Colorado’s $100 Million, or $150 Million, Venture Capital Mystery

Call it Colorado’s $100 million—or is it $150 million?—mystery. That’s part of the mystery too.

Gov. John Hickenlooper on March 6 told members of the media the state of Colorado is about to create a $100 million or $150 million state-backed venture capital fund. The news came during a media briefing during a visit to the annual “Venture Capital in the Rockies” winter conference, held at the posh Beaver Creek ski resort.

For Colorado entrepreneurs who think the state has a VC shortage—and that’s a widely held view—it was welcome news. But after the stories covering Hickenlooper’s announcement ricocheted around social media and were picked up by local media, the story seemed to disappear.

Subsequent conversations with state officials, leading Colorado-based VCs including the manager of the existing state VC funds, and entrepreneurs at the conference suggest Hickenlooper might have committed a faux pas common at Beaver Creek by getting out over his skis.

First, a recap.

Hickenlooper was at the VCIR conference to deliver the keynote address. Reporters from major national tech and VC blogs covered the conference, and Hickenlooper met with them that morning.

According to their reports, Hickenlooper said the state is in the process of creating the new fund. It would make early stage and late stage investments and, according to one report, would be managed by the state.

Hickenlooper reportedly said the state retirement fund will be a limited partner, and that other investors would include tech companies and CEOs. Officials had created a draft plan for the fund’s legal structure, and the goal is to launch it this summer, according to the reports.

Hickenlooper did not mention the fund in his keynote speech, meaning conference-goers learned about it from the media.

Since the story broke, state officials have been quiet about the proposal.

No press releases appear to have been issued by the Governor’s office or any other state agency. The state Legislature is in session, but there’s no evidence a bill related to a fund has been introduced. The state Senate just approved the $20.5 billion budget, but the announcement from the Democratic majority makes no reference to the fund despite promoting other economic development initiatives.

Inquiries to the Governor’s Office have not yielded information either. It referred questions to the Office of Economic Development and International Trade. Neither provided details or a recap of what Hickenlooper said.

“We hope to have more details available this summer regarding the potential VC fund which we will share as they are available,” the office’s spokesperson Kathy Green wrote in an e-mail.

So, what’s up with the tantalizing mystery fund? Not many people know, including VCs and entrepreneurs who attended the conference.

Hickenlooper discussed the fund with reporters before giving his keynote address, but neither he nor other state officials presented details of the plan to the conference, according to Chris Marks, a conference co-chair.

Marks is a partner in Boulder-based Tango, a private investment firm. He also is a partner in High Country Venture, the independent Boulder-based firm that manages the state’s existing venture funds, which total about $50 million.

He said the governor and his staff left soon after his speech without answering questions.

“No one really got a chance to follow up and ask him to flesh it out in any detail,” Marks said.

State officials haven’t given other Colorado VCs many details either, according to Foundry Group managing director Seth Levine.

Levine learned about the proposed fund through media reports. Conversations since suggest the plan was not as developed as it seemed.

“It’s pretty unclear right now what Hickenlooper is thinking. I wasn’t at the meeting where he made the announcement, but the reports from that meeting indicated that he described a fund managed by the State of Colorado that would make direct investments into startups,” Levine wrote in response to questions e-mailed to him.

“Since then it’s come out that the idea of a state fund of some kind hasn’t been fully vetted and that there are a number of ideas under discussion.”

Levine wrote that Foundry Group recently closed its third $225 million fund and is not looking for new investors.

Levine’s initial reaction was negative, and he said so on Twitter. His pessimism was based on a report suggesting state officials would manage the fund and pick companies to invest in.

“I think a state trying to stand in for what is a fluid market such as this is a mistake—the State of Colorado shouldn’t be trying to replace a market that already exists. Direct state management of a venture fund is a bad idea (and previous attempts at that across the U.S. have proved this out),” Levine wrote in the e-mail interview.

States and VC firms have interests that do not necessarily align, with elected officials focused on jobs and VCs looking at the financial return.

But they can work if the fund is set up carefully, Marks said.

High Country Venture is designed so its partners, and not the state, call the shots on investments, Marks said. It has a few restrictions, like the $250,000 minimum and $3,375,000 maximum it can invest in a company.

Some of HCV’s investments look like winners. It invested in Lijit, a Boulder-based Web analytics startup that San Francisco-based Federated Media bought for an undisclosed price in 2011. According to a reporter covering Federated Media, Lijit, which remains in Boulder, has been a stellar performer in what has otherwise been a rough year for the company.

High Country Venture also has invested in LogRhythm, a Boulder-based company that monitors network security logs and preemptively blocks intruders. LogRhythm has raised $27.5 million through four rounds.

The relationship between High Country Venture and the state is working pretty well, Marks said.

“They understand that the rewards will come, that you have to be patient and nurture things over time,” Marks said. “It requires some time, and it requires a learning process, but the goals can be aligned.”

In addition to problems like possible political interference and inexpert state officials making poor investments, some state funds have catches that drive VCs and limited partners (LPs) away.

Funds with a lot of strings attached are not appealing to good fund managers because they are able to raise money from traditional LPs like pension funds without strings attached, Levine said. Levine, who is an advisor to HCV, said the state was fortunate to find good managers.

“I think the state really lucked out in finding such a qualified manager given the size of the fund they put together and the management fees that such a fund size can support,” he wrote.

Marks said that LPs shy away from joining states in a fund because they don’t want to be bound by state restrictions. Other VCs are willing to invest in companies alongside HCV, though.

State officials seem to be aware of the problems and want to avoid them, at least according to what seems to be one of the few public discussions of the potential fund.

Jeff Kraft, director of business funding and incentives for the economic development office, was a panelist at a March 21 Silicon Flatirons conference about the investment climate for entrepreneurs.

“There are a lot of people at this table who are much better at that, picking deals,” he said.

Kraft was asked directly about Hickenlooper’s comments during the question-and-answer period.

“At this point, I’m not going to say much more about the fund, because it has not been fully structured yet,” Kraft said.

Kraft did go on to say the state would be likely to find an independent private manager or possibly create a fund-of-funds with multiple managers.

So, what do entrepreneurs need to know? State officials support the idea of a fund, but important details such as its size and who manages it remain to be determined. They also could impose restrictions that could hinder the fund’s effectiveness.

In the meantime, High Country Venture has about $12 million to invest, Kraft said.


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