The Utah Funds of Funds is a State of Utah economic development program designed to increase the diversity and quality of capital available to Utah startups and growth companies. The fund is in the process of expanding from a $100 million fund to a $300 million fund in Q3 of this year. We recently sat down with the Managing Director of the Utah Fund of Funds, Jeremy Neilson, to find out more about the program, how the expansion is coming along and what kind of successes they are seeing from their initial fund.

Silicon Slopes:  Can you briefly describe the Utah Fund of Funds and its purpose?

Jeremy Neilson: The Utah Fund of Funds is a State of Utah economic development program aimed at increasing the amount of alternative capital to Utah’s start up and growth companies. The Utah Fund of Funds is a $300 Million program supported by the State of Utah. The State has not funded the program with dollars but rather has assisted the program in obtaining funding from a large institutional bank by providing tax credits to the program to use as collateral.

The Utah Fund of Funds invests the $300 Million in various venture capital and private equity funds that have a desire to look for investment opportunities in Utah. Currently, the Utah Fund of Funds has committed $100 Million to 20 funds, the investing of the subsequent $200 Million will begin 3rd Quarter 2008.

Of the 20 funds the Utah Fund of Funds has invested in; 35% are based in Utah, 65% are based outside of Utah; 45% focus on IT, 35% focus on Life Science and the remaining 18% on other, like consumer and manufacturing; and 49% invest in seed or early stage, 18% invest in expansion stage, 19% focus on late stage and 14% focus on buyout opportunities. These percentages reflect how the first $100 Million was invested and do not represent going forward targets.

Silicon Slopes: All signs indicate that the fund is exceeding expectations in terms of economic impact and opening doors for future investment in the state. Can you give a rundown of some of your successes?

Jeremy Neilson: The Utah Fund of Funds has gotten off to a great start. To date, 28 Utah companies have received investments from funds in the Utah Fund of Funds portfolio resulting in over 1,000 high paying jobs. Additionally, these 28 Utah companies have raised over $385 million dollars from all of their investors, $135 million of the $385 million came directly from funds in the Utah Fund of Funds portfolio. Finally, over 375 Utah companies have had the opportunity to visit with funds in the Utah Fund of Funds portfolio.

Silicon Slopes: Has the increase in the amount of VCs looking at Utah for deal flow translated into a more competitive investment environment, benefitting entrepreneurs with more funding options and better terms?

Jeremy Neilson: I would like to think so. It is hard for me to know the Utah Fund of Funds effect on individual transactions but the stories communicated to the Utah Fund of Funds staff reflect an increase in capital which has, in turn, provided a more competitive environment.

Silicon Slopes: The Utah Fund of Funds recently received approval for a $200 million expansion. How is the process of financing this additional $200 million going? Will your approach in this round be different than the Fund’s initial $100 million round?

Jeremy Neilson: Increasing the Utah Fund of Funds from $100 million to $300 million is moving forward. The current ‘credit crunch’ is making things interesting, but the Utah Fund of Funds will begin to invest in funds in 3rd Quarter 2008. Our approach on the second fund will mirror closely the approach on the first fund, which is looking for quality managers regardless of location and working hard to obtain a benefit to Utah from the investment.

Silicon Slopes: The Utah Fund of Funds does not require that portfolio companies open an office in Utah or contractually bind them to invest specified dollar amounts in Utah companies. What is the idea behind this strategy?

Jeremy Neilson: Research has shown that if you want to invest in the nation’s best managers, which help in obtaining a return on your investments, then you cannot have strict rules and burdensome compliance requirements in exchange for your investment. Therefore, if you want to have relationships with top investing talent and decrease return risk you cannot require offices or investment clauses. Furthermore, in reviewing other locations that have had more strict rules in exchange for an investment their economic development impact don’t appear to be as strong as the Utah Fund of Funds impact data. In short, our strategy seems to be working.

Silicon Slopes:  Are there any assurances that the portfolio company will invest the money they receive back into Utah or incentives to entice them to do so?

Jeremy Neilson: There are no assurances that money the Utah Fund of Funds invests into a fund will make it back to Utah. In fact, I am very confident that some, hopefully the number is very small, funds the program invests in will not invest in a Utah company.

The Utah Fund of Funds is about access to capital rather than an entitlement program that assures capital for Utah companies. With that said, the program has already seen a lot of success in obtaining investments in Utah companies. To date, the Utah Fund of Funds portfolio of funds it has invested in has already invested $135 million in Utah companies. Hence, the Utah Fund of Funds has committed $100 million to 20 funds that, as a group, have already invested $135 million dollars into Utah companies—Utah has already received its money back.

Additionally, of the out-of-state-based funds the Utah Fund of Funds have invested in, at least 50% have already invested in a Utah company. In short, we have great success from our investments on the impact for Utah front. Now we have to wait several years to see if returns are as successful.

Silicon Slopes:  How are your successes comparing with other state funds?

Jeremy Neilson: The Utah Fund of Funds believes it is a strong performer in comparisons to other state programs. A direct comparison with other states is difficult because you are often times not comparing apples to apples. Every state has its different strengths, weaknesses and development stages. For instance, it is hard to compare Utah to Oklahoma because of the difference in history, population and start-up environment. With that said, Utah appears to be a top performer in the area of jobs created and local companies invested in by its portfolio of funds.

Silicon Slopes:  It appears that you have a large list of firms applying for the Utah Fund of Funds program. What criteria are you looking for in determining which firms to ultimately fund?

Jeremy Neilson: The Utah Fund of Funds does get a number of firms applying for funds. The Utah Fund of Funds looks at two major areas before it pursues an investment. The first criteria is performance—the Utah Fund of Funds wants to invest top managers in an attempt to obtain industry returns. Earning industry returns will protect the Utah tax credits that back the financing. The second criteria is impact or fit with Utah. The Utah Fund of Funds spends a lot of time studying if a particular fund will have a high likelihood of making a Utah investment or if a particular fund will fill a funding gap that Utah companies traditionally have not had access to.

Silicon Slopes:  In your experience, what are some of the reasons interested VCs opt not to invest in Utah companies? Are there certain stigmas floating out there that we need to overcome?

Jeremy Neilson: In my experience, VCs are very willing to invest in Utah companies and when they opt out the reasons are rarely similar. Furthermore, the reasons they opt out are the same reasons they opt out when passing on investments in other locations. Utah as a start-up community can gain more experience, recruit and retain talent and become knowledgeable and reasonable with regards to valuation and fund raising methods.

My one suggestion to Utah entrepreneurs is to encourage them to become talented fund raisers which takes years of effort and consistent attention. Utah entrepreneurs should be diligent at building a large network of financers and then keep that network warm so that when fund raising needs occur fund raising is not an uncomfortable, foreign exercise.