Utah software companies raised a ton of money during the pandemic. Now, there's been a downturn, but the big moment may come soon.

Utah’s “PayPal Mafia” moment may be coming soon

Utah software companies raised a ton of money during the pandemic. Now, there's been a downturn, but the big moment may come soon.

For tech companies and venture capitalists, the pandemic was a major boon. With a large portion of Utah’s startup scene comprising software companies, the period meant there was a major increase in the valuation of companies in the area, according to investors. And those that sold during that time made the most of that perk.

Once 2022 hit, the situation changed. Inflation brought the economy to a halt, and for investors like Ted McAleer, a co-founder and board member of Park City Angels, it meant that company valuations returned to normal. “There’s too much money in Utah chasing the deals that are here, and therefore, entrepreneurs have asked for ridiculous valuations,” he says of the past two years. “We’re starting to see the ridiculous valuations drop. Primarily, that’s a function of the global markets having a downturn.”

The economic stress test marked a key moment in Utah’s tech scene: a chance for investors to see how their estimation of the region would hold up under what McAleer described as a bubble bursting—similar to the dot-com bust of the late 1990s. “It just kind of ripples through like a multi-layer cake,” says Gavin Christensen, one of the first venture capitalists in the Utah scene, who started Kickstart in 2008. “Everybody’s looking at their investments and thinking, ‘Okay, if everything goes well, what is the price two years from now?’” 

Now people are moving slower, he says, “because they’re just living with public company risk all day long…Deals are still getting done, but this is no longer 2021.”

Diogo Myrrha, a partner at Album VC in Provo, has been working in venture capital in the area for about a decade and says he’s watched tech and venture capital explode during that time. He attributes it to a “scrappy” growth process from Utah companies, which often have to do more with fewer amounts of money. “A lot of the work was really putting Utah on the map,” Myrrha says. “Now we’ve become the kind of secret weapon, if you will, for firms that we’re friends with that count this ecosystem as an ecosystem that they’re paying really close attention to. [We went] from a marginal market to a flowering, blossoming environment where the coastal firms are definitely paying attention. Not just paying attention, but they’re voting with their dollars.”

McAleer echoed this development. He pointed out that when angel investors started their work in Utah, they were one of the smallest markets in the country. Now, he says, Park City Angels is solicited and invests in companies in other states because they are more competitive than the VCs in those markets. All of this growth comes from the particular time period, the VCs say, when Novell and WordPerfect exploded.

Novell, the company that created document-composing software, was started in 1980 in Provo, and its early success helped spur a culture of innovation in the state. That created the next generation of entrepreneurs, McAleer says, which has resulted in 18 unicorn companies since 2014. “We’ve had a lot of unicorns, but I can’t say necessarily we’ve had a PayPal,” he says.

McAleer is talking about the PayPal Mafia, when 20 former PayPal employees, flush with cash after the company’s initial public offering, went on to found Tesla, YouTube, LinkedIn, Kiva, Yelp, and several others. Utah’s closest major success has been Qualtrics.

Utah software companies raised a ton of money during the pandemic. Now, there's been a downturn, but the big moment may come soon.

During the pandemic, 2020 saw the highest IPO capital raising in a decade. Tech companies were performing extremely well, benefiting from the increased use of online tools. Many of the largest IPOs during that time were tech companies like Airbnb, Palantir, and DoorDash. At the same time, a trend of using special-purpose acquisition companies (SPACs) cropped up. These companies, also known as “blank check” companies, are shell companies that raise money on public markets and then use that capital to acquire other businesses.

Utah had quite a few companies go public during this time, including Qualtrics, which makes software to help businesses poll internal data. The IPO was Utah’s largest, blowing away the previous highest offering from the state—it was valued at more than $1.5 billion during its IPO. The shift highlighted a strengthening startup scene in Silicon Slopes. 

“The gold standard for us is software specifically, B2B—it’s just an incredible sector to invest in at the earliest stages,” Christensen says.

Qualtrics started out slowly, operating for 10 years before it raised $70 million in a Series A funding round led by Sequoia Capital, a famous California VC firm known for investing in Apple, Google, and other household names. Qualtrics had a big impact on the technology scene in the Provo and Salt Lake City areas. For McAleer, Qualtrics was representative of the ability of local companies to maintain frugality. “They bootstrapped for a long time,” he says.

For Cydni Tetro, CEO of Brandless and president of the Women’s Tech Council in Utah, money from California investors for a company like Qualtrics represents an important point for business owners: to help grow the market even further. “You needed a series of those—to fund one company here in order to fund this population,” she says of Silicon Valley investments. “Those companies hired lots of people, they trained lots of people in tech, they’re very entrepreneurial companies.”

The companies helped fuel Utah’s tech growth, Tetro says. “Our funds in the state have become significantly larger.”

As a result, in the past few years, more money and attention have been on the state’s businesses than ever before. In 2020 alone, according to Crunchbase data, venture-backed companies in Utah were able to attract $1.2 billion in funding. While the surge of IPOs has slowed in 2022, partly due to a decrease in SPACs, there have still been some high-profile Utah offerings in the past year. 

One was Vivakor, a clean technology company that debuted at an $8 million valuation. Three others—Verb Technology, PolarityTE, and LeeWay Services—all announced major valuations in the past few months.

Tetro says the combination of outside funding from places like Silicon Valley in conjunction with a rapidly expanding VC culture in Utah has been a major boost to businesses in the state. “We’ve been shattering records,” she says.

While the downturn has alarmed economists across the world, Utah’s VCs remain cautiously optimistic. “It’s a fascinating market right now,” Myrrha says. “We do not take lightly the dryness of the market. Everyone’s apprehensive of what’s to come.

Utah software companies raised a ton of money during the pandemic. Now, there's been a downturn, but the big moment may come soon.

Jack Dodson is a reporter and documentary filmmaker most recently based in Palestine-Israel from 2018-2022. He has reported for Vice, BBC, The Intercept, Middle East Eye, among many others. He has a master’s in investigative journalism and documentary from Columbia Journalism School and a bachelor’s degree from Elon University in rhetoric.