plain City, SB 11 is considered by many business leaders, venture firms and entrepreneurs to be a great win for the state.
“If we don’t have a competitive environment, then no one’s going to knock on our door and our businesses in the state are going to leave,” said Governor Jon Huntsman during the 2008 Utah Economic Summit. “A big part of [creating and keeping businesses here] is the Utah Fund of Funds. I think that we can finally say that we are approaching best-in-class in the entire nation in this category. More than 1,000 Utah jobs have been created because of the fund’s portfolio and 25 Utah companies have been created.”
Neilson says that it was a combination of support offered by Utah’s entrepreneurs, business leaders and strong legislative leadership that led to the bill’s overwhelming passage. “A lot of people, businesses and venture firms supported the bill,” says Neilson. “This is a tremendous victory for the Fund of Funds program and the state’s entrepreneurs and companies. We’re going to continue helping Utah entrepreneurs build great companies and keep them here.”
Paving the Way
Utah has a long history of innovation and entrepreneurial spirit. Companies including Adobe and Pixar, and technologies like the artificial heart and the hearing aid, all got their start in the state. But the road to success for Utah entrepreneurs hasn’t always been smooth. Though considered to be a state booming with talent, Utah was also long presumed to be a place without the necessary financing to help young companies get on their feet. This lack of funding forced many entrepreneurs to start their companies elsewhere.
“A lot of Utah’s [entrepreneurs] received interest from venture capitalists and equity firms, but they were also kindly encouraged to move out of the state. They were told, ‘I’ll give you this money, but you need to move somewhere else, like California.’ There was a feeling that there was no money in Utah and if an [entrepreneur] could get money, then they couldn’t stay in the state,” says Neilson.
As Utah continually saw its entrepreneurs building their companies outside of the state, and with the dot-com crash of 2001 causing financial turmoil, Utah leaders decided it was time to lay some groundwork for entrepreneurs to develop their businesses here.
In 2002, a work group formed to find a way that Utah could attract more venture funding from both within or outside of the state. Under the guidance of Peggy Wallace, a former state representative from West Jordan, the group examined the methods several successful states were using as an economic engine and found a model that was working well in Oklahoma. Upon further examination of the program, the group decided to pattern legislation after that model, and Wallace took it to the legislature in 2003.
With overwhelming support from the Utah Technological Council, local venture firms, the business community and both political parties, HB 240, called the Venture Capital Enhancement Act, passed with more than 90 percent yea votes in the Senate and House.
How It Works
The Utah Fund of Funds’ purpose is to increase the amount of capital funding available to help the state’s early stage companies grow, prosper and mature in Utah. The fund invests in venture firms found inside and outside the state. These firms then invest in startup companies.
The fund is supported by a $100 million contingent tax credit. Using the tax credit as collateral, the Utah Fund of Funds has secured financing from a third party, Deutsche Bank, headquartered in Frankfurt, Germany. While the program is supported by state tax credits, no money has actually been put into the fund by the government. However, in the unlikely event that the Utah Fund of Funds could not pay back its debt to Deutsche Bank, the tax credits would be used.
With financial backing from Deutsche Bank, the Utah Fund of Funds carefully selects venture capitalists and private equity funds to invest in. The program is currently invested in 20 firms, which in turn invest in a variety of young companies. Though the firms do not necessarily have to invest in Utah-based startups, the legislation mandates that selected firms commit to spending at least 1,000 days in Utah building relationships with the state’s business community.
Beyond working with venture capitalists and private equity firms, the Utah Fund of Funds also works with local entrepreneurs. When entrepreneurs are seeking capital to start a business, the fund’s officials will examine the proposed company and match the entrepreneur to a venture firm that has parallel goals. While the venture firm does not have to invest in that particular company, the Utah Fund of Funds match-up gives the startup a serious advantage, as it will be preferentially considered for funding.
Mark Solon, managing partner of Highway 12 Ventures says that it’s this match-up that makes the Utah Fund of Funds so successful. “Utah Fund of Funds does a marvelous job of aggregating Utah’s opportunities and in vetting them for the proper funds. I know that when they send me a company to look at, it has been screened and will almost always fit our profile.”
Highway 12 Ventures, which is based in Idaho, has already invested in six Utah companies and plans to continue investing here. “We’ve put the majority of our capital in Utah,” says Solon. “We’ve had a great experience working with Utah Fund of Funds and will keep working with them in the future.”
To ensure that operations run smoothly, the Utah Fund of Funds has two governing boards. The Utah Capital Investment Board (UCIB) is a state government board responsible for overseeing the tax credits, financing and reporting to the Utah legislature. It does not determine investment strategies. Board members include government officials and individuals appointed by the Governor.
The Utah Capital Investment Corporation (UCIC) is the fund’s public board or as Neilson calls it, the “get it done” board. “The UCIC makes decisions on the investments, working very closely with UCIB on the financing.” Board members are prominent industry experts who volunteer their time and expertise.
Utah Fund of Funds also has an independent investment advisor, Fort Washington Capital Partners Group. As the fund’s independent advisor, Fort Washington evaluates potential investments and makes recommendations to the UCIC board.
Because the Utah Fund of Funds invests in out-of-state venture capital and private equity firms, many non-Utah businesses benefit from the fund. Though it may seem a bit odd to be investing in non-Utah companies at times, Neilson says that this strategy is key to the program’s success.
“If you require venture capitalists to invest in something specific, they won’t take your money,” Neilson says. “We could back a lot of investors that have poor track records and would agree to only invest in Utah companies, but this would put at risk the tax credits and the longevity of the program. We felt it was important that we require a high threshold of quality, which means allowing the venture firms’ experts to make the decisions of which companies to invest in.”
The fund is also purposely structured to invest in venture firms instead of investing directly in technologies or companies. By investing in venture firms, in-state venture firms grow and out-of-state venture firms are more likely to consider doing business within the state. This strategy also minimizes the program’s risk, says Neilson.
“When you pick which company to invest in, you run the risk of investing in a lot of bad companies and losing a lot of money,” Neilson says.
Though the fund’s investments do not flow directly to the technology or entrepreneur, the money is reaching Utah companies. According to Trell Rohovit, president and CEO of Venafi, a systems management company focused on encryption technologies, the fund has played an integral role in helping young companies get up and running. “Much has been said and written about the base of tech talent along the Wasatch Front, but if we’re to retain and grow that base, we need more ventures competing for the services of these people, keeping them in this market,” says Rohovit. “By investing in venture capital funds, Utah Fund of Funds indirectly helps ensure Venafi has access not only to financial, but also to human resources necessary to build a world class enterprise software business in Utah.”
As the Utah Fund of Funds receives returns from its investments, it repays the original loan to the third-party lender and the process continually recycles. The result is more Utah companies, job creation, tax revenue and a growing economy.
Calling the Utah Fund of Funds the state’s own cash cow may seem like a bit of an exaggeration, but in reality, it’s not too far from one. Since it officially got off the ground in 2006, the Utah Fund of Funds has already started 25 Utah-based companies, which have created more than 1,000 jobs with an average salary of $60,000 within the state. These companies have raised approximately $365 million from investors, with $127 million coming from the fund portfolio. During the next 10 years, state officials anticipate that these jobs alone will create more than $150 million in tax revenue.
Beyond stimulating Utah’s economy with companies, jobs and tax revenue, the fund is also making great strides in the state’s less concrete areas. The fund has fostered relationships with the nation’s most influential investors, increased awareness and credibility of Utah’s business environment and has enhanced confidence among the state’s entrepreneurial community, says Neilson.
Now that the legislature has boosted the tax credits to $300 million, Neilson says the fund is planning to invest in more venture firms and continue growing. All in all, Neilson hopes to help even more Utah entrepreneurs start their companies and keep propelling Utah’s economy forward.
“We’ve met with and tried to help more than 300 Utah businesses in the last two years,” Neilson says. “Our goal is to help any Utah business that is in the venture space. We try very hard to help Utah businesses get in touch with potential financers, and we have a large rolodex of funds. We welcome and enjoy any company who wishes to call us or send us an email. We’ll do our best to help.”