What’s Your Impact?
Dougall has kept the State Auditor’s Office primary mission as conducting financial audits, but wants to expand to auditing the performance of programs to see if they talk the talk and walk the walk as far as actually doing what they’re supposed to—including dealing with conflicts of interest and achieving legislated goals.
Dougall has considered the possibility that the FOF may indeed be ripe for a performance audit to see exactly how its taxpayer-backed investments have helped Utah’s economic landscape.
“A performance audit really looks into other factors,” Dougall says. “Like, how much are they really investing in Utah? How much are they driving the economy? How much is it complying with various aspects of the law?”
A former lawmaker and one of only two legislators to vote against approving the FOF for an additional $200 million loan in 2008, Dougall has long been skeptical of the Fund of Funds. He questions how effective the FOF can be, especially when the people who get to invest the money don’t suffer the consequences if their investments crap out.
“Whether it’s banking or the housing sector or whatever else, when someone else protects your risk, you get riskier,” Dougall says.
That’s a point Utah Capital Investment Board member Eccles says isn’t valid. He says that bad fund performances affect the reputation of venture-capital firms, and the diversity of the funds keeps too many taxpayer eggs from being in just one company, or basket, so to speak.
“The investment risk is mitigated when it’s diversified; that’s the whole point of people pooling money together,” Eccles says. “Sometimes, some companies don’t pan out. They may not get Google-type returns, but with [profitable investments], they all balance each other out.”
But the success of the FOF isn’t measured just by a return on its investments, but by what impact it’s brought to the state through wise investments.
Bridgewater says that if the FOF does indeed need taxpayer credits in the next five years, those costs will have been outweighed by the gains already realized in the Utah economy. Since its formation, the FOF has helped inject capital into 67 Utah companies, although seven of them are no longer active.
Bridgewater says that by surveying those companies, the FOF has determined that the companies have created 3,500 direct and indirect jobs. Seventy percent of the FOF’s local firms focus on early-stage development companies that otherwise struggle to get up and running.
But it’s unclear whether the FOF was instrumental in helping the now-successful companies grow and add jobs to the economy. While the FOF has committed $121 million to 28 venture-capital firms, which have spread that money to 67 Utah companies, in a recent Legislative committee hearing, the FOF’s Peterson explained that the FOF is “a very small percentage of the funds invested in most cases, and we’re less than 10 percent in all cases.”
Bridgewater says that by the FOF’s own analysis, about one-third of the 67 companies were definitely impacted by FOF funding; another third were somewhat impacted. Those estimates, however, aren’t based on an independent study, but on the FOF’s own estimations.
“It’s hard to track specifics,” Bridgewater says.
In 2012, the FOF had the University of Utah conduct an analysis of the FOF’s overall performance, which said the fund is performing “above the median” on returns, compared to other portfolios. As for economic impact, FOF touts itself as one of the best state-backed venture-capital programs. At the June Legislative committee hearing, Peterson showed lawmakers that the Utah FOF ranked in the Top 3 of 30 similar programs across the country.
And even that ranking is based on educated guesses. Bridgewater says that they determined that ranking by calling and asking other states about their funds and making their determination based on what information they could glean from other states. It was not possible to get complete data for a number of the other states’ programs.
“We know we are two to three times more effective than they are,” Bridgewater says. “We have not drawn any money, while other states have drawn anywhere from $5 million to $35 million at the high end.”
But Bridgewater says it’s not likely that Utah’s outperformance is thanks solely to the FOF, but is rather a result of the state’s already-strong economy. He points out that states like Oklahoma have had venture-capital programs operating for 20 years, but have supported only half the businesses Utah has.
For Oklahoma, “that may be a grand-slam home run, where we may only be hitting a triple just because our economy is so strong,” Bridgewater says. “So you can’t necessarily compare them on equal footing.”
But it’s hard to find firm footing with many of the statistics surrounding the FOF. On May 14, 2013, KUTV 2 ran a story on the lawsuit between the FOF and the State Auditor’s Office in which Bridgewater was quoted as saying that the fund was $7 million or $8 million in the hole. According to the report for 2011 given to the Legislature, however, the fund will have to begin drawing down on a $19 million debt in 2017, to be paid out over the course of four or five years.
In a July interview with City Weekly, Bridgewater said the number is more likely $15 million.
“It’s hard to put a sure number in the ground,” Bridgewater says. “If the public market opens up, that number could go down significantly.”
Winners & Losers
Another measure of economic impact is the companies themselves. But since those companies aren’t disclosed, it’s hard for policymakers to gauge the success stories.
In defending the FOF to the Legislature, fund VP Peterson did identify several success stories. The fund is proud of helping out companies like MediConnect, a health-care data company that in 2012 was acquired by publicly traded company Verisk Analytics for a net purchase of $348 million. Sera Prognostics has also been invested in by the FOF and has been hailed in various publications for its promising development of a test designed to predict complications during pregnancy and tell if babies will be born prematurely.
The FOF has also helped two local companies become publicly traded corporations. In the legislative committee, Peterson touted local Salt Lake City tech company Fusion IO and Park City-based headphone manufacturer Skullcandy as examples of companies that enjoyed major growth because of the FOF.
Going public is a measure of accomplishment for the FOF, and that’s generally when the FOF will sell off its shares in the company. Both investments, Peterson says, were hugely successful. But the current status of the companies calls into question their lasting impact on the local economy.
Skullcandy went public in the summer of 2011, and the FOF sold its shares of Skullcandy shortly after. Shares hit a high in the fall of 2012, trading at $16.66. But the company has since stumbled in its mission of expanding its product line, resulting in a California office being shut down. As of July 30, shares were trading at $5.62.
Fusion IO went public in June 2011 and originally claimed a $1 billion valuation. Shares traded well for the first five months, hitting a high of $39.60.
The company slipped in May 2013 when the CEO and COO made an unexplained departure from the company. According to Bloomberg, the departure was so that they could begin “pursuing new investing activities.” As of July 30, shares were trading at $14.91.
The FOF’s Peterson says the fund got a healthy return on the investments and the state also enjoyed an economic ripple effect. By being an early investor in Skullcandy, FOF firm Mercato Partners had .9 percent of the company’s shares by the time it went public in 2011.
“We helped take [Skullcandy] from 10 employees to over 200,” Peterson says. “You can’t really ignore that economic impact.”
The Game of Risk
The FOF isn’t just about distributing money. Bridgewater and Peterson host conferences for venture capitalists and entrepreneurs and bring big out-of-state venture-capital firms to Utah to tour factories and facilities and “kick the tires” on Utah investments.
While Bridgewater says he and his team are working on new “quantifiable metrics” to show the governor and the Legislature, he stresses that the FOF’s goal has always been as a matchmaker: marrying venture capital to entrepreneurial ambition, and even, in some cases, referring entrepreneurs to funds outside the FOF’s portfolio. They hope to implement a new round of investments by the end of this year.
“The role we play is to help the entrepreneur know where to go to get capital,” Bridgewater says.
For Rep. Jim Bird, R-West Jordan, however, the concern isn’t where the entrepreneur gets capital but where the FOF gets its capital. Bird, who has a background in securities, is highly skeptical of the FOF and recently called for a legislative audit of the fund.
During the June 2013 Business & Labor Committee hearing, the panel noted that the FOF’s 2011 report listed a “management fee” of $445,718. That sum would include salaries for administrators like Peterson and Bridgewater and other expenses, but did not break them out line by line.
“How much are those people being paid that are working for the FOF? Where’s that money coming from?” Bird asks. “They won’t even tell us that.”
While the report for 2011 that the fund presented to the Legislature didn’t identify salaries, the Utah Capital Investment Corporations tax documents filed as a nonprofit did show director Bridgewater being paid $92,750 and VP Peterson receiving $93,797. 2010 tax documents show previous director Jeremy Neilson receiving $193,000, while Peterson received $83,606.
At the June committee meeting, representatives had plenty of questions for the FOF spokesman and vice president, but the burning question for Rep. Jake Anderegg, R-Lehi, was, “Why in the heck are we doing this?
“I don’t think the taxpayers should be greasing the skids to induce investors for this or any group,” Anderegg said. “I think private venture capital or the private market can be doing this a lot better than we can. As soon as we get the shot, I think we should go ahead and defund this.”
Monson at the Sutherland Institute says the FOF’s lack of transparency fits a classic M.O. for these kinds of risky endeavors.
“If people know what’s going on, then people will know when things are headed south, and that’s when these things blow up for people,” Monson says. “It’s easier to do damage control when suddenly we’re issuing $200 million in tax credits and everyone’s wondering, ‘What’s going on?’ We didn’t get to question them all along, so, then you have your fall guy, you get rid of him and say, ‘Oh, everything’s different now.’ ”
Bird has big concerns about the FOF and plans to draft legislation about it in the 2014 session.
“We have issues trying to fund education as it is; now, we have something in place that if it goes badly, they’ll look to the education fund to fill the gap?” Bird asks. “Then education takes another hit—and that’s a problem for me.”