When Alan Hall, co-founder of Utah-based Mercato Partners was trying to close his first fund in the depths of the 2008 financial crisis, it wasn’t easy to convince investors to take on a risk on anything, let alone a newcomer fund in one the riskiest asset classes known to man.
But Hall and partner Greg Warnock were persistent. After setting up 100 or so LP meetings, paring the projected fund size by two-thirds, and contributing 10% of the fundraising total from Hall’s own pocket, the two managed to close a $52 million Fund I focused on regional growth-stage deals in late 2008. They then squeezed their way into sought-after rounds of some of Utah’s hottest startups, including flash storage provider Fusion-io and mobile accessory designer Skullcandy.
Less than three years later, it looks like the strategy is paying off. Both Fusion-io and Skullcandy carried out well-received IPOs this summer. And though both are down from their initial peaks, they’ve sustained market caps of around $2 billion and $400 million, respectively.
Partners at Mercato declined to discuss their exit track record. That’s a good indication the firm is looking to raise a second fund and keeping a low profile to comply with fundraising quiet period restrictions.
While it’s unclear if Mercato has yet returned its fund, it has certainly at least made a good dent. Mercato had a 6.9% pre-IPO stake in Skullcandy and sold close to a third in its July offering, according to a securities filing. Though the stock has moved down from the first-day initial offering price of $20 per share, the company is still valued at close to $400 million.
The firm is not on the list of shareholders with a 5% or greater stake in Fusion-io. But given Fund I’s small size and Fusion-io’s much larger market cap, even a very small stake at a strong multiple could go a long way toward returning the fund.
Its other portfolio companies, all still private, include Control4, a maker of home automation products; Cymphonix, a provider of bandwidth management services, and MediConnect Global, a medical records provider. They’re also Utah-based, which isn’t surprising as Mercato’s partners have strong ties to the region. Warnock was one of the founding partners of vSpring Capital, a Salt Lake City-based early-stage investor, while Hall was the founder and CEO of Ogden, Utah-based outsourced sales and marketing company Marketstar.
However, the firm recently demonstrated that it’s willing to venture out of its home state for the right deal. Its latest portfolio addition is Cradlepoint, a developer of wireless routers based in Boise.