Nurturing Lead Active Capital in Alaska

Connectivity,Collaboration and Technology transfer

2004-10-12T11:52:00.000-07:00

Greetings Ken,
Your expression of interest in co-sponsoring some type of educational event or competition for Alaska business students using the NASA Cap 1 and Cap 2 databases is very interesting. Several folks have asked what the Cap 1 and Cap 2 databases are and if there are any identifiable technology transfer successes that students and/or entrepreneurs could refer to to get a better appreciation for the opportunity. Any comments or suggestions?

connectivity

2004-10-08T15:41:00.000-07:00

I know there are discussions of proximity issues. What is the connectivity between Fairbanks and Anchorage? Is ther good connectivity between the universities in these locations and other universities in the northwest?

If this needs to be improved that maybe a second area we can focus on. Alaska benefits from being 9 hours from everywhere. With good connectivity, technology, and a few young business types we should be able to generate some diversity in the economy.

Introduction

2004-10-06T01:35:00.000-07:00

Hi,

I am the newly appointed Dean at the School of Management at UAF and I am extremely interested in community economic development. We are currently working on several projects that we believe will ultimately benefit Alaska.

My contact information is below.

Wayne Marr, Dean School of Management (SOM)
University of Alaska at Fairbanks
(907)-474-7916 (Direct) 512-468-4550 (Cell)
wayne.marr@uaf.edu www.uaf.edu/som

--------------------------------------------
The School of Management (SOM) will be a nationally recognized School educating future generations of Alaskan leaders in collaboration with business, non-profit organizations and the community; the School will produce quality research, emphasizing issues of importance to the Circumpolar North.

Thank you,Peter

2004-09-28T23:03:00.000-07:00

Greetings Peter,
I posted a response to your posting under comments. Few people realize that there is a comment section on the bottom of each message so I thought I would bring this to everyone's attention. I took the liberty of sharing your resume as well since I would like to see you become a more active part of the lead active capital network in Alaska. Thanks again for sharing.
Regards
Allan

Alaska Perspectives...

2004-09-28T10:21:00.000-07:00

First, thanks to Allan for inviting me to join this blog and also for supporting my current Alaska-related activities.

Having had the opportunity to spend some significant time in Alaska since last January, I've met a number of tech companies as well as consultants and assistance providers. One thing is certainly true. Alaska has no shortage of smart people who love the state and want to help it prosper.

I have had the good fortune to work in two states that have economic landscapes similar in many ways to Alaska. They are Montana and New Mexico. Specifically, these states are relatively large, sparsely populated, and have historically had economies dominated by natural resources exploitation. Tourism has more recently emerged as a focus for economic development.

In both Montana and New Mexico, there is a drive to diversify and grow their economies by supporting techn0logy-driven economic development. There have been modest successes in both states. Here are some of my observations.

Tech-driven economic development requires technology, capital and people, as we all know.

Both Montana and New Mexico have struggled to attract venture capital. New Mexico has achieved some success by implementing a state program which will invest into funds that set up an office in NM. There are now 7 or 8 VC firms in NM, and all have made investments in NM. To my knowledge, Montana still does not have a fund. If you are interested, I can provide you with more information about the NM program.

Both Montana and NM are technology rich. Montana State University in Bozeman is an active partner in tech transfer and economic development, and has a strong research base. In my opinion, Bozeman is the center for high tech in Montana. Right Now Technologies raised venture capital from outside the state, just went public, and will likely produce spinoffs.

NM has several strong universities, including the U of NM in Albuquerque. UNM also is an active partner, if not leader, in economic development and has a strong research base including a medical center. Of course, NM also has Los Alamos and Sandia national laboratories, both of which do more than a billion dollars in research a year. A number of companies have raised venture capital and have gone public in NM. In one case, local investors backed a seasoned entrepreneur with only a fuzzy business plan because they believed in the person.

Having said all that, raising venture capital in MT and NM is still difficult. Even the funds in NM are pretty much just Series A guys. Funds outside the state are looked to for follow-on rounds. But funds outside have enough deal flow that they don't need to travel to MT and NM for deals. There is a history of companies being formed in Montana and NM and then being forced to leave. It seems to me that Alaska faces the same problem.

However, in the cases of MT and NM, in my view the most critical limiting resource is still people. Not just smart people with good ideas, but people that investors are willing to back. Although one can point to a lack of capital in Alaska, my feeling is that investment is always available to fund good deals. Admittedly, the deal may spawn in Alaska and then be forced to leave to get funded, but if enough deals are spawned, some will stick. Then one or two big successes will help to build critical mass. Its a long term program.

In sum, I see Alaska having two primary liabilities. The first is a limited number of entrepreneurs whom investors view as "fundable". The second is, with respect to tech-driven business, the location of your primary research university and perhaps its weak connection with your efforts. In any case, small tech companies usually need, or at least can benefit from, access to and the support of the local research university and since most of these are in the Anchorage area, UAF is not easily accessible. Moreover, in both Montana and NM, ideas generated within the universities are the seeds of new start-ups.

Secondary issues, I believe, are the lack of venture capital and Alaska's distance from the lower 48.

Ken Dozier's idea to mine the business schools is a good one. Montana State U is doing some of that. Los Alamos National Lab is also recruiting from top biz schools. Obviously, the more seasoned biz school graduate may be more successful in attracting investment.

Thanks for giving me the opportunity to share my thoughts and I hope to have an opportunity to continue to stay connected with and to support your efforts.

Best wishes,

Peter Perna

ALPINE STRATEGY GROUP, LLC
P.O. Box 4950
Boulder, CO 80306
ph/fax: 970-259-9276
mobile: 505-250-9337
www.alpinestrategy.com

FLC

2004-09-06T20:55:00.000-07:00

I am headed to the FLC I am speaking on the commercial assment process and I will be discussing the concept of mining for talent in the B schools of states that want to develope new technology clusters. I will see if I can get DoD, DoE and similar labs interested in the approach.

Thanks Ken

I got on

2004-09-02T19:48:00.000-07:00

The last two time I tried to access, things just hung. Got right through this time. Anyway. I will making a presentation at the FLC conference on the Commercial Assesment Program. I will also briefly mention that we are looking at building an online entreprenuerial progam and ask the other Federal Labs if they would like to throw some technology in the mix.

I think they will like to have some contact with the students and also look to gain some information on their technology. I suspect most are too busy to do the CAP.

Thanks Ken

Technology

2004-08-24T11:03:00.000-07:00

What did Bill Gates invent? Nothing!! His daddy purchased a small software company for him, he licensed soem technologies from Xerox and he hired the old Vax operating system team. All of these are examples of technology treansfer.

After discussions with Allan yesterday we decided to explore the creation of a mechanism to discover some "Bill" type folks in Alaska.

Through my NASA Far West Regional Technology Transfer Center we can create a portfolio of existing NASA technologies that are matched to the needs of Alaska. Students in Alaska's business schools can use exiting online tools to knowledge mine the Internet and prepare commercial assesments of this IP portfolio. The commercial assesment reports can then be used to award prizes to the most promissing young "Bill's or Billie's".

Any thoughts?
Ken

Startup perspective - Lance Ahern

2004-06-21T15:48:00.000-07:00

Allan, thank you for inviting me to share my thoughts.

I've read -quickly- through the previous posts. Many good thoughts and much experience are evident; enough to support a variety of discussion threads.

I can't contribute anything from the perspective of a financial professional, which has been the focus of discussion thus far. I also can't speak to resource development opportunities. My focus is limited to technology startups.

The 8(a) market is interesting - Pat and I worked together briefly. In terms of venture funding any particular deal, each particpants' goal (return vs. revenue vs. economic development) needs to be on the table up front. My concerns re: 8(a) are the potential closing of the ANC window in ~5 years, the stability of leadership from equity partners, market maturity and growing competition, and the tight margins on all government contracts that will strongly impact potential exit events. Allan and others have good ideas that address some of these issues. It is unlikely that I will be involved in an 8(a) again - I simply don't see the long term value for myself.

In terms of "deal flow" I've seen a few dozen interesting prospects since returning to Alaska two summers ago (I'll meet with any geek who buys lunch.) Some teams didn't have IP or other business issues resolved, some business folks didn't have enough technology in hand. Few teams were targeting a large enough market to justify my involvement.

(I should add that when I was at the Panasonic incubator in San Jose I met with numerous teams that the incubator was looking at, and tech startup issues here are no different from the Valley.)

I know I'll have another tech startup in Alaska. First and foremost, my wife is already supportive (we both know we'll never retire to the life we want on a paycheck.)

Second, there is no shortage of opportunities that have a global scale that can be addressed by an Alaskan company. At Fort Nocs we attempted to address one such opportunity. A major reason we failed is that we failed to raise local funding, and then waited too long to move the company to Silicon Valley (we finally relocated in March 2000, preceding the Nasdaq crash that April.) Yes, there were lesser issues, but two competitors were bought by eBay, and Verisign purchased Signio for close to $1B - there was a strong market for the payment business. I greatly appreciate our Alaskan investors, but if we had raised local funds -outside my investment- prior to relocating things could have been very different.

I see a lot of value in the structure Allan is proposing. One size does not fit all, and a structure that supports resource development projects may not be appropriate for tech startups. But long term local private capital (seed, LBO, etc.) can only help future Alaskan companies and investors compete and succeed in a global economy.

Lance
lance@fortnocs.com
907-770-7940

Venture capital in Alaska

2004-06-21T12:14:00.000-07:00

Allan,

As an inventor and entrepreneur, I'm very interested in seeing a venture capital community develop in Alaska. Thanks for inviting me to join this list.

Best,

Alex Hills

Venture Capital Investments In Alaska

2004-06-18T18:01:00.000-07:00

My name is Corey Lavinsky and I'm here at the invitation of Allan Johnston. I'm the CEO of Growthink Research, a venture capital research firm in Southern California. We publish reports that detail equity investments in private, U.S.-based companies. We also use our huge database of funded companies to perform research projects in various fields.

We have both a proactive research team and a network of regional contacts that provide us with information about newly funded companies. We love finding companies that haven't issued press releases or haven't been covered in other published sources. To date, however, our track record in finding Alaska-based companies that have raised capital has been subpar. If you guys can keep me posted regarding Alaska-based investments, it would enable me to represent Alaska more accurately in our reports. Any assistance would be greatly appreciated.

Corey Lavinsky
Growthink Research
corey@growthinkresearch.com
www.growthinkresearch.com
(310) 823-8346

San Francisco Alaskaphile & resource

2004-05-19T16:49:00.000-07:00

I’m new to this discussion list and blogging. But it’s interesting already, thank you Allan Johnston for the invitation to join!

Years ago, through my firm Redwood Capital (http://redcap.com), I did business in Alaska, and I’ve always dreamed of doing more. I don’t yet have an opinion on whether an Alaska domiciled VC or private equity firm makes sense. But I’d note there are many established VC, private equity, and industrial firms that are willing to partner with others, usually irrespective of geography, so there is no lack of capital.

Does Alaska have the deal flow to support a traditional VC or private equity firm’s way of doing business and fee structure? If not, and given the variety of transactions in Alaska, can a structure/operating model be devised that would be responsive to the needs of the market at a sensible cost? Would the operation's parts be aligned so it would have a good chance of working as intended?

I’m pleased to be a resource any way I can for list members. An entrepreneur, my background includes significant experience in the business of equipment leasing and early stage company financings including angel and venture capital. The 8(a) industry is intriguing, and would be interested to hear of related opportunities.

Review of the discussion--Kevin Wiley

2004-05-18T17:45:00.000-07:00

Allan-

Thank you for allowing me to walk along the most interesting paper trail you sent over. Though I am largely echoing that which has been said, a couple things come to the forefront for me:

First, I feel that both Barbara and Bob are right on when they suggest that initial deal flow for private equity in this state needs to be instigated from the top down. That is, AIN could do well by beating the bushes and identifying lucrative LBO opportunities and moving in for the kill. Where an AK supported VC fund is the end-all ideal, it is the mechanism for due diligence that would be most beneficial at this stage. And frankly, I don't mean venture forums or biz plan competitions (god bless 'em); I'm talking about drumming up existing prospects that have proven cashflow and potential for improved cost structure. Though savvy firms would be the best bet here, I'd venture that there are more leaders like Jamie Kenworthy that would be willing to step up to the plate under a common flag and begin this process. In addition, I could see value in recruiting MBA students or SCORE execs to latch onto the financials of potential companies and evaluate the possibilities. While several of the local start-ups are definitely sexy and intriguing, I have first-hand experience of seeing hundreds of Intelligent 'volunteer' hours being spent to nip and tuck some ugly beasts. Perhaps with guidance, a bit of this energy could be spent toward eliciting/analyzing divestitures as Barbara notes. (At the same time, continuing the MBA-level competitions and initiating lower-level
Platforms could continue to prove to be a powerful grassroots awakening. My thought is more to leverage eager minds in new directions than to alter current successes.) Assuming it is still an option, I would suggest taking Bob up on the notion of developing a "search fund prospectus."

Second, and perhaps more significant, this notion of a "neutral
platform" for ANC's to come to the table with other private equity interests is highly compelling. Bill Strafford hints that if his firm had the time, this type of consortium would be structured already. As Bruce will tell us, where there is a problem, there is an opportunity. If ANC's like Sealaska are turning away deals due to risk tolerance, diversification or capitalization issues, then there is a distinct need for a way to re-channel these in state. To take this a step further, we see 8a organizations finding it eminently easier to find capital out-of-state. If an ANC/VC syndicate could pool their resources under amenable circumstances, then we'd have breeding grounds for considerable economic development with ROI to spare.

Regards,

Kevin Wiley
Financial AdvisorMerrill Lynch
kevin_wiley@ml.com
564-6624 (work)
317-1183 (cell)

Vermont VC offers assistance to Alaskans--Cairn Cross

2004-05-17T22:43:00.000-07:00

Regarding venture funds for Alaska, I am happy to serve as a resource for idea or a sounding board if the discussion is continuing. It seems like with so much capital in the form of Native Corp liquidity and the permanent fund, there ought to be some way to import some expertise and do some creative financing for Alaskan early stage companies. The CDVCA (Community Development Venture Capital Association) might be an interesting resource also. The CD Venture Capital industry is very focused on job creation (sometimes to the detriment of profit) but my thesis is that community development venture money will broaden in mission to include something more akin to "socially responsible" dual or "triple" bottom lines (as if we don't have enough bottom lines to worry about - the SR folks keep adding them). Anyway CDVCA is based in NYC and has a website and I would encourage Alaskans to think about attending one of their conferences which are jammed
packed with workshops.
Cairn G Cross, Managing Director
FreshTracks Capital

Alaska VC shares thoughts--Mead Treadwell

2004-05-17T22:41:00.000-07:00

Allan, my apologies for taking so long to join this thread. Three thoughts:

1. George Kozmetsky used to tell us we only need one big deal that works to beget a bunch of others. Austin had Dell. Seattle’s Microsoft millionaires have done much following on. I’m not sure a committee can pick a big deal, but a collaborative effort can help produce the culture that will build one.

2. I think the Permanent Fund can stimulate your concept in a couple of ways. First, it can invest a small amount in a national portfolio of venture firms. (Small amount could begin with $100 million a year and ramp up over a decade to a billion; even then that’s a conservative portion of the portfolio.) Second, those firms could be asked to look at deals from Alaska. Third, some follow-on effort of community entrepreneurs (your collaborative idea; Investnet, AIDEA, or an advisory group to the Fund itself) could screen deals and offer them to the others who now have a vested interest in looking at Alaska deals.

3. ANCSA corporations –be they regional or local – aren’t configured to provide wealth through some form of liquidity event. (Given the goals of intergenerational ownership, that’s understandable.) They are increasingly configured though, to dividend stock in subsidiaries, including 8a firms, to members. I’ve felt for a long time that some liquidity capability in our commonly owned assets – whether owned by ANCSA firms, the state in the form of the railroad/Kodiak/water, oil and gas rights, whatever would be better managed if there were some form of public “tracking stock” that brings the benefits (discipline, disclosure, independent measure of performance) of capital markets to our enterprises here. Applying that concept might help provide more of a deal culture as well as a move away from the sense that the only way stockholders can benefit is from dividends, or public goods. A collaborative venture effort could help provide liquidity.

Mead Treadwell
CEO, Venture Ad Astra
Commissioner, U.S. Arctic Research Commission
Senior Fellow, Institute of the North
1007 West Third Ave., Ste. 200
Anchorage, AK 99501
907 278 4800 office
907 223 8128 mobile
907 278 4807 fax
meadwell@alaska.net or mead@ventureadastra.com

Montana VC with Alaska Investnet ties shares thoughts--John O'Donnell

2004-05-17T22:38:00.000-07:00

Greetings John,
Any thoughts or ideas you would like to seed with the Alaska financial community for collaborating with the Montana TechRanch. Your insights and stimulation of discussion would be appreciated.
Regards
Allan

Allan,
To be blunt your document is very difficult to read and follow. I really am not sure what you are proposing. Is it your desire to create a fund? Or is your desire to have a point organization (like AIN) act as a catalyst to networking with lower 48 funds, channel deal flow, educate entrepreneurs in what VC’s want and to then help kick start a fund? I would vote to start with the latter by finding someone that truly knows and understands private equity transactions. VC’s hate referrals that do not map to their funds criteria.
I am happy to discuss with this you and anyone else interested!
John O’Donnell, Executive Director
Montana TechRanch
Misc Info: Alaska Investnet has a signed Strategic Partnership agreement with Montana TechRanch for mutual assistance in nurturing entrepreneurship in our respective states. John has raised in excess of $100,000,000.00 from Venture Capitalists and has successfully taken one of his companies public.

Vermont VC with Alaska Investnet ties offer insights-- Cairn Cross

2004-05-17T22:34:00.000-07:00

Greetings Jeff (Clarke),
Any chance Cairn Cross might want to share his thoughts?
Regards
Allan
Misc info: Alaska Investnet brought Cairn Cross to Alaska two years ago as a forum speaker. His organization along with Village Ventures has expressed an interest in actively participating in a $15 million dollar venture capital fund if 2/3rds of the money came from Alaska.

Allan,

This arrived this morning:

Jeff Clarke
Alaska Investnet Advisory Board

The road to hell is paved in good intentions. I intended to chime in many weeks ago but alas.....

Anyway....here are some thoughts on FreshTracks and the Village Ventures model. First a few basic data points.

1) FreshTracks formed in 2001 and is an $11 million venture fund formed
primarily to fund Vermont (and parts of NH and upstate NY) opportunities. However, for portfolio diversification reasons, right from the beginning we agreed to do as much as 33% of our investing in a non geographically specific companies. We classify our portfolio as "in market" and "out of market" with "in market being VT, NH and upstate NY and everything else is out of market.

2) Village Ventures agreed at first to co-invest alongside us in the amount of $9MM. They became part of our investment commitee and since our investment committee must approve things unanimously then in essence Village had veto power over our deals. This created a problem when in the post 9/11 world with the economy tanking and Village suffering its own woes, they needed to restructure their own balance sheet. They decided to change their investment philosophy to focus much more exclusively on IT and medical techology companies. This meant we might have issues over approving which companies to invest in. In addition, the $9MM co-investment commitment was simply out of whack with their co-investment in other funds which tended to
me much smaller.

3) So we restructured our relationship to drop their co-investment
commitment to $4MM and to "carve out" a portion of our portfolio to allow us to invest without Village Ventures. We must however replace them with another institutional venture fund. We have found that two funds, Boston Community Ventures and Coastal Enterprises in Portland Maine that are willing co-investment participants in Vermont investments.

4) At present we have 8 portfolio companies. 5 are in market and 3 are out of market. The out of market investments are $250 thousand or less while the in market investments are $200 thousand or more. Our portfolio is relatively diverse from a sector and stage view with some later stage investments; some seed deals and some that are in between.

5) We have invested $2.8 million and have $2.0 million reserved for
follow-on investing in those companies. We figure we have about $3 -4
million left for new deals. The rest of the money is allocated for fees and expenses incurred by the fund such as legal, mgt and accounting. We are about half way through the investing life of the fund.

6) Village has the following affiliated funds in their "network."
FreshTracks, Borealis (NH and ME), Long River (Amherst MA) Worcester Capital Partners (Worcester obviously), Point Judith (Providence RI), High Peaks (Albany), Berkshires Capital (Williamstown, MA) Tall Oaks (Charlottesville, VA), Inflexion (Gainesville FL), Spring Mill (Bloomington Indiana), Highway 12 (Boise ID) and Solstice Capital (Tucson, AZ). The largest is High Peaks with $45 million of capital. We are the smallest.

7) In general the best things about the Village Ventures relationship for us are the access to deal flow outside of our geographic area which works well for diversification of our portfolio, the access of our "in market companies" to additional capital syndicated through Village Ventures and the two conferences a year that Village puts on and that we attend. The conferences are a good way to keep our skills sharp and network with other fund managers. In addition, there are a few back office things that the network provides such as health and disability insurance, etc which is good for the managing partners such as me but makes no difference to the FreshTracks limited partners.

8) Seems to me the biggest problems with running a small fund in a
backwater state, (Vermont or Alaska) is that stand alone venture funds do not typically do very well from an economic point of view. If you make decisions as a fund manager on your own and in a vacuum then you run a greater risk of making a poor and uninformed decision. The flip side though is that when you affiliate with an organization such as Village you usually grant them some veto authority over investment decisions and so your "local" deals are held up to the standard of national or international class deals.
It's a tremendous tug of war. Seems to me the ideal structure is what we finally achieved where we can "carve out" some of the fund to invest in local deals that might be quirkier or look more like economic development deals and the balance of the portfolio is for more typical venture deals. Then also having the ability to diversify out of one's primary market is a good thing too and an affiliation structure works well for that type of syndication.

10) Of course the real proof here is what the portfolio will look like say 4 years from now. Were we able to make good investments? Will we realize some exits? Can we raise a second fund? So far so good but this is a tricky business and it's a longterm business so it is really too soon to tell.
Cairn G Cross, Managing Director
FreshTracks Capital

8(a) Association President Sees Opportunity-- Ron Perry

2004-05-17T22:31:00.000-07:00

More and more companies are coming to Alaska to find 8(a) vehicles. I met with two last week. The idea is sound. It is structuring the deals that are going to be the hard part. Putting companies together is the easy part, getting them to agree on who will be in control is the rub.

Ron Perry, President
Alaska 8a Association

ANCSA President sees 8(a) opportunities--Bruce Borup

2004-05-17T22:29:00.000-07:00

I'm glad to see Patrick Simpson's and Bill Strafford's response. I think they show real insight into where some of the current opportunities are for private equity in Alaska. I have seen more deal flow come across my desk as the CEO of an ANC than I have for years. I can no longer agree that deal flow is a problem. Nor can I echo that Alaska does not have the technical expertise or management expertise. I see it every day. I see mining companies like Couer Alaska willing to invest millions in resource development. I see IT start-ups getting multi-million dollar contracts in their first year of operations. I see new companies courted by billion dollar strategic partners. I have more deals than I can handle. This is not a function of capital on our part as an ANC either. It is a function of time and due diligence. The 8a marketplace allows me, as an ANC, to aggregate capital and talent in order to provide value. As a village corporation I do not need to have the capital to cash flow or bond large projects because the lower 48 private equity marketplace has been very excited to provide it for us. Likewise, since many companies have now made the leap that SciFish has done to JV, team or otherwise partner with ANCs, I no longer have to be concerned with bootstrapping a value proposition or scrapping around for talent.
Is 8a the key to Alaska private equity? I'll let those of you who are wiser than me figure that one out. In the meantime, I would be delighted to partner with Alaska companies and especially Alaska private equity capital. But, to be perfectly honest, with the sole exception of Alaska Growth Capital, who I have found to be as professional as they come (they just need more money!), it is so much easier to do private equity
business in the lower 48.

So, would I use an Alaska VC fund? Absolutely! Especially if they understood the federal contracting marketplace and even more so if such a fund didn't want to be just a mini frozen Sand Hill and were willing to look at deals ranging from IT to construction management.

Should this fund be capitalized by Native Corporations? Many ANCs won't play because they can do this without a fund. Some ANCs may want to because they won't want to spend the time/resources to develop the expertise in federal contracting. I think the question is irrelevant. I can see the need for the capital. I can see the ability to get
appropriate ROI. How the founders of a fund choose to sell the value proposition of the fund to their limiteds is purely an exercise in marketing and understanding the investment goals of each of their individual limited partners will be the key to success. (e.g. taste great or less filling??). I also don't see why the traditional VC fee structure for the managing partners won't work. The fund will either be able to develop adequate returns or it won't. In other words, if the founders can't sell their ability to get adequate ROI, no amount of shoe-horning fee structures into some other business model is going to change that.
Bottom line: I would be delighted to collaborate with other ANCs, other Alaska companies and Alaska private equity. In the meantime I'll keep cherry-picking deals until everyone else discovers this deal flow!

Bruce Borup, CEO

Cape Fox Native Corporation

This forum has been very helpful and educational--Pat Simpson

2004-05-17T22:26:00.000-07:00

Allan --

I have gained a great deal of knowledge on the venture funding process through the mail thread that you have shared regarding you VC Fund concept. As a tech company, I would like to see VC funding in Alaska. However, as I look at the size of the deals that are being contemplated -- $10 M plus -- I am unable to point to any Alaskan tech company that would be ready for such an investment. As Jamie Kenworthy aptly points out, the size of these deals will lead us toward natural resource ventures like mining. The tech companies that would benefit from capital investments are probably looking at $1M to $2M now, with possibly a need for larger investment later. However, there is a business sector that I do believe is thriving in Alaska and might be a good candidate for the deal flow that is needed to interest VC investors. Let me motivate this discussion by relating a recent event here at SciFish.

My company, Scientific Fishery Systems, Inc. (SciFish) began developing sonar systems and electronic logging packages for the fishing industry in 1992. In 1999 we began receiving interest in expanding our work into DOD. As a former DOD contractor, I was comfortable with this work and relished the opportunity to augment our cash flow. Our work in this area grew rapidly and soon we were working with companies like Lockheed Martin on several different technology development efforts. One of those joint efforts was a large ($6M+) program targeted specifically for Alaska. We (LockMart and SciFish) began developing and delivering briefings to the Pentagon and DISA in an attempt to compete for, and hopefully secure, this work. After nearly 18 months of trips to DC, briefings, emails, telecons, and draft proposals, we were told that the project was going to be sole-sourced under the 8(a) program to an Alaska Native Corporation (ANC). Once I was over the anger and devastation of having the rug pulled out from under me, I realized that if I wanted to compete for this type of work from Alaska, I needed to be on an even playing field. I immediately began to develop a new business strategy that incorporated a divesture of SciFish's DOD work to a majority Alaska Native Owned entity and then apply for 8(a) certification.

The point of the story is that the 8(a) program is an extremely lucrative vehicle and there are firms in Alaska that are very effective at using this vehicle. I just found out the hard way. Continuing from here, I believe Alaska's Government Contracting Sector, and specifically those that are using the ANC 8(a) advantage, is where some of the greatest potential lies for investments in Alaska. There are at least 10 ANC 8(a)'s that are generating $50M in annual revenue. These companies, subsidiaries of Alaska Regional or Village Corporations, have learned how to develop the management expertise required to build, sustain, and grow large government contract business. At the beginning of this industry's growth, these firms focused on Base Maintenance work. This work has since grown into larger service contracts, handling a much wider range of services, including IT and support services. Now we regularly see contracts announced for $100M+ from a strong stable of ANC 8(a) firms. I feel that the management expertise that is being developed through these firms can be viewed as a strategic asset for Alaska and one that could be leveraged for further growth.

I appreciate the opportunity to participate in the dialogue and look forward to following the progress of this process as it evolves.

-- Patrick K. Simpson
President, SciFish

You missed the heart of the issue--Bill Strafford

2004-05-17T22:23:00.000-07:00

Allan: having read through the material, I am of the opinion that you continue to miss the heart of the nature of what Native Regionals & Village Corporations are real looking for, including us.

My thought is that what we need to establish is a "teaming" or "pooling" agreement between interested parties as to their degree of fund "commitment" or "available" by each to invest alongside other Regionals in potential business opportunities - Alaska or elsewhere.

What we are interested in doing is maximizing returns to the shareholders within reasonable risk. We do that through funding commitments to "passive" investments and acquisitions of business opportunities that we can afford to risk on one deal.

I think we would prefer to continue to run our "passive" investments through major discrete hedge funds or investment pools or private equity capital funds - i.e. the experts.

I don't believe that any of the Regionals or Village Corporation our going to put their funds into a separate Alaska equity fund for others to manage. They want to co-invest (commit) within the group but want the business opportunity brought to them for review prior to funding and without any upfront fees or expenses. The big Regionals are sophisticated enough to do their own project due diligence and decision and the smaller groups want to piggy-back their funds onto the trust and respect of the larger groups.

However, I see a opportunity (not a business commission revenue generator) for several Regionals and/or village Corporations, some who have limited but available funds they would like to "pool" with other Native Regional Corporations and Villages AND including lower 48 gaming tribes and First Nation tribes, into a "discrete commitment agreement" of possible active investment opportunities that may become available to one or more of the interested agreed upon groups; especially business opportunities where-as the partners can take advantage of their regulated opportunities 8(a), reservation investments, tax advantages, etc.

We continue to assess and do due diligence on discrete and advantageous business opportunities that we sometimes proceed on or cannot proceed on because of the size of the investment to the Company (beyond our modest means or risk tolerance or diversification rules) BUT if we had a sharing mechanism within the group for either passive fund commitments and or sharing of opportunities (co-investments) already set up and within an agreement, we could solve some of the size problem and assist those who wish to "go along" but without large management time and cost; but increasing our collective influence.

Some examples that we have experienced recently are the PSE deal, a private equity deal, the ANW deal, etc. However all of them came to us from outside sources and the significant management and return of the deals all transferred to other parties. We could capture that within the group if we had an agreement already in place and looked for those opportunities individually but brought them to the group for review and possible investment. Each company would do its own due diligence of a potential deal, and then offer it to the group - doing that would allow the smaller companies to invest without having to upfront fees and expenses. The company bringing the deal and acting as general partner would be paid a modest fee on revenues for managing the deal and closing the deal and managing the operation. Others would be passive but active partners within the Native Corporation group. Outside groups could be paid a "finders" fee for bringing a successful deal to the table and conclusion.

We have several companies discussing with us at this time partnering their available investment funds with us as co-investment partners, not managers and not spending their money prior to the investment. We are thinking about the concept of a partnership management agreement but due to time restraints and resources (staff) we cannot take this approach out to everyone and get an agreement but may be part of someone else bringing the concept in-house (agreement).

Within the resources available to Alaskan Native Corporations, Indian Casino tribes, and the emerging First Native Groups, a remarkable financial force is possible, if someone has the resources (time, ability, experience, stamina, and persuasiveness) to achieve a collective agreement.

bill

William F. Strafford
Executive Vice President and Chief Financial Officer
Sealaska Corporationemail: bill.strafford@sealaska.com
907.586.9222 Direct
907.586.1512 Sealaska
907.586.2304 FAX

Well written and presented. Please keep me posted--Bob Shake

2004-05-17T22:18:00.000-07:00

Very well written and presented. This type of financing is sorely needed in Alaska and could provide the sort of economic stimulus that we to often talk about but do not seem to be able to provide. Please keep me posted on your progress Allan!

Bob Shake
SVP,Executive Loan ManagerNorthrim Bank

Current ANCSA Management has private equity track record--Mark Kroloff

2004-05-17T22:14:00.000-07:00

Allan -- I agree with much of what you have to say in your summary, and with some of Bob K's and Craig F's comments as well. The flaw I see in the concept is the notion that the fund would seek to be a collaborative vehicle for Native corporation investment as an a priori matter. In fact, a number of the Native corporations that have real capital to invest also have real expertise available, either in-house or from trusted consultants, to evaluate investments. Any fund that is formed should not be viewed as a vehicle for a group of smart investment professionals to gain access to pooled Native capital. I realize the intention is more noble, but intentions are not always perceived accurately (I suspect this underlies Bob's wise comment that he'd only want those investors who want to be there in the first place). Put another way, the value of the fund will be in its deal sourcing, not in its limited partner make-up. Good deals will attract investment -- by Native corporations and others. Intriguingly, much of the demonstrable track record of Alaskan private equity investing inheres in Native corporation management today.

Mark Kroloff, Chief Operating Officer
Cook Inlet Region Inc.

The Business Enterprise Institute would like to assist--Dr. Michelle Augustine-Williamson

2004-05-17T22:01:00.000-07:00

Hello,

The attachment with the current responses to the initial question on developing active lead investment capital in Alaska was forwarded to me.
The Business Enterprise Institute is very active with students, professors and the University's Intellectual Property Office in the development and commercialization of the Universities Intellectual Properties. We have a number of projects in the very early stages.

I am very glad to see discussions to provide economic development through Alaskan intellectual properties. This link will take you to an article in the Alaska Business Monthly's March issue which I am quoted concerning "Growing Entrepreneurs in Alaska".

http://www.akbizmag.com/2004/Mar_04_UAA-ABM.htm
Also attached is information on the Business Enterprise Institute.
Please keep me in the loop on this conversation.

Dr. Michelle Augustine-Williamson
Executive Director
Business Enterprise Institute
University of Alaska

Thanks for letting me know about this--Alex Hills

2004-05-17T21:59:00.000-07:00

. Please keep me on the mailing list.
Best,
Alex

Dr. Alex Hills
Alex Hills Associatesahills@cmu.edu
(907) 232-6088

Wonderful proposal,long overdue--Diane McLean

2004-05-17T21:57:00.000-07:00

Wonderful proposal that is long, long overdue. Please keep me on the
distribution list.

Diane McLean
UA Director of Intellectual Property and Licensing
303 Signers' Hall
P.O. Box 757560
Fairbanks, AK 99775-7560
(907) 474-7765

Respone to Barbara Paduch--Jamie Kenworthy

2004-05-17T21:54:00.000-07:00

Greetings Barbara,
There’s been a lot of disparate effort to attract High Tech to Alaska (more by the Anchorage Economic Development Corporation than ASTF which focused more on growing our own) to too little result. But I don’t think that’s a critical pre-condition for more institutionalized risk capital in the state. Risk or equity capital requires high risk/high reward deal flow and Alaska is likely to continue to be the location of more of those types of deals in the resource industry (both hard rock and oil and gas) and the digital based technologies that can make resource industries more competitive (are 3-D seismic firms high tech suppliers?) than in the computer or telcom industries which are traditionally called High Tech and likely to remain concentrated in industrial agglomerations elsewhere.

But with China seeming to permanently raise worldwide energy demand and for the 1990’s hangover seemed to have financed too much capital seeking too few customers in large parts of the tech/telecom market, I’m not sure I’d rather be here than there. (The performance of energy versus tech in the stock market the last 2 years suggests I’m at least temporally right.)

The problem is Alaska doesn’t yet have the firms that are experienced in structuring those types of early stage resource deals and we are often far from the headquarters where energy and mining investment decisions are made. The state, for instance, has no junior mining development companies so we have native corps putting a lot of effort into seeking partners to develop prospects and majors only willing to look at deals in the $200-500 M range but no companies and investor networks based here that can put up the $500K-$2 million often required to do the drilling and prove up properties for the majors to look at. Since a lot of the technical (geology, geophysics) talent is here there’s no reason we can’t grow the finance/ business types that structure those early stage deals and in many cases already worked for the majors and ready to strike out on their own. The folks who will make outstanding returns on Pogo are the early stage investors and developers; none of that was Alaskan money or business talent. A smart Denver mining investment guy showed me the risk/reward profile on that type of deal is no different than an early stage Silicon Valley deal 15 years ago before too much capital started financing too many deals. I think the same role can be played by growing more an independent oil and gas analysis and development industry here since a number of smaller and mid-range companies are now taking more initiative than the majors to develop the North Slope.

Aside from early stage resource and resource tech deals I also think there is a considerable but not large deal flow in the middle risk 20% ROI range for what might be better called advanced manufacturing than tech deals and aims primarily at the import substitution market as well as deals that bring tech and better management to the government financed market in health care/construction/etc. (The success of Alaska Growth Capital has helped validate that market but even with their expansion their size limits them to date to no more than a million in one deal and their risk profile is in most cases limited by needing to qualify for the SBA paper market.) The includes entrepreneurs apply computer-assisted and other digital technologies to jobs we already do here, such as Pat Simpson’s Scientific fisheries which applies customized advanced radar to identifying different kinds of fish at different depths.

When I went around town seeking to document successful private equity deals in Alaska-based firms 3 years ago I found quite a mixed record but the key success ingredient was good management more than access to capital. The ASTF Board consistently found management more than capital to be the critical shortage here. And of the 15 folks I talked to who had varying degrees of skepticism about institutionalizing more risk capital, every one said any Alaskan based firm should include a mix of experienced locals and outsiders both for cross-educational reasons as well as to establish relationships to larger firms that can provide second round financing.

So to sum up this harangue, I think the state can support one or two small firms in the $10-$20 M range but not based on the traditional 2% management fee/20% back end formula mentioned. Diligence and monitoring costs would have to be lower but that’s possible if such a firm piggybacked on a native corps or Alaska Growth Capital back office. At least one equity firm should be focused on resource deals and have lead assessment expertise there but another firm is probably necessary to share risk and provide portfolio diversity as well as allow those other firms to take the lead in building up assessment talent much as CIRI has done in wireless deals. It would be great and probably necessary if wither of those firms consciously combined the talent of native corps and the non-native business community.

Even at that scale of $10-20 M, investments will be small because no firm should put more than 10% of their capital at risk in one deal but it’s a place to start. An SBIC is a lot of paperwork but it provides good leverage and cheap cost of federal capital. And of course, those firms would have to look at both Alaska and non-Alaska deals. But with a good track record, capitalization and connectivity to Outside firms grow.

In sum, I agree with the thrust of later commentators, particularly Bob. The Alaska based version that succeeds will have to be a lot more hands on both by management and investors because of the quality of deal flow, the necessity to recruit and build up initial management, the need to keep costs down to cover overhead, and to maximize local talent. I’m probably one of 50-100 Alaskans willing to be a small investor in such a fund and contribute time to assess deals as part of a larger network but I await an organizer and sensible business structure by better trained folks who want to do this full time.

Jamie Kenworthy
Former Executive Director
Alaska Science and Technology Corporation

Response to Barbara Paduch -- Allan

2004-05-17T20:14:00.000-07:00

Barbara,
Thank you for your quality and thoughtful input. Your contribution will help encourage some of the experienced wallflowers to join the dance. As we watch the dance steps and count the number of dancers we'll get a better feel if the Alaskan venture capital community is ready for more than a DJ yet. I'm convinced that we have the critical mass and the talent but we don't have the focus or the will---yet :). Would anyone care to respond to Barbara's question about past efforts to attract high tech to Alaska? Maybe John Sibert, Jamie Kenworthy or Hans Roeterink will
share their observations.
Allan

Agree with Bob Kaufman -- Barbara Paduch

2004-05-17T20:10:00.000-07:00

Allan –

I would echo all of Bob Kaufman’s comments. Based on the responses that I have been copied on, there are people here who have the experience and capabilities to evaluate deals and eventually start a fund vehicle. Having an established VC or private equity firm as the lead on the first few deals is a good strategy. It will mean giving up control and a lot of the economics to them, but the fund vehicle would be able to establish a track record, which would help when it goes out to raise its first fund. I agree whole-heartedly that without high quality deal flow, there is no point in raising a fund at all.

When I worked in private equity, we found our best opportunities by tapping our old investment banking client base for divestitures. We banked large corporate clients, most with multiple business lines, and we found that they often had a business line or two in mind that they were considering for sale. I’m relatively new to Alaska, so I don’t know, but might there be assets here that are held by Outside entities that could be available for sale? Sometimes you can’t wait for the deal flow to come to you, you have to go out there and create it. Has anyone done a thorough analysis to identify some of those potential opportunities?

You talked about wanting to create high quality high paying non-resource related jobs in Alaska. I think that theme is critical to Alaska’s future. Anchorage would seem to me to be an ideal setting for the high tech industry. Has there been an effort in the past to attract that kind of business to Anchorage?

Barbara J. Paduch

Interesting topic. Please keep me in the loop--Evan Rose

2004-05-17T20:09:00.000-07:00

This looks very interesting. Please keep me in the loop.
Evan Rose
Alaska Permanent Capital

Interesting and worthwhile discussion--Mike Burns

2004-05-17T20:08:00.000-07:00

Allan, please keep me on the distribution list. I find this a very interesting and worthwhile discussion.
Mike Burns

Opportunity to participate in statewide economic conference--Jeff Staser

2004-05-17T20:05:00.000-07:00

Allan, et al -

The Denali Commission has been tasked by Congress to sponsor a statewide "reduction of poverty" initiative involving an economic development commission targeting rural Alaskans. I'm required to appoint a panel,chaired by AFN's Julie Kitka, of representative interests aligned along regional boundaries -including the State Chamber and Bankers' Association. Our state Co-chair is also required to appoint regional "supporting committees" that feed ideas into the statewide effort. I'd like to involve the talent pool receiving this e-mail.
Personally, I don't think government does "Economic Development" very well; that's the private sector's role. We're lucky if we can do development that is economic. But we do see examples of success in other countries based on close cooperation between government and private sector activities. The question is: how do we move from descriptive analysis to proscriptive action?

Anybody have suggestions or thoughts on how best to engage this group
(real venture capitalists) or how best to garner business sector guidance and advice? We are flexible and could even appoint someone to attend the new Commission meetings, or we could form an advisory group that meets by e-mail to review and make recommendations to the envisioned "Economic Development Commission". Lot's of room for creativity and flexibility. I do plan to appoint members in April, as outlined in the legislative guidance enacted as part of the latest round of appropriations bills passed as an Omnibus Bill. (Details on our web site www.denali.gov). The door is open for you (each of you) to help us implement better public policy in the economic development arena as part of this new initiative.

Best wishes, Jeff

Jeffrey B. Staser
Federal Chairman, Denali Commission
510 L Street, Suite 410
Anchorage, AK 99501
(907) 271-1414
FAX 271-1415
jstaser@denali.gov

Response to Bob Kaufman's comments--Craig Floerchinger

2004-05-17T20:00:00.000-07:00

From: CAFloor@aol.com [mailto:CAFloor@aol.com]
Sent: Saturday, March 13, 2004 8:37 PM
To: bkaufman@tdicapital.com; allan.johnston@wedbush.com; borup@gci.net; dhoffman@alaskagrowth.com;

Subject: Re: An Alaskan Venture Capital Fund Opportunity

I strongly agree with Bob's comments. Demonstrating that there are real deals that can really be done is step one. Asking for firm commitments to a fund that has no track record and no deals in the pipeline is a formula for disappointment. The search fund asks only for conceptual support from investors with little commitment. If there are real deals to show, the deals will attract the money and will naturally lead to a fund.

Craig Floerchinger

2004-05-17T19:40:00.000-07:00

Dear Friends and Potential Strategic Partners,
Your comments and suggestions on refining the needs and opportunities for a Collaborative Venture Capital Fund would be most appreciated. I believe that we will see at least one of these funds started in the near future and your insights/interest will add significantly to the quality, composition and direction of any collaborative venture capital activity that evolves. Your input is important in helping to identify the participants and the
interest in this project. Thank you for your consideration.
Sincerely,
Allan

From: bob kaufman
Sent: Thursday, March 11, 2004 12:16 AM
To: 'Allan Johnston';
Subject: RE: An Alaskan Venture Capital Fund Opportunity

Allan,

I really appreciate your getting this conversation going. Two parts of
your thesis ring true with me: 1) There would be value in a collaborative due diligence vehicle, and 2) There is value in a neutral platform in which multiple native corps could participate.

But I think Ian makes a good point: we need to demonstrate high quality dealflow before exerting a lot of energy raising a large fund. It's hard to justify taking a management fee without being able to show a track record of prior success. And the reality is Alaska can point to few examples where investors have been able to earn private equity type returns on buyouts or venture deals.

As someone who has access to capital and is actively looking for Alaska deals, my own view is that classically-defined PE or venture dealflow virtually does not exist in Alaska. I wish someone would tell me I'm wrong, but ninety percent of what I see is small companies doing less than $10m in revenue, sellers looking for 5x and higher multiples for companies that can't support that type of valuation, or companies operating in industries with single digit growth rates. To my way of thinking, the only guys who can buy these companies and make economic
sense of it are guys who are basically buying a management job--cuz there ain't much room in the cap structure to also include an investor who would make a reasonable return.

On the other end of the extreme, each year I see one to three Alaska deals in the $50 to $300 million purchase price range that are extraordinary (several of which I have participated in). They're extraordinary because there's less competition for these deals in Alaska. These are generally strong cashflow companies with great balance sheets to leverage against. These are the kinds of deals that I think we should study. How can we put together a consortium of high net worth individual investors and native corporations to participate in these buyouts? I'd like to form an Alaska consortium that might invest alongside a seasoned private equity firm in these transactions. Provided the Alaskan investors are in it purely for the ROI and desire to be equity owners in their own economy (not for shareholder hire or other worthy non-pecuniary goals), would not an Outside private equity group see value in having them as a co-investor (political benefits, deal-sourcing benefits)? Ian could react to how compelling this value proposition would be to an Outside investor.

In any event, I personally would not feel comfortable asking Alaskan individuals or native corporations to invest unless a top-tier private equity fund would be willing to co-invest on the same terms. That's one way of knowing if it's a good deal--because if it's not a good enough deal for them, then we're better off just being a limited partner in their fund and piggybacking off their superior dealflow! I have been talking to two reputable funds ($10 billion+ in equity invested at 35%+ IRR over 20 years) who would be very interested in partnering with such an Alaskan consortium. (I imagine Ian's firm would as well; I'm just not completely clear on what they do.)

More valuable than jumping into a deal right now might be to rigorously review potential deals with a seasoned PE firm and hear what's wrong with the deals we're seeing. Knowing what's problematic with many of the deals we typically see could be a good first step in being able to identify deals that are good. I think Ian has offered to help us with that. We could use that perspective to go out and source the right kind of deals to begin with. I don't see them coming in over the transom; I think we will need to originate them--by contacting a company we like or targeting an industry we believe has long-term potential.

My belief is that they're out there. But there is cost associated with generating them. What if we asked our prospective investors to each kick in a small amount for a search fund with the following activities: 1)bring together thought leaders from a few of Alaska's major industries to talk about where they see the long-term opportunities, 2) based upon their input, contact potential sellers or structure straw-man deals, 3)screen the resulting potential opportunities with Outside co-investors, and 4) bring back any good ones to the search funders (who have first right to invest).

This is the classic search fund strategy that often precedes fund formation. It's a step prior to Ian's notion of the quasi-pledge fund. The understanding is you put your money in the search because you're interested in the longer-term fund opportunity--but you're not committed to it by virtue of funding the search. More of a "show me the money" approach. I would be very interested in putting together a search fund prospectus, provided several native corporations stepped forward a priori and said they'd be interested in backing the process. I would not want to "sell" anyone on it, to persuade them on it if they didn't already know they wanted it.

One last thought: I do know of one Alaska deal, which might pass muster which will materialize in the next quarter. I can't disclose specifics at this time. And I don't know whether the seller will ultimately agree to attractive terms. But if there are some Alaska investors who are serious about treading in, it has some compelling characteristics, and we could use this deal as the anchor deal of a new fund (e.g. you can't invest directly in the deal; it has to go through the fund). Presuming the deal were sound, do we believe our prospective investors are ready to come up with some equity number between $15 and $30m or more between them? What would the process be for reviewing this opportunity with interested parties? If there were interest, this particular opportunity could be a starting point in the formation of a fund.

By the way, I don't mean to be callous towards the small Alaska entrepreneur whose interest is not in these mega-deals. There should be some local source of risk capital for them, too. Nor do I mean to be indifferent to those who would invest to promote economic development and jobs in Alaska. It's just that I think we should start with a singular focus on ROI until we develop a track record.

I welcome any feedback--including critical feedback.

Bob Kaufman

Stimulating the discussion--Ian Charles

2004-05-17T18:47:00.000-07:00

From: Allan Johnston [mailto:Allan.Johnston@wedbush.com]
Sent: Tue 3/9/2004 5:32 PM
To: Ian Charles

Subject: An Alaskan Venture Capital Fund Opportunity

Greetings Ian, Bruce, Bob, Dave and Craig,
Any suggested changes on this trial balloon. This has had input and revisions by two individuals so far and I would appreciate any comments or suggestions you might have.
Regards
Allan

From: Ian Charles [mailto:ian@Cogent-Partners.com]
Sent: Tuesday, March 09, 2004 3:52 PM
To: Allan Johnston
Subject: RE: An Alaskan Venture Capital Fund Opportunity

I like it! I think it will generate some interesting conversations. Where are you planning on releasing this piece?

From: Allan Johnston [mailto:Allan.Johnston@wedbush.com]
Sent: Wednesday, March 10, 2004 10:47 AM
To: Ian Charles
Subject: RE: An Alaskan Venture Capital Fund Opportunity

Initially I am just circulating it among the potential strategic players for input and buy in. If most agree with the finished product I'll run it by the rest of the ANCSA Corp CEO's and CFO's and see who is interested in further involvement. It might make sense to have it as an article in the Journal of Commerce to 'condition the environment' for some of the Village Corporations to think of participating if there isn't a critical mass among the Regional Corporations yet. If nothing else it will be fun to play with until the ski conditions improve :).
Regards
Allan

From: Ian Charles [mailto:ian@Cogent-Partners.com]
Sent: Wednesday, March 10, 2004 9:16 AM
To: Allan Johnston
Subject: RE: An Alaskan Venture Capital Fund Opportunity

Allan:
Sounds good. Something else to think about with regard to stimulating a project like this would be to generate some deal opportunities to form a quasi pledge fund. If there are some interesting buyout deals that you know about, lets talk about them and start to figure out if they are viable opportunities. If they are, our team can raise money around the deals from our relationships and/or from local Alaskan investors. Once we can demonstrate a pool pf successful opportunities exists, it may be easier to raise money from local groups.

Ian Charles, CFA
Cogent Partners, LP
100 Crescent Court, Suite 500
Dallas, TX 75201
Main: (214) 871-5400
Direct: (214) 871-5403
Fax: (214) 871-5401
http://www.cogent-partners.com

Is Alaska Ready for a Collaborative Venture Capital Fund?

2004-05-17T18:01:00.000-07:00

Alaska is in need of a sophisticated capital source to initiate venture capital projects (sponsor) so that Regional and Village Native Corporations can refer unsubstantiated investment opportunities for due diligence, screening, and refinement. In the lower 48 states it is common for venture capitalists to require entrepreneurs to attract several concurrent investors rather then depend on a single capital source. This process is very important to catalyze and incubate new business development (deal flow) in Alaska. I strongly believe that the timing is right for more active venture capital activity to be started in Alaska and I predict that we will see the first investment vehicle of this nature formed within the next 24 months.

If we can identify an individual or local organization with a demonstrated history of successful operational and collaborative business skills then the opportunity to raise a critical mass of venture capital from various native corporations and/or other institutional investors currently exists. This type of collaborative vehicle should encourage mentoring as well as the mutual sharing of expertise and opportunities. As lead active capital sources develop a successful track record in Alaska some of the billions of dollars of passive capital on the sidelines could be accessed for co-investment opportunities in Alaskan related investments. If we are serious about wanting to create high quality high paying non resource related jobs in Alaska then we need to encourage and support this type of economic evolution.

Several individuals and organizations are currently evaluating various aspects of getting one or more venture capital companies going in Alaska but most of the conversations are on a small scale. If instead a larger investment pool formed it could attract the managerial skills and could provide incentives by employing the traditional 2% annual fee with the 20% backend participation.

Initially the fund may establish a track record and credibility by engaging in at least some leveraged buyouts where the investments have a demonstrated cash flow. There are a number of Alaskan investments available where local management can purchase assets and businesses from out of state entities and improve on the bottom line return through the elimination of high allocated costs from expensive New York, London and Tokyo headquartered companies. This strategy would lessen the risk of the first fund while assisting in reversing the brain drain that happens when national firms purchase local companies and the high-end professional services are consolidated “outside”. These high-end professional service providers are a critical source for knowledge and expertise in maintaining the competitiveness of local businesses and are quite frequently the breeding grounds of new CEO’s and CFO’s for our most dynamic companies. Some of these individuals would most likely be part of management teams in the leveraged buy out process while others might join new management teams as acquisition opportunities present themselves.

The purpose of this paper is to stimulate discussion on this issue and to identify the potential funders, managers and opportunities that are needed to condition the economic environment to encourage active capital formation in Alaska. If you would like to participate in this process I would appreciate your comments and suggestions. Allan Johnston drafted this initial discussion question with considerable input and clarification from Art Fredston.