Feature Article

 

Capital And Influence - An Introduction to the Utah Fund of Funds

 

By Jeremy Neilson, Kimball Thomson and Mark Dayton

 

The Utah Fund of Funds (Utah FoF; www.UtahFoF.com) was created by the Utah Legislature to increase the amount and diversity of capital funding available to high growth, early stage companies in the state in an effort to help them grow, prosper and mature in Utah. Rather than invest directly in these companies, the program is structured to motivate high quality professional venture capital firms both in and out of the state to focus more of their investment efforts on Utah entrepreneurs. The Utah FoF invests in these carefully chosen venture firms, which then commit to work closely with Utah companies and entrepreneurs — with the goal of funding promising deals in the state.

The Utah FoF, conceptually contemplated by leaders in the state's investment and entrepreneurial communities, ultimately took shape in 2003 in the form of Utah House Bill 240 (HB 240), the Venture Capital Enhancement Act. Led by the Utah Information Technology Association (UITA; now the Utah Technology Council, UTC) and other Utah economic development leaders and entrepreneurs, an unfunded legislative workgroup crafted the legislation based on best practices from other states, but adapted to Utah.

HB 240 was sponsored by State Representative Peggy Wallace. With powerful support from then-UITA president & CEO Richard Nelson, who encouraged hundreds of technology industry leaders to advocate and educate legislators on Capitol Hill, the legislation surprised many observers by passing overwhelmingly through both the Senate and the House in its first year. Thus the Utah Fund of Funds was born.  

 

Structure

The Utah FoF is governed by two boards that oversee and report on the fund's activities, many of which are carried out by a professional investment advisor firm. 

The Utah Capital Investment Board (UCIB) is the state oversight board responsible for the Utah tax credits.  UCIB plays a critical role in overseeing Utah FoF financing and in reporting program status to the Utah Legislature.  The UCIB board is a state of Utah government board with membership determined by government position or state governor appointment. Current UCIB board members include:

• Edward Alter, treasurer, state of Utah. Appointed to the UCIB by legislative statute, Alter also serves as president of the Utah State Retirement Board. He was president of the National Association of State Treasurers, named to City and State's All-Pro Government Team, and received the first Jesse M. Unruh award for treasury excellence from the National Association of State Treasurers.
• Lonnie M. Bullard, president & CEO, Jacobsen Construction Company; former senior partner, Boyer Company. Bullard has served on numerous trade, community and charitable boards. 
• Robert P. Majka, CEO, Marlin Bank. Majka was formerly executive VP of Associates Corporation, one of the nation's largest sub-prime lenders, and president & CEO of Associates Capital Bank, which later merged with Citigroup.
• Alexander L. Searl, retired executive. Searl served in a variety of industry leadership capacities, including executive positions with Paradigm, Crown Energy Corp., Theratech, American Stores and Hercules. He served on multiple corporate and philanthropic boards, and numerous state government appointments.
• Jason Perry, executive director, Utah Governor's Office of Economic Development, which oversees economic development, the Office of Tourism and the Utah Film Commission. Perry served as deputy director of the state's Department of Commerce and as acting director of the Divisions of Securities and Real Estate.

 

The Utah Capital Investment Corporation (UCIC) is a nonprofit corporation with a public charter. The UCIC jointly approves Utah FoF financing with the UCIB, approves all Utah FoF investments, and selects and manages the outside investment advisor.  The UCIC board is self-perpetuating, with the UCIB board playing a key role in member replacements. 

All UCIC board members volunteer their time and expertise without receiving pay. The current UCIC board of directors includes:

• Will West, (chairman): co-founder, president & CEO of Control4, a prominent manufacturer of home automation products. West has founded four technology companies in Utah – including STSN (now iBAHN) – which have raised an aggregate of more than $250 million in investment capital. 
• Geoff Woolley, founding partner, Dominion Ventures, where he raised and managed more than $750 million. He was also founder and executive chairman of European Venture Partners. Woolley has invested in more than 400 companies during his career.
• Frank S. Trumbower, retired CEO of Cambridge Technology Partners, a prominent national VC firm. He served as chief economist at the Office of Economic Opportunity in the Lyndon Johnson administration and chief economist of the African Development Corporation under Robert McNamara, former president of the World Bank. 
• Richard Nelson, president & CEO of the Utah Technology Council (UTC). Nelson has long been a key leader in Utah's technology and public policy communities, and was instrumental in the passage of the Utah Fund of Funds and USTAR legislation.
• Peggy Wallace, vice President, America First Credit Union. Wallace serves on a variety of professional and political boards, including UTC and the World Organization of Credit Unions. From 2001 to 2006 she served as a Utah State Representative, where she sponsored the Utah Fund of Funds legislation.

 

The Utah Fund of Funds Investment Advisor is a professional firm selected through an RFP process. Among the advisor's primary duties are finding qualified fund investments; evaluating potential investments; performing extensive due diligence on relevant funds; providing investment recommendations to the UCIC board; and assisting the Utah FoF in community outreach programs and events. Through an extensive search and evaluation process, UCIC selected Fort Washington Capital Partners Group as the Utah FoF Fund I investment advisor. The firm is headquartered in Cincinnati, Ohio, and maintains full-time offices and senior staff in Salt Lake City.

 

Financing 

The Utah FoF financing is provided by a third party, and is supported by contingent tax credits issued by the state of Utah. The first $100 million round of the Utah FoF was financed by Deutsche Bank. The program is structured to be financially self-sustaining, with profits from Utah FoF investments paying back financers. Only in the case of a shortfall – which is not anticipated in any Utah FoF pro-forma forecasts – would the state be required to place tax credit funds into the Utah FoF. Proposals from more than 30 financial institutions were evaluated by UCIC and UCIB, with Deutsche Bank being selected to provide the initial financing.

 

Portfolio

The Utah Fund of Funds is targeting approximately 20 funds in its Fund I portfolio. As of March 2007, nine venture capital and private equity funds have received funding, ranging across many industry categories.

Utah FoF's current investments include: 

• 5AM Ventures (www.5amventures.com; Menlo Park, Calif., and Waltham, Mass.), a seed and early-stage venture capital fund focusing on life sciences.
• Apax Partners (www.apax.com/EN/; New York City, N.Y.), a large buyout fund focusing on retail/consumer, tech/telecom, healthcare, media and financial/business services.
• Cross Creek Capital (www.crosscreekcapital.com; Salt Lake City, Utah), a later-stage venture capital fund that co-invests with major national funds.
• Highway 12 Ventures (www.highway12ventures.com; Boise, Idaho), an early-stage venture capital fund focusing on emerging companies in the Intermountain West.
• University Venture Fund (www.uvf.com; Salt Lake City, Utah), an early-stage venture capital fund that co-invests with local and national venture capital funds.
• Rosewood Capital (www.rosewoodcap.com; San Francisco, Calif.), an expansion-stage private equity fund focusing on growth companies in the consumer and business services sectors.
• SV Life Sciences (www.svlsa.com; San Francisco, Calif., Boston, Mass., London, England), a multi-stage venture capital fund focusing on life science companies.
• RWI Ventures (www.rwigroup.com; Menlo Park, Calif.), an early-stage venture capital fund focusing on networking, semiconductor, software and life science companies.
• vSpring Capital (www.vspring.com; Salt Lake City, Utah), an early-stage venture capital firm that focuses on technology and life science companies.

 

Approach and Early Successes

Based on extensive research and benchmarking, the Utah FoF does not require portfolio funds to open a Utah office or commit to invest specific dollar amounts in Utah companies. Rather, the Utah FoF requires a commitment from a funds' senior management to spend considerable time in Utah meeting with the state's companies and entrepreneurs. Research indicates that forced offices generally consist of junior staff and result in neglect by the senior partners; investment requirements often result in lower fund returns and strained relationships between portfolio funds and the states involved. 

To date, the six out-of-state Utah FoF portfolio funds have committed 640-plus aggregate partner days in Utah over the next five years – equivalent to 2.5 years of business working days. The Utah FoF intends to invest in six to 10 additional out-of-state firms in the next 18 months.

As of March 2007, Utah FoF portfolio funds have invested $44 million in 20 Utah companies, resulting in the creation of 700-plus jobs. These Utah companies have raised a total of $267 million. Additionally, the Utah FoF has provided other companies with investor introductions and assisted in obtaining financing from non-portfolio funds.

 

Jeremy Neilson serves as venture manager for the Utah Fund of Funds. Kimball Thomson is an Alpine-based freelance writer, and president and CEO of Next Phase Communications, an integrated public relations and marketing firm that represents the Utah Fund of Funds. Mark Dayton is a Provo-based freelance writer, and chief operating officer for Next Phase Communications. 

 

Launch - May/June 2007

 

 

For the full "digital magazine" version of May/June 2007, visit: http://www.nxtbook.com/nxtbooks/growutah/launch0507/