Injecting social equity into NM’s startup ecosystem

A lot more investment capital could soon flow into nascent businesses in New Mexico’s underserved communities, thanks to new government funding to strengthen and diversify the state’s startup ecosystem.

That includes $64 million in federal funding for the Economic Development Department to launch a novel venture investment program focused on socially and economically disadvantaged individuals and communities, plus $35 million in state money for the New Mexico Finance Authority to also begin venture investing in local startups for the first time.

Both programs will deploy money into independent venture funds that invest in New Mexico businesses, although the NMFA may also pump some capital directly into startups.

And both programs require matching funds from private investors that receive money, meaning nearly $200 million could flow into local businesses over the next decade to promote economic development, particularly in marginalized rural, tribal and low-income urban areas.

“We want to make investments in a space that traditional investors don’t look at because they want a high rate of return,” EDD Strategic Programs Manager Johanna Nelson told the Journal. “At EDD, we want to put this money into socially focused funds that may not produce high returns, but that will be high in social impact.”

Although NMFA is still developing its investment strategy, it too will deploy capital in a “differentiated way” that aims to fill in gaps in the ecosystem, said NMFA Policy and Capital Strategist Ryan Decker.

NMFA does have a fiduciary responsibility to prudently deploy and recover capital, Decker said. But in general, it’s focused more on low-cost loans and assistance rather than high returns.

“If we deploy capital to venture funds to invest in businesses, we could expect a below-market rate on returns compared with what traditional venture firms expect,” Decker told the Journal.

American Rescue Plan funding

The EDD received approval from the U.S. Treasury in September for $73 million in funding through the State Small Business Credit Initiative, or SSBCI, which got $10 billion in new federal money under last year’s American Rescue Plan to support small businesses following the pandemic-induced downturn. That funding includes mandates to allocate significant capital to very small businesses of under 10 employees, and to disadvantaged, underserved populations.

The SSBCI provides capital for a variety of uses, including low-cost lending and loan guarantee initiatives, but EDD prioritized venture investment based on consultation with local public and private leaders.

“We want to create the biggest impacts to meet local needs, and we identified a critical need for capital in the venture equity space, particularly for seed and early-stage investments in underserved markets,” Nelson said.

In response, Treasury approved $64 million for EDD’s new venture equity initiative, plus $9 million for a “collateral support” program to help small businesses cover collateral shortfalls on loans.

To maximize benefits for underserved communities, EDD contracted Avivar Capital, a Los Angeles-based firm that helps develop “impact-investing” strategies that emphasize social and environmental benefits to create sustainable economies. Avivar is now helping EDD identify existing and emerging venture funds focused on social impact, said Avivar Vice President Javier Hernandez.

“We’ll target those aligned with the program,” Hernandez told the Journal. “We’ll also cultivate emerging fund managers of color. The program is still under development, but we want to see capital go to fund managers who have traditionally been excluded and who are committed to deploying capital in underserved communities.”

Federal funding will be allocated in three tranches over 10 years, beginning with a $20 million-plus award for the first three years. Including matching dollars from venture funds that receive EDD money, that would generate about $40 million in deployable capital in the first tranche, or about $13 million per year.

So far, 15 existing or emerging funds have expressed initial interest.

“We’re working with Avivar to follow up with each fund,” Nelson said. “Initially, we’ll likely deploy capital into a few funds that are already set to go in early 2023.”

Avivar will also work with public and private organizations across the state to collaboratively assist fund managers and provide wrap-around support services for startups to maximize impact, said Avivar Managing Partner Tina Castro.

“We’ve seen a lot of motivation and eagerness on the ground in New Mexico,” Castro told the Journal. “There’s already a solid foundation here that we want to build on to propel the ecosystem to the next level.”

State funding for NMFA

The state Legislature allocated $35 million to NMFA under a new Venture Capital Investment Act approved with bipartisan support in this year’s legislative session.

The act aims to increase locally available venture funding to reinforce economic development beyond what’s been achieved to date under the State Investment Council’s private equity program, which invests money from the Severance Tax Permanent Fund in venture firms that focus on local startups.

NMFA is now seeking an investment adviser for the program, which is still under development.

“Venture equity is a totally new asset class for NMFA, and we’re still working on the how to set it up,” said Decker, the agency strategist.

The main goal is to fill in gaps not met by the SIC program — which is largely focused on technology startups — while also reinforcing EDD’s emphasis on marginalized populations.

“We could get creative, maybe even see something collaborative across the three agencies,” Decker said.

NMFA expects to have its program strategy and structure in place by next spring, to begin deploying capital in mid-2023.