News Column

Venture investing stagnant

June 16, 2014

By Kevin Robinson-Avila, Albuquerque Journal, N.M.

June 16--The latest tally of venture capital investment in New Mexico shows funding for local startups barely has budged since the recession knocked the industry on its heels.

Less than $42 million in venture funds flowed into local companies last year, according to newly complied statistics from the New Mexico Venture Capital Association. That's virtually unchanged from 2012, when investors pumped about $40 million into local startups, and it's just one-third the amount of capital invested annually here before the recession in 2007 and 2008.

Veteran investors say stagnation in venture activity could pose a major problem for emerging, grass-roots initiatives in Albuquerque to promote homegrown companies as a force for economic development. That includes such things as Innovate ABQ, aimed at building a thriving technology research and development district Downtown, and ABQid, a city-backed program to help fledgling entrepreneurs turn great ideas into new ventures.

To succeed, startups from those programs will need access to a lot more venture capital -- particularly in the early stages of development -- than is currently available in the local market.

Expectations will rise

"As these initiatives gain force, the startups that emerge will need capital to grow," said David Blivin, managing director of Cottonwood Technology Fund, which backs early stage companies.

"Today, there are already some very active incubators in Albuquerque and Santa Fe, but not many companies in those facilities are getting the funding they need to move out on their own. With more startup initiatives, expectations will increase for companies to grow and graduate from the incubators, and for that, we need more capital in the local market."

In part, New Mexico's current venture capital crunch reflects the shallow industry roots that developed here before the recession hit.

Local venture activity only began to build significantly in New Mexico during the early 2000s, after the State Investment Council began investing heavily in venture funds.

That attracted many venture capitalists to New Mexico, pushing the number of VC firms active here from just a couple at the turn of the century to more than 15 by mid-decade. And that, in turn, pushed investments statewide to a peak of about $120 million annually in 2007 and 2008.

But after the economy tanked, local venture investment plummeted to just $22.2 million in 2009, and today it remains 65 percent lower than pre-recession levels. The number of VC funds now active in New Mexico has fallen to just five or six.

In contrast, while the VC industry nationally also contracted dramatically during the recession, investment in places like Boston and the Silicon Valley has rebounded.

Last year, total investments nationwide reached $29.4 billion, according to the National Venture Capital Association. That's nearly equal to pre-recession levels, after having fallen to just $20 billion in 2009.

U.S. bouncing back

"Other places bounced back because they already had a big base of equity," said Tom Stephenson, managing partner with the Verge Fund in Albuquerque.

VC firms nationwide generally have retracted to their traditional bastions, said Albuquerque Economic Development Director Gary Oppedahl.

"Since the recession, it's become much more geographic in nature on the coasts and in places like Austin," he said.

In addition, a hiatus in new SIC commitments to venture funds from late 2008 to 2012 contributed to the industry decline here, as did a decision by the New Mexico Small Business Investment Corp. to cease its venture investments.

Both agencies are authorized to commit capital from the severance tax permanent fund to venture activity. But while the SIC began investing again in venture funds last year, the SBIC has said it will avoid such commitments for the foreseeable future.

The capital crunch has made it much more difficult for local startups to get funding. That's particularly true for new companies that need smaller amounts of money to further develop their products and businesses to the point where out-of-state investors are willing to step in with larger rounds of investment.

Later stage funding

Early stage capital has contracted because most venture firms are pumping larger follow-on investments into existing companies to ensure their success, rather than spend scarce dollars on new startups.

"There's just not enough proactive investors in the market now looking to invest in the next crop of startup companies," Blivin said.

The problem has been offset somewhat through seed funding from the New Mexico Angels, a group of about 70 high-wealth individuals who pool their resources. That group has committed about $7 million to 23 companies since the recession, said Angels President John Chavez.

Other seed sources also are available, such as Los Alamos National Laboratory'sVenture Acceleration Fund, which provides grants to select startups. The University of New Mexico as well recently approved a $1 million fund for investments in companies that commercialize university technology, and the new ABQid venture accelerator program will provide seed money to entrepreneurs selected to participate.

But such seed investments generally range from tens of thousands to a few hundred thousand dollars. Early stage investments of perhaps $1 million to $3 million or $4 million are harder to come by, and that's the stage where startups really build their businesses into magnets for larger rounds of capital.

'A real challenge'

"It's a real challenge for companies seeking money in that range," Chavez said.

Most have to go out of state to get funding. Many have succeeded, but only top-notch startups with the most-promising products usually get funded, and many feel pressured to relocate to other states.

Filling the early stage gap will be critical for projects like Innovate ABQ, said UNM Chief Economic Development Officer Lisa Kuuttila.

"We're building a pretty strong pipeline of local startups," she said. "The question is whether we can attract the early stage funding to capitalize on all those opportunities."

Nevertheless, things could soon get better. For one thing, Innovate ABQ, the ABQid initiative and New Mexico's growing focus on home-grown entrepreneurialsm is drawing national attention, which could lure more investors to the state.

"We're building a real buzz," Oppedahl said.

In addition, some homegrown, venture-backed startups were acquired by big firms for substantial sums since last year. That's a huge magnet for national investors, because it shows New Mexico has quality technology and entrepreneurial talent to successfully take it to market, said Brian Birk of Sun Mountain Capital, which advises the SIC on investments in venture funds.

Such exits include the sale of biometric identification firm Lumidigm Inc. to a Swedish company for more than $60 million in February and last fall's $20 million sale of ZTEC Instruments to a California firm.

Moreover, as venture investors look closer at New Mexico, more state money will be available. In May, for example, the SIC approved a $10 million commitment to a new fund by Utah-based Epic Ventures for early stage investments here.

"Venture capitalists will go where there is good deal flow," Birk said. "With the opportunities now emerging in New Mexico, I believe VC will come back."

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(c)2014 the Albuquerque Journal (Albuquerque, N.M.)

Visit the Albuquerque Journal (Albuquerque, N.M.) at www.abqjournal.com

Distributed by MCT Information Services


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Source: Albuquerque Journal (NM)


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