Utah Innovation Lab would be a government-sponsored angel investor for college startups

The legislation would create a non-profit organization to take early stakes in companies, most of which are unsuccessful.

This story is part of The Salt Lake Tribune’s ongoing commitment to finding solutions to Utah’s biggest challenges through the work of the Innovation Lab.

They call it “the valley of death”.

In the world of tech startups, it’s the funding gap between the federal grants that fuel research at universities and the venture capital that funds startups as they begin to scale.

Can a state-founded nonprofit be the angel investor guiding the state’s tech entrepreneurs through death valley?

That is the intent of Rep. Jeff Stenquist’s HB42, a bill creating the Utah Innovation Lab. The Draper Republican proposes an independent nonprofit that would invest in startups at the “pre-seed” stage before venture capitalists are willing to jump in.

The lab would start with $15 million, but it wouldn’t just give it away. It would buy stakes in the startups and become part owners in the ventures.

Even the plan’s proponents concede that not every investment will pay off. Most in Death Valley actually die.

“Most startups fail,” said Keith Marmer, chief innovation and economic engagement officer at the University of Utah. “Most companies that we start don’t make it far enough to bring a product to market.”

But the hope would be that the lab selects enough successful projects — projects that offer a return on the innovation lab’s equity — that it is self-sustaining without further external funding.

The legislation said the lab would begin with an allocation of $15 million from Utah’s “fund of funds,” which is a holdover of previous efforts to nurture startups in Utah. The fund of funds was created during Gov. Jon Huntsman’s administration and was created with private seed money that has since been repaid. The money in the fund of funds is investment income and doesn’t come from taxpayers, say the lab’s supporters.

“That’s the beauty of funding,” said Dan Hemmert, a former executive director of the Governor’s Office of Economic Opportunity, who was instrumental in setting up the Innovation Lab plan before leaving the state government in late 2022.

Even the tax watchdogs at the Utah Taxpayers Association agree. UTA President Rusty Cannon said the association generally doesn’t like government “in business,” but the fact that the seed money doesn’t come from taxpayers is enough for his association not to oppose the law.

Whether the lab succeeds or fails would depend largely on its board’s ability to pick winners. Stenquist’s bill calls for a board of directors with university representatives and members of the private sector with expertise in areas where technology transfer holds promise. These include software, life sciences and the defense industry.

Stenquist recently offered a replacement bill, which added a World Trade Center representative in hopes of attracting more international interest in the lab.

Board members are unpaid and do not vote on projects where they have a conflict of interest. Stenquist said the lab will also provide regular reports on its investments.

“The state is already investing in this research. This gives us an opportunity to actually make a return,” he told the House Economic Development and Workforce Services Committee last week.

Forming a separate nonprofit organization is intended to avoid conflict with the Utah Constitution. Article VI, Section 29 states that the State may “subscribe stock or bonds for the benefit of any individual or corporation or corporation”. However, the same section also provides an exception that allows the state or a state university to have an ownership interest in a company if that interest was acquired under an agreement licensing the university’s intellectual property.

For years, universities have had licensing agreements with private companies for many of the technologies developed on campus. Intellectual property rights, including patents, usually belong to schools. High-profile companies like Myriad Genetics and bioMerieux pay royalties to the University of Utah. Startups funded by the Innovation Lab could have similar licensing deals, although they need to get products to market in order for universities to generate royalties.

Marmer said potential US investment opportunities go through a “fairly robust screening process” before being presented to the Innovation Lab. “These aren’t deals you look at for the first time.”

Kelvin Cullimore, president and CEO of BioUtah, a Utah life sciences industry trade association, acknowledges that the startup world is risky, but he expects the lab’s investment to be in the $100,000 range. This allows the lab to make many small investments in the hope that some of them will pay off.

“Why this law is gaining traction is because of the type of jobs it creates,” Cullimore said. Utah has a higher percentage of the life sciences workforce than any other state, and these jobs generally pay 50% more than the state’s average wage.

The lab’s supporters say other states — and other state universities — often have equity stakes in technology spin-offs from their universities. Marmer pointed to Ben Franklin Technology Partners in Pennsylvania, which has been funding tech startups in the state for 40 years.

Everyone involved in the lab’s founding is quick to distance it from a previous attempt at technology transfer: USTAR. The Utah Science Technology and Research Initiative was formed to support technology transfer through taxpayer-funded grants. USTAR even built laboratory buildings at the University of Utah, Utah State University and Hill Air Force Base. USTAR had a rocky history and was shut down by the Utah Legislature in 2020. The buildings have been repurposed for other research purposes.

Innovation Lab proponents promise that the independent board will be free from political considerations and make financially sound investments. The construction of buildings is also not planned.