The 2010 venture capital report for Utah is pretty similar to the WBI report of 2009, however, there are some notable exceptions. Since 2000, the good news is that venture capital, under management in Utah has increased 17-fold, from $ 200 million to almost $ 3.5 billion is still there; but dry powder (investable funds) has diminished. State sponsored Research and Development has increased dramatically with programs like USTAR and the Centers of Excellence; University-based entrepreneurship programs have exploded; angel groups abound; and a cadre of truly great service providers exists.
All that is true, but the economy has taken its toll. The Utah Fund of Funds’ executive director has left and the remaining $ 200 million in contingent tax credits remain unsubscribe. Also, COE is probably not going to fund any companies this year. In 2009, it was an awful (in every sense of the word) year to raise money for a venture fund, the worst in recent memory. On the upside, 2010 is looking markedly better.
Last year, homegrown high-tech economic development has gone from an economic cult, to the number one mainstream economic religion. In fact, in 2005 Utah was third in per capita venture capital investment and 2010 is looking pretty good. Don’t be fooled, it took 35 years of hard work by some great people to make it happen.
This is to say, Local stalwarts who have done the heavy lifting in financing the Utah tech community, “UV Partners, Epic Ventures, vSpring, Canopy Group and EsNet” successfully raised new money just before the 2008 collapse. At the close of 2007, Sorenson partners raised a new fund in 30 days. Rumor had it Peterson Partners raised its last fund in 30 minutes. There was Huntsman Gay, $ 1.2 billion first close. Zions Bank also contributes millions in venture debt in two and a half years, that’s a commitment and Silicon Valley Bank had opened a loan production office in Utah.
In 2008, Wayne Brown Institute had a record year. WBI Utah Alumni companies had $ 1.3 billion in sales, 6,200 employees, generated over $ 49 million in state taxes, and raised over $ 170 million in capital. According to the recent MWCN Deal Flow Report, 2009 is not as grim: venture investment was on par or a little ahead of 2008. While WBI Alumni companies were down in capital raised, exits exceeded $ 2 billion. It appears Utah is holding its’ own.
Everyone was a prophet in 2007, but now we’re in the middle of 2010 and the news media reports that the economic world overseas has ended (anyone who watches CNN knows this to be true). We’re now told it will be better, but the big question is: Will it? Whether it’s George Bush’s fault, or President Obama trying to centrally plan the economy, entrepreneurs and investors share the same traits: they still continue to be confused, scared, and tight with a buck.
When they peek out from under the covers, VCs are still seeking great deals.
In 1992, the venture capital industry invested approximately $ 2.2 billion in about 2,500 deals. In 2009, venture investment hit approximately $ 17 billion, which was still invested in about 2,000 deals. In 2010, venture capital investment is trying to hit $ 15 billion in about 2,000 deals. The amount invested changes, the number of good deals doesn’t.
Now class, pay attention: This is important
— Everyone’s still in trouble, including your competition
— Your product or service must deliver a real, immediate, bottom line return on investment to the customer
— Speed of lifecycle is greatly reduced
— Cash is still King Kong!
— Grow organically and position for a better deal terms and be prepared when the market improves
— Or, if you can get an up round, prepare to exit when the market improves
— Growing organically tends to produce lifestyle businesses, not big deals. Venture Capitalists and Entrepreneurs pick wisely.
— VCs raised more money in the first half of 2010 compared to the first half of 2009, but total dollars were still very small.
— VC returns for the last 10 years have been negative; this does not bode well for the future of the VC community and the creation of new VC funds.
— The Financial Reform Act will have a chilling effect on both angels and venture capitalists. How chilling remains to be seen, but the job creation engines of angel and venture investment clearly have not been incentivized.
What the Future Holds
Let’s cut to the chase. What you need to do: Have lots of sales and grow organically. Prepare yourself for an up round in 2010 or 2011 (deals with up rounds have gotten done in Utah in 2010). If you can get an up round now prepare yourself for an exit in late 2011, it will be glorious.
Rumor has it that VC funds are succeeding at raising money again. If the stock market reach and stay above 10,000, they will. My original forecast was for a $ 7-$ 10 billion venture industry in 2010 with some recovery after. It appears that was too pessimistic. At $ 15 billion to $ 20 billion seems more accurate. Don’t despair, that was the amount invested in 1997, in any case don’t worry. Unless you have a bad deal then you might be in trouble. However, in my opinion, many VCs are making questionable investment decisions. In an effort to survive, many hope that smaller, less risky deals (they delude themselves in thinking these are the next big thing) will build their portfolio returns with quick exits. This is opposite of the traditional model of Go Big, or Go Home.
In the meantime, take solace in the fact that Utah’s unemployment rate is only 7.2 percent rather 11 percent like California. Why? Because high tech entrepreneurship continues to save our bacon! In the first two quarters of 2008, VCs invested $ 120 million into Utah. In the first two quarters of 2009 they invested $ 119 million, less than a one percent drop. In Colorado, they were down 49 percent. However, in the first two quarters of 2010, Utah is down 32 percent, but our neighbor to the east is down 55 percent. Less than $ 45 million separates the two states. Not bad considering in 2000 that difference was over $ 2.5 billion. I don’t even want to talk about the rest of the intermountain states, they’re done. Did I mention that Utah keeps adding funds with new money? And there are at least three more funds in formation in addition to the three in 2009. Yes, of the 22 Colorado VC funds, only two have raised new money in recent memory. Maybe that’s why I’m seeing so many Colorado service providers hunting for work in Utah.
You’ve got to love those Angels! My goodness, Utah’s angel groups are very active. According to a 2009 study completed by WBI, the angel groups in 2008 and 2009 invested almost $ 14 million in 55 deals.
Yes, you’ve still got to work harder and smarter, so what else is new? So do it!