Coalition creates Ariz. Fund of Funds to build investment pool for startups

October 13, 2009

By hammersmith

A coalition of private-sector groups and venture capitalists has joined with the Arizona Economic Resource Organization (AERO) in an initiative to raise $200 million to invest in Arizona startup companies in the biosciences and other high-technology sectors.

The Arizona Fund of Funds will recruit investors, aggregate funding, and reinvest it in several venture-capital funds that agree to back early-stage Arizona firms. Sun Mountain Capital, an investment firm based in Santa Fe, N.M., has been retained to establish and manage the Fund of Funds.

“This initiative will arm the science and technology leaders in Arizona with significant capital investment at a time when we must focus on strengthening businesses and diversifying our State economy,” said Bill Hardin, an AERO board member and an attorney at Osborn Maledon in Phoenix.

“Arizona has impressive technical and scientific resources, but it has been challenging for many innovative, Arizona-based companies to find the capital they need to grow,” said Brian Birk, managing partner of Sun Mountain Capital. “The Arizona Fund of Funds will help alleviate this situation by deepening the local capital pool.”

Economic-development advocates described creation of the Fund of Funds as an important step forward for Arizona. Around 40 states already have programs similar to the Fund of Funds in place. In many of those states, legislative appropriations provide money to the funds.

“We are one of the last states not to have this type of fund,” said Sal Rivera, AERO’s executive director, in the Arizona Republic.

Given Arizona’s tight budget circumstances, supporters of the Fund of Funds have not turned to the state for dedicated support, despite the urgent investment needs of startup firms and the potential payoff for the state as a whole.

“Enhancing Arizona’s global competitiveness by accelerating the pace of discovery, innovation, and technology business development has never been more critical,” said Donald E. Cardon, director of the Arizona Department of Commerce. “We must be aggressive in securing a stronger economic future and better jobs for Arizonans.”

As Arizona’s Bioscience Roadmap has noted, the relatively small size of Arizona’s venture-capital community has presented a persistent challenge to the state’s bioscience sector. In the past, venture firms outside the state have sometimes waited to invest in Arizona startups until in-state funders show confidence first, a tendency that has hampered some firms’ growth.

And in the current economic climate, firms outside the state will likely be even more cautious in their investments. The National Venture Capital Association reported recently that venture funds raised only $1.6 billion in the third quarter of 2009, compared with $8.5 billion in the same quarter a year ago. Under such circumstances, the investments of contributors to the Fund of Funds should carry added weight.

Larry Hecker, board chair of AERO and principal of the Tucson law firm Hecker & Muehlebach, noted that in addition to supporting Arizona firms trying to gain a foothold, the Fund of Funds will also be in a position to support firms from outside the state that move their operations to Arizona.

“It could result in the relocation of valuable, expandable companies and the creation of high-skill, high-wage jobs,” he said.

Eric Tooker, one of the managers of the Translational Accelerator LLC (TRAC), a $20 million venture-capital fund launched last year that focuses on early-stage bioscience companies, agreed.

“TRAC has looked at close to a dozen companies located outside of Arizona that indicated a willingness to relocate to Arizona if we provided funding for them,” Tooker said. “This is a very good indication of the likely success the Fund of Funds will have in attracting new businesses to Arizona.”


For more information:

$200 mil sought for Ariz. startups,” Arizona Republic, 09/27/2009

Sun Mountain Capital to manage Arizona fund of funds,” Arizona Economic Resource Organization news release, 09/27/2009