A collaborative venture capital fund for Alaska?
Posted Aug 22 in Allan Johnston
Originally written Monday, June 7, 2004 for The Alaska Journal of Commerce
Alaska is in need of a sophisticated capital source to initiate venture capital projects 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 for a project, rather then depend on a single capital source. This process is very important to catalyze and incubate new business development 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 Alaska-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 those with high-level managerial skills and could provide incentives by employing the traditional 2 percent annual fee with the 20 percent 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 Alaska 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. The are also quite frequently the breeding grounds of new CEOs and CFOs 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 article is to stimulate discussion on this issue and to identify 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. Please e-mail me at allan.johnston@wedbush.com or call me at 907-273-2300.
Allan Johnston is regional manager for Wedbush Morgan Securities in Anchorage. He can be reached via e-mail at allan.johnston@wedbush.com.
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