‘Utah Innovation Lab’ would be a state-sponsored angel investor for university startups

Legislation would create a nonprofit to take early stakes in companies, most of which don’t pan out.

(Francisco Kjolseth | The Salt Lake Tribune) Lassonde Studios on the University of Utah campus in Salt Lake City on Thursday, Oct. 27, 2022. The Utah Legislature is considering a bill to create a Utah Innovation Lab that would fund startup businesses coming out of university entrepreneurs at Lassonde and elsewhere.

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

They call it “the valley of death.”

In the technology startup world, it’s the gap in funding between the federal grants that fuel research at universities and the venture capital that funds startups when they’re starting to scale up.

Can a state-created nonprofit be the angel investor that walks the state’s tech entrepreneurs through the valley of death?

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

The lab would start with $15 million, but it wouldn’t just be giving it away. It would be buying equity in the startups, becoming part-owners of the ventures.

Even the proponents of the plan acknowledge that not every investment is going to yield a return. Most in the valley of death do, in fact, die.

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

But the hope would be that the lab chooses enough successful projects — projects that provide a return on the Innovation Lab’s equity — that it will be self-sustaining with no further outside funding.

The legislation says the lab would start with a $15 million allocation from Utah’s “fund of funds,” which is a remnant of an earlier effort to encourage startups in Utah. Started during the Gov. Jon Huntsman administration, the fund of funds was created with private seed money that has since been paid back. The money in the fund of funds is investment income and did not come from taxpayers, lab backers say.

“That’s the beauty of how it’s being funded,” said Dan Hemmert, former executive director of the Governor’s Office of Economic Opportunity who was instrumental in setting up the Innovation Lab plan before he left state government at the end of 2022. “It’s not a direct appropriation of taxpayer dollars.”

Even the tax watchdogs at Utah Taxpayers Association are fine with it. UTA President Rusty Cannon said the association generally doesn’t like government “in the business of business,” but the fact that the seed money didn’t come from taxpayers is enough that his association is not opposing the bill.

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

Stenquist recently offered a substitute bill that added a representative of the World Trade Center in the hope of encouraging more international interest in the lab.

Board members will be unpaid, and they would not vote on projects where they have a conflict of interest. Stenquist said the lab will also produce regular reports on its investments.

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

(Utah Valley University) An initial rendering of the new engineering building that will come to Utah Valley University, with construction expected to be done by fall 2025. Supporters of the Utah Innovation Lab say it will provide seed money for startups at all of Utah's public universities.

The creation of a separate nonprofit is intended to avoid a conflict with the Utah Constitution. Article VI, Section 29, says the state cannot “subscribe to stock or bonds in aid of any private individual or corporate enterprise or undertaking.” But the same section also offers an exception, allowing the state or a state university to have an ownership interest in a company if that interest was obtained as part of a deal to license the university’s intellectual property.

For years universities have had licensing deals with private companies for many of the technologies generated on campus. The schools generally hold the intellectual property rights, including patents. High-profile companies like Myriad Genetics and bioMerieux pay licensing fees to the University of Utah. Startups funded by the Innovation Lab could have similar licensing deals, although they have to get products to market for the universities to realize any licensing income.

Marmer said prospective investment opportunities from the U. would get a “fairly robust vetting process” before they were presented to the Innovation Lab. “These are not deals that would be looked at for the very first time.”

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

“Why this bill has traction is because the kinds of jobs it creates,” Cullimore said. Utah has a higher percentage of the workforce in life sciences than any other state, and those jobs generally pay 50% more than the state’s average wages.

The lab’s supporters say other states — and other state universities — often hold equity positions in technology spinoffs from their universities. Marmer pointed to Pennsylvania’s Ben Franklin Technology Partners, which has financed tech startups in the state for 40 years.

Everyone involved with the creation of the lab is quick to distance it from an earlier effort at tech transfer: USTAR. The Utah Science Technology and Research Initiative was created to support technology transfer with 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 the Utah Legislature shut it down in 2020. The buildings have been repurposed for other research.

Innovation Lab proponents promise that the independent board will be free from political considerations and will make investments that are financially grounded. There are also no plans to build buildings.