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Polaris Fund aims to tap Alaska's investment potential.

Polaris Fund Aims To Tap Alaska's Investment Potential

Alaskan entrepreneurs may not have to go so far from home to find venture capital if the Polaris Fund fulfills its promise to deliver future funding. Set up by the Alaska Industrial Development and Export Authority (AIDEA) in February of last year, the fund is expected to create a $30 million investment pool to provide capital to young Alaska businesses.

"There really is no venture capital industry in Alaska," says Palo Alto, Calif., financier Timothy Draper, one of the fund's three managing partners. "Our goal is to pioneer its development in the state."

AIDEA seeded the Polaris Fund with $3 million and will invest another $3 million at an undetermined later date. The partnership agreement with AIDEA also required the three risk-fund managers to put 1 percent, or $60,000, of their own assets into the fund.

Using the AIDEA funds, Polaris plans to develop a portfolio of Pacific Rim investments to take to other investors, such as pension funds, to expand the pool to $30 million. The fund's three risk managers must reach this goal in 10 years or the agreement with AIDEA self-destructs. So far Polaris has invested nearly $1.5 million in seven startups.

"When you're talking about raising venture capital, you're always talking about the long term," says Bert Wagnon, executive director of AIDEA from May 1982 to May 1991. Asked whether Polaris could be the core of an Alaska venture capital industry, Wagnon says, "There's some skepticism about that. But if it happens, it won't be overnight."

The Polaris Fund is the brainchild of the AIDEA board of directors and its chairman, Jack Jessee, who want to build an investment pool for young Alaska companies struggling to find venture capital. Funding Polaris is consistent with AIDEA's mission to encourage growth of the industrial and manufacturing sectors in Alaska's economy. AIDEA itself is financed by state assets and by the sale of bonds.

"I've had my doubts about Polaris because the state tried a similar thing before and it didn't work," says Wagnon. "But I think having private partners outside the state will increase its chances of success."

AIDEA is a limited partner in the fund and has no direct authority to choose the investments. Draper, Alaska businessman James Yarmon, and Boston financier James Lynch will make the investment decisions. "Their decisions will be strictly economic, not political," says Wagnon.

Draper agrees. "Any business that comes to us for money will be assessed by the standard yardsticks: their business plan; their management team; whether they have a unique product line, solid markets, and revenue potential."

Though the fund was seeded with public dollars, Polaris is not obligated to invest all of them in Alaska businesses. Autogenesis Inc. of Anchorage is the first Alaska-based company to get money from the pool.

Polaris also has provided $250,000 in funding to Kvikk-Alaska, a joint venture with an Icelandic company that is developing equipment to split fish heads, increasing fish harvest yield by 3 to 5 percent. This year, the fund has invested $375,000 in two Virginia firms and nearly half a million in three California startups.

Polaris can invest in any stage of a company's development, "though we prefer to get in early because the potential return is then higher," says Draper. A company needs startup capital for research before moving to the second stage of development, which could interest the venture capitalist.

Draper declined to estimate the dollar return Polaris expects on its two Alaska investments, but "generally, we want a tenfold payback," he notes. Like any other venture capitalist backing a high-risk enterprise, he expects a return equal to the level of risk.

Draper is the general partner of Draper Associates, a venture capital firm in Palo Alto, Calif. Lynch is a partner in a Boston real estate development firm and a specialist in Latin American economic development. Both are Harvard MBAs. Yarmon, their Anchorage partner, is a real estate developer.

"We were finally able to form a partnership with AIDEA because of Jim Yarmon," says Draper. "We now have someone in the state who can watch over our investments."

Despite the obstacles to getting the fund moving, both Wagnon and the Polaris partners agree that Alaska's investment potential is great. The fund's managers see Polaris as the state's link to the capital markets in the Lower 48 and Alaska itself as a conduit between the Far East and the U.S. commercial markets.

Wagnon hopes the Alaska Science and Technology Foundation will nurture more projects such as Autogenesis that venture capitalists will find attractive. He says, "Entrepreneurs looking for money in the Lower 48 always run into what I call |the Alaska bias,' the belief that the state doesn't have the business savvy or the ideas that venture capitalists would invest in. Projects coming out of the foundation could change that."
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No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Alaska Industrial Development and Export Authority
Author:Murray, Marjorie
Publication:Alaska Business Monthly
Date:Jul 1, 1991
Previous Article:Autogenesis scores in venture capital pursuit.
Next Article:Tales of Pan American World Airways.

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