howardnlby Howard Stephenson
One of the most controversial measures to be enacted at the recent session of the Utah Legislature was HB 240 – Venture Capital Enhancement Act. Passage of the bill was highly criticized by some who questioned whether it is the proper role of government to get into the business of guaranteeing risk capital formation. Proponents claimed that this tool is essential to ensure that Utah high-tech startups are able to expand in Utah rather than going to states which have greater venture capital resources.

As I began to study this issue, I felt HB 240 was a bad idea – along the lines of the previous Utah Technology Finance Corporation (UTFC) – which essentially allowed a committee to decide which companies would get the blessing of taxpayer-funded financing. But after seeing the kinds of safeguards and market forces that are built into HB 240, I became convinced that it is an important tool to create the “critical mass” of venture capital in Utah to keep start-up and expanding high growth companies and jobs in Utah.


The measure establishes a $100 million “fund of funds” created by investors who want specific, safe levels of return. These investors might include utilities, retirement funds, banks and other conservative investors. The Utah Fund would then be made available to venture capital firms to invest, in combination with their own capital, in high tech, high growth Utah companies which currently have difficulty expanding in Utah due to the scarcity of venture capital.

The fund would not be created through an appropriation of state funds like the former UTFC, but rather through a contingent tax credit for potential losses to the conservative investors who capitalize the fund. These investors would receive a return of say, 5% as determined by the professional fund manager. The difference between the 5% payout and the historical yield of 16% to 26% in venture capital investments would keep the fund’s conservative investors from having to access the tax credits. The excess of returns over payouts would go into a reserve account to ensure the 5% payout to investors in the event any of the investments don’t pan out.


Utah legislators were told that Oklahoma has had a similar fund in place for eleven years and has not cost the taxpayers of Oklahoma one dollar since its inception. At the same time, Oklahoma has been a place where startups and expanding companies can remain, without watching companies and jobs leave the state. Oklahoma has provided $41 million in new venture capital which has been matched three to one with participating venture capital firms, attracting eleven new venture firms to the state.

Utah has a history of creating great start-up companies, only to see them leave the state, along with very attractive jobs, due to lack of capital. Examples of this include Iomega, which moved its headquarters to San Diego, Novell, which moved key operations to Boston, and Megahertz (3Com) which now has only 90 employees left out of 1500 former Utah employees. Proponents of HB 240 also pointed to the loss of Utah companies through acquisitions, including Campus Pipeline, Found, DoBox, Cirque, DotOne, and BlueStep.

I have always opposed business incentives which play favorites, or which incent economic activity which would have otherwise occurred in Utah. That’s why I have opposed local redevelopment agencies in most cases because there is usually no net new economic activity to the State of Utah from tax incentives for development of retail stores, office buildings, or industrial parks. The construction of these facilities occurs as a result of natural market forces.


But I do realize that there is a war among the states for economic activity. That’s why Utah provides a sales tax exemption for manufacturing equipment. If we did not provide that exemption, some of the economic activity resulting from either retaining existing manufacturers or attracting new or expanding manufacturers to this state would not occur.

This war among the states for economic activity is why legislators passed HB 240. Legislators were convinced that Utah must have a “critical mass” of venture capital to keep the high growth companies here that need to expand, or to keep budding companies that require venture capital from leaving the state. Legislators were convinced that the creation of an adequate pool of venture capital is not likely to occur very rapidly in Utah without the kind of limited government involvement provided by HB 240.


But in the final analysis, HB 240 is not really about venture capital or even start-up high growth companies. The real reason for supporting this measure has to do with families. We must provide the breadwinners of Utah with the kinds of jobs that make for strong families. We must ensure that our children have the kinds of jobs they need to stay in this state. It’s not enough for us to pay among the highest taxes in the nation to educate our kids only to have them move to states which have the critical mass of venture capital to establish these kinds of jobs. We do have a war among the states for this kind of activity.

In 1980 Utah’s average annual wage was 96% of the national average annual wage. Today that has dropped to 82% of the national average. We cannot afford to stand by while Utah’s relative earnings continue to drop.


If you want to learn more about HB 240, you may wish to attend the Utah Taxpayers Association’s annual post legislative conference on April 24, from 8:00 a.m. to 1:30 p.m. Former Olympic CFO and current venture capitalist Fraser Bullock will be explaining the reasons for passage of HB 240 and how it will be implemented. For information on registering for the conference, go on the web to .