Utah businesses need more early-stage capital
I was honored to participate in the 2021 UB Economic Outlook Summit on November 5, where I shared my perspective about on investing in Utah companies. Cydni Tetro, our panel moderator kicked off the hour-long discussion directing the first question to me which was, “How much capital should be raised in Utah to fuel the growth of the economy?”
I was thrilled to be asked this question based upon my experience in Silicon Valley and Silicon Slopes around starting and funding companies in two quickly growing markets. My answer was much bigger than the panel imagined: Utah needs about nine times more than what we’ve ever received – about $15 billion dedicated to startups, annually.
The National Venture Capital Association has ranked Utah as #14 in deal activities in the US, investing $1.77 billion in 150 early-stage Utah-based companies. However, if you do the math, it shows that it takes a ton of luck and success (otherwise known as traction) to be one of the lucky 150 that receive the crucial early-stage funding. Basically, startups have a .18 percent chance of closing venture capital here in Utah, and that’s wickedly tough.
Utahns are known for the lean startup approach, where founders pursue product development being compelled by the critical path to revenue and financial independence. This ensures that the company can survive on lower capital amounts, and crazy ideas with a larger price tag are often abandoned.
Only those who will risk going too far can possibly find out how far one can go.– T. S. Eliot
This is the diabolical opposite of my Silicon Valley experience where skunk work projects were encouraged, funded, rapidly tested, patented, adjusted, or flunked, and every project’s creation cost became a venture capital portfolio loss. The attitude of founders being very bold and brazen in Silicon Valley was a common occurrence. Often these West Coast startup losses did not bankrupt the founders or show up as their second mortgage. It affected portfolio performances, and sometimes the IP was sold or rolled into an academic environment so the merit continued but in a different form.
Another panelist, Scott Paul, famous crypto, social, and pre-seed angel investor, got a big cheer from the audience by making a similar war cry. Since WordPerfect, Utah has not created another well-known household name yet; but it will happen soon, because someone, who may already have started their endeavor, is taking the moonshot and will have an entire campus that becomes the next global mega-trend, based here in our state.
Paul and I agree that if we don’t give enough pre-seed capital cover that is quickly and readily available to fund the next big thing, where people can do crazy skunk work activities; then it is us, the investment committee, who is not providing a canvas to our entrepreneurial artisans.
Now, pre-seed capital is crucial, especially for Utah, and there are a few reasons why. For one, Utah is the fastest-growing state over the past decade in both population (18 percent) and GDP (19 percent). Utah is primarily a small business state – there are 310,000 small businesses, and 81,000 were created post-COVID, which is rising by 6 percent annually. That means 26 percent of Utah companies are new and have rapidly adapted to this post-pandemic market. Small businesses account for more than 99 percent of Utah’s business entities and also 99 percent of employment. It makes sense as to why Utah and its counties directed so much budget to relief funds—the funds went to the locals.
Most businesses can’t get an SBA loan until they are 2 years old, so alternative capital sources must be fully exploited. Following the lean startup model, business spending and risks are heavily scrutinized, revenue is revered, pitch competitions, and of course equity rounds are where founders turn toward during the critical first 24 months. So, revisiting those 81,000 startups that are making profound improvements in this post-Covid environment, they have to either make the money for themselves or fight to be in the top .18 percent of startups that get funded. That’s not awesome nor encouraging for any Utah startup to make the next moon shot attempt.
Today, venture capital is having a banner year. By September 30th, US startups raised $240 billion according to PitchBook, dwarfing the $166 billion raised in 2020. At that time, the US GDP was $22.74 trillion. So for every $10 the US economy was producing, there was $1 backed by venture capital to fuel the next round of innovation and growth. In stark contrast, Utah’s GDP was $178 billion, and the venture capital raised by Utah companies was $1.77 billion – reflecting a $100 GDP to $1 venture capital funding ratio.
USA’s 10:1 ratio is vastly different than Utah’s 100:1 ratio. What if our state grows our pre-seed and seed investment at a faster clip than our population growth rate, our GDP growth rate, or the rate of business creation or closure?
I think we’ll see more moonshots coming from the Beehive State.
Another panelist at the summit, Ben Capell, managing director at Peterson Ventures, made another keen observation. Capell claims that creating the $1 billion+ fund in Utah may not be the answer because we’ve seen midwestern communities attempt these feats and have yet to succeed. However, by increasing the dowry for these freshman hopefuls they can be more daring. Capell is about expediting the investments and opening it up to non-Utah funding sources.
I would take it a step further and say that our local community who qualify as accredited investors should now become more active and that smaller, faster checks coming from many sources are actually equally helpful as receiving larger amounts of funding from fewer investors. On paper, Utah has the highest investor pool as we ever have. According to Utah Business, Utah now has an estimated 71,613 millionaires meaning about 7 percent of the population can lend their pre-seed support to make a difference.
That’s why I am headstrong on BoomStartup Accelerator’s pre-seed investment approach where we incentivize angel investors to invest alongside us, and leverage our parent company, Assure, Special Purpose Vehicle to collect and consolidate the checks so that there’s only a single shareholder added onto the startup’s precious cap table. We think the opportunity to include more investors with smaller checks will create better results and faster investment cycles. To date, Assure has funded over $266 million into Utah-based companies through SPVs— so there’s proof that this collective fundraising approach is a viable option to diversify investments.
The other wise observation came from Curt Roberts, partner at Kickstart Fund, the most active seed-stage venture fund in Utah. Roberts has seen more deals than all of us and he knows that it takes the right talent and capital dispensing culture to create additional backers for future startup generations. Roberts says that our talent is indeed top of the market when it comes to performance and prosperity. Our next growth will come by distributing more capital throughout the organization and not be too conservative on employee investment education or distribution.
The audience also broke out into serious laughs in agreement when our panelist Sid Krommenhoek, founder and general partner at Album VC echoed Roberts’ comment by saying that Utahns have a habit that when employees leave a company, they are treated unfairly and are cut off quickly. He reminded everyone that we don’t live in North Korea and that when people leave startups that being hostile with stock options actually is a detriment in many unobvious ways. Krommenhoek believes in more employee stock participation will bring in more compensation than salary.
Capell, Roberts, Paul, Tetro, Krommenhoek, and I all shared our encouragement that Utah people need to improve their interest and participation when it comes to equity-based deals, as employees, direct or indirect investors, and founders, to really catch up on what this great place deserves. So hear our unified activation ask: Educate yourself and get more involved, and this will make a better Utah.