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Fund Sought to Prime Pump for New Capital in Utah

Desperate to resurrect investment in its struggling start-ups, Utah’s technology sector wants the Legislature to sign off on a new $100 million, private sector-created fund to court out-of-state venture capitalists.

Salt Lake Tribune

The Utah Information Technology Association and House Bill 240’s sponsor, Rep. Peggy Wallace, R-West Jordan, stress the fund would be financed by banks, insurance companies, utilities and other businesses — not taxpayers.

The measure’s so-called "fund of funds" would in turn be used to funnel cash into venture capital firms agreeing to target Utah-based technology enterprises. Recipients would be expected to open offices in the state, providing a "physical presence" and availability for new, home-grown tech firms.

At the core of HB 240 — expected to be introduced in final form sometime this week — would be a state safety net made up of "contingency tax credits." In a worst-case scenario, they could be used to bolster the fund with up to $20 million a year in converted tax liability breaks for investors.

Richard Nelson, UITA president and chief executive, and Wallace stress that those tax credits do not amount to what would be an unconstitutional "guarantee" for the fund’s investors, but are rather an "enhancement" that likely would never be needed.

The tax credits would kick in if the annual return for investors fell below a yet-to-be-set rate (but expected to be around 6 percent). Past performance in similar venture capital funds has been in the 15 percent to 20 percent range, HB 240’s backers say.

"Contingency tax credits would play an extremely remote role," Nelson said Thursday, adding that a reserve fund — fed by excess earnings over the set rate of return — would be tapped first.

Wallace noted that other states operating VC enhancement funds — Oklahoma, Iowa, New Hampshire, Arkansas, Ohio, Maryland and New Mexico — have never played their tax credits cards.

"This is landmark legislation we need badly," she said. "Small businesses struggle in this state, especially our high-tech start-ups."

Oklahoma’s 10-year-old VC enhancement fund serves as the bill’s model. As of December 2002, the Oklahoma Capital Investment Board had invested $41.3 million, attracting 11 VC firms to the state; for every $1 spent by the board, HB 240 backers say, Oklahoma realized $3.30 in investments.

There is no doubt Utah’s VC funding lags behind the nation at large. The 2002 PricewaterhouseCoopers MoneyTree Survey, for example, showed Utah companies received just less than $95 million last year, down from $223 million in 2001 and a peak of $706 million in 2000.

In all, 26 venture capital deals were completed in Utah last year, down from 43 in 2001 and 64 in 2000. Nationally, venture capitalists invested $21.2 billion last year, down from a peak of nearly $107 billion in 2000.

Addressing that funding disparity is critical, Nelson contends, if Utah is to stop the loss of its entrepreneurial start-ups to bigger, well-heeled out-of-state companies, or to bankruptcy.

"This is the most important economic bill and initiative for this session, and not just for high-tech companies, but for all potential high-growth companies," he said.

Jerold Oldroyd, a Salt Lake City corporate attorney who also serves as a UITA trustee and belongs to the state business and economic development board, says HB 240 is "desperately needed."

Oldroyd, emphasizing he spoke as an individual, said he has witnessed a parade of promising Utah start-ups bought and moved out of state, or forced to close their doors due lack of local VC funding.

"I’ve had three of them just recently," he said, declining to identify the companies due to confidentiality constraints. "I’ve worked with a lot of start-ups with good Utah technology, and they simply run out of money, unable to get early-stage capital."

So far, no opposition to the idea has arisen, though once the final draft is presented sometime next week, backers suspect some raised eyebrows over the tax credit safety net provision.

One hurdle for HB 240 could be the powerful Utah Taxpayers Association, always leery of potential drains on public coffers.

"We do support sound tax policy to support economic growth," said UTA vice president Mike Jerman. "[But] we haven’t weighed in on this yet. When the bill does come out in its final form, we will definitely look at it."

However, HB 240 already has the support of the Utah-based Wasatch Venture Fund. The Salt Lake City VC consortium has invested more than $25 million in Utah companies over its eight years of existence, but knows much more money is needed.

Wasatch’s managing director, Todd J. Stevens, has been on board with luring out-of-state capital since 2000, when, as co-chair of Gov. Mike Leavitt’s venture capital panel, he urged formation of a VC enhancement fund.

"[HB240] is the right solution at the right time for Utah," Stevens said. "This bill will not guarantee that early stage Utah companies will receive funding. It simply gives Utah companies more turns at the plate to get a hit."

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