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

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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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