NM may be heading into a ‘Golden Age’ of venture investment

New Mexico is entering a new phase of venture capital-backed development that could potentially accelerate and diversify the startup economy across the state.

It’s backed by a fresh wave of federal and state funding that is pumping up public coffers, providing more investment capital for venture funds that will, in turn, invest in local startup businesses.

The first surge could begin rippling through the startup ecosystem early next year as new programs managed by the state Economic Development Department and the New Mexico Finance Authority get underway, and as State Investment Council-backed venture funds begin deploying more private equity into the local economy.

Many public and private-sector professionals here believe it could mark a turning point in New Mexico’s 30-year effort to build a thriving, venture-backed startup system that provides existing and aspiring entrepreneurs with access to capital — and to entrepreneurial talent, training and mentoring expertise — to build nascent businesses into successful, sustainable enterprises.

SIC member Harold Lavender, who heads the council’s private equity investment committee, said New Mexico is approaching a new era in venture development.

“I believe we have the potential now to enter a Golden Age of venture investing with huge economic benefits for the state,” Lavender told the Journal. “A vibrant venture capital ecosystem is one of the keys to New Mexico’s success. It provides critical funding and resources to help local companies grow and succeed, which leads to jobs, tax revenue, wealth creation and economic progress.”

Many challenges lay ahead, said Brian Birk, managing partner at Santa Fe-based Sun Mountain Capital, which manages an SIC fund for direct investments in local companies. That includes appropriate strategies to efficiently deploy new capital into promising startups, assistance to scale them into sustainable businesses with robust markets, and then, a record of success achieved over time that can turn the local venture ecosystem into a spiraling magnet that attracts a lot more private investment going forward.

But the influx of new state and federal funding provides a lot more “dry powder” to build the startup economy, Birk said. And that, combined with the progress already achieved in recent years to create foundational programs and support services for local startups, is generating a lot of excitement in New Mexico’s investment community.

“The foundation is in place for the ecosystem to achieve a whole new level of activity,” Birk told the Journal. “… There’s never been a better time to be an investor or entrepreneur in New Mexico, with new dry powder coming in to fund a lot more deals, especially for early-stage companies. And many resources and programs are now in place to help businesspeople across the board.”

Two new government venture funds will pump millions into underserved NM communities

The NM Economic Development Department and NM Finance Authority’s programs will require matching private funds.…

Strong foundation

New Mexico has already achieved a solid foundation for growth, especially in the past few years.

The state originally began building a publicly supported, venture-development strategy in 1993, when the SIC — which manages New Mexico’s permanent funds — launched its private equity investment program to channel money from the state’s Severance Tax Permanent Fund into independent venture funds that commit to investing in local companies.

The program has grown and changed over the years, with many ups and downs. The 2008 recession, in particular, threw a major wrench in the works, virtually grinding the program to a halt for nearly five years after many state-backed local startups crashed and burned in the downturn.

But the SIC began pumping new money into the program in 2013 and, since then, the amount allotted has grown steadily. At the same time, as strategies for building startup economies gained momentum across the nation, public and private entities in New Mexico worked together to construct extensive support infrastructure for existing and aspiring entrepreneurs here to launch and grow new companies.

A formidable array of incubators, business accelerators and other support programs are now firmly grounded in all of New Mexico’s major urban centers, with tentacles into many rural areas, as well. And an array of in-state and out-of-state venture funds have been investing actively in many new startups, particularly in Albuquerque, Las Cruces and Santa Fe.

That’s created dozens of companies at different levels of development, with some now poised for breakout success.

“In the early years of the SIC program, we had many small startups with funding around the state and just a couple of relatively high-profile companies,” Birk said. “Today, we have about a dozen high-profile companies with promising prospects, plus a much deeper, healthier pipeline of up-and-coming startups. Our early-stage ecosystem is now much more vibrant and robust than it was 10 years ago.”

Startups growing, expanding

Birk cited Albuquerque-based BayoTech Inc. as a prime example. The company, which launched in 2015 with backing from Sun Mountain and other SIC-supported venture funds, has raised well over $200 million in private equity to deploy New Mexico-built compact mobile hydrogen generators across the country. It currently employs more than 100 people — plus dozens more who work for a manufacturing partner in Farmington — converting BayoTech into one of the state’s most successful startups to date.

Other success stories include Albuquerque-based semiconductor companies Skorpios Technologies and 3D Glass Solutions. Both launched with local SIC-backed venture funding to grow into bustling manufacturing firms with major growth potential.

Dozens of small and mid-sized firms are also developing an array of new products and services for everything from robotics, space operations, information technology and the gaming industry to medical therapies and diagnostics, clean energy and data analytics. Together, they employ thousands of people in well-paid jobs across the state.

Some prominent examples include:

• Build with Robots, which is marketing autonomous machines to disinfect facilities
• BennuBio, which built a superfast cytometer, or cell meter, for rapid medical diagnostics
• Parting Stone, which uses a proprietary process to turn people’s ashes into memorial stones
• X-Bow (or “crossbow”), which has created potentially groundbreaking rocket-motor technology
• UbiQD, a materials development startup that produces low-cost quantum dots for novel applications in solar generation and agricultural production
• Ganymede, a Las Cruces gaming company focused on new games for aging gamers
• Meow Wolf, a Santa Fe-based creative arts entertainment company with venues in New Mexico and elsewhere

New Mexico’s post-recession venture activity has far surpassed the early years of SIC’s private equity program, with $165 million in state money committed to 17 different in- and out-of-state venture firms between 2013 and June 2022, according to the most recent council report. In addition, the council provided another $105 million to the SIC’s own fund for direct investments in companies managed by Sun Mountain Capital.

All that funding has, in turn, attracted a lot more venture investment to the state, allowing local startups to raise hundreds of millions in additional capital to grow their companies, Birk said.

For example, a $20 million “catalyst fund” — set up in 2016 with $10 million from the SIC, and $10 million in federal and private money — provided capital to seven micro venture funds around the state to invest small seed-rounds of capital in early-stage startups. Those micro funds also contributed matching dollars for all catalyst money they received, allowing at least $40 million to flow into newly formed local companies.

All told, the micro funds had invested in 29 different startups as of June, Birk said. They now employ more than 350 people in New Mexico and have collectively raised another $250 million in additional capital. A $2 million Arrowhead Innovation Fund at New Mexico State University, for example — which received $800,000 from the SIC’s catalyst fund — has invested about $1.5 million directly into 13 different startups, while also supporting another five local companies, said Fund Manager Beto Pallares. In addition, Arrowhead collaborated with co-investors from other in- and out-of-state venture funds to raise another $17.3 million in additional capital for Arrowhead-backed companies.

“Overall, they’ve created about 140 jobs,” Pallares told the Journal. “… New Mexico continues to be a hotbed for great ideas that need to be paired with the right amount of capital to continue building technology companies here.”

Adding fuel, diversifying programs

Given the strong foundation already achieved, the next phase of New Mexico’s venture-investment programs could greatly accelerate and diversify the startup ecosystem, allowing many more companies to launch and grow into stable, successful firms, while potentially attracting a lot more investor interest in the state.

This time, it’s not just the SIC that’s working to build the venture system, but also the Economic Development Department and the state Finance Authority.

The EDD expects to deploy $64 million in federal money over the next 10 years for a new venture capital program. The U.S. Treasury approved that funding for New Mexico in September from money included in last year’s American Rescue Plan to support small businesses after the pandemic-induced economic downturn, said EDD Strategic Programs Manager Johanna Nelson.

The EDD will specifically target underserved communities around the state, channeling investment into venture funds that commit to investing in businesses launched by socially and economically disadvantaged individuals. That could allow private equity to flow into many more marginalized areas — such as rural zones, tribal communities and low-income urban neighborhoods — to help fill gaps in the venture ecosystem.

“It will allow us to address real community needs,” Nelson told the Journal. “… That’s the exciting part of it — promoting economic development through innovative funding approaches.”

NMFA is also creating a new private equity program with $35 million in funding approved by the State Legislature under a Venture Capital Investment Act that passed with bipartisan support in this year’s session. The act authorizes the NMFA to manage venture investment as a new asset class alongside its other financial programs.

The agency is now developing strategies and logistics to begin deploying capital in mid-2023, said NMFA Policy and Capital Strategist Ryan Deker. It wants to fill in gaps in the venture ecosystem not addressed by EDD or the SIC.

“We want to see capital deployed in a differentiated way to support those other two programs,” Deker told the Journal. “We don’t want all three agencies to be doubling or tripling down on (similar) investments.”

Although the NMFA has yet to publicly define its goals and targets, both that agency and EDD will be focused on seed and early-stage investments in nascent companies, especially in underserved communities. And, given their economic development mandates, they can deploy capital at below-market rates to emphasize social impact above returns.

That could potentially pump up to $200 million in new venture capital into the startup economy over the next five to 10 years, when including matching funds by venture firms receiving EDD and NMFA allocations combined with the $99 million that those agencies expect to deploy.

America’s Frontier Fund

The SIC, meanwhile, is stepping up its private equity commitments and potential impact through a new, $100 million investment it approved in late-November for the newly formed national venture firm America’s Frontier Fund. That firm plans to create a “venture studio” in Albuquerque — plus satellite studios around the state — to pull emerging, cutting-edge technologies out of the state’s national labs and research universities to build them into marketable products and services through New Mexico-based startups it will help launch and grow.

The SIC commitment to AFF will be deployed over 10 years, contributing about $10 million per year for local investments out of a new, $500 million fund the firm is now raising from public and private sources.

Although spread over time, the SIC funding is the largest single-venture commitment ever made by the SIC to a New Mexico-focused venture fund since the private equity program began three decades ago.

“It’s a big bite for the New Mexico program,” SIC spokesman Charles Wollmann told the Journal. “It’s a long-term commitment, with the capital being drawn down over a decade. … (But) it could be a real inflection point in New Mexico’s venture ecosystem, both for existing companies and new ones.”

The council also continues to approve substantial commitments to other in-state and out-of-state venture funds that invest in New Mexico companies, including a $35 million allocation approved in November for two new funds that Silicon Valley-based Crosslink Capital is now raising. That includes $20 million for an early-stage investment fund that finances initial Crosslink commitments to new companies, plus $15 million more for a later-stage fund that Crosslink will use to help established startups continue to grow.

Prior SIC commitments in 2018 and 2020 to two previous Crosslink funds contributed to substantial Crosslink investments in two local companies, including Santa Fe-based data analytics firm Descartes Labs, which currently employs nearly 100 people, and rocket motor company X-Bow systems.

Opportunities and challenges

The SIC’s latest commitments, particularly its investment in the new Frontier Fund, plus the new EDD and NMFA private equity programs, are generating a lot of enthusiasm about the prospects for pushing the local venture ecosystem into a new level of vibrancy, said Sun Mountain partner Lee Rand.

“Given the historical foundation that’s already been built, there’s a lot of new interest and excitement with the new capital flowing in,” Rand told the Journal. “It has real potential to jumpstart a new (venture capital) life cycle in the state.”

Still, many challenges lay ahead, such as the need to attract a lot more private investment from inside and outside the state in new, promising startups that need larger follow-on rounds of capital to continue to grow, Birk said.

There’s significant funding now for early-stage financing of new startups. But, to obtain needed follow-on funding, most companies must generally turn to deep-pocketed national investors concentrated in such other places as Silicon Valley and the East Coast. And that often comes with pressure on startups to move out of New Mexico and relocate their operations closer to those big investors, Birk said.

“It’s a challenge for New Mexico companies to raise ‘B’ and ‘C’ rounds,” Birk said. “And, with so many more early-stage companies operating here now, they need follow-on capital, and it’s not there locally.”

The EDD and NMFA programs could also face challenges in raising the private matching dollars needed to deploy state and federal capital in locally focused venture funds.

“There’s concern that many programs need matching private capital,” Birk said. “We need to see a pool of private sector investors develop here and step up. That could be a challenge.”

Long-time local investor and serial entrepreneur Stuart Rose — a partner in Albuquerque-based Tramway Venture Partners, and founder of both the Bioscience Center in Uptown and the FatPipe co-working space Downtown — said those challenges and more must be addressed to build a healthy, sustainable venture ecosystem. But the foundational development already achieved, particularly in the past decade, plus the new programs and SIC-backed investment underway have attracted a lot more national attention focused on potential investment opportunities in New Mexico.

“The big venture capitalists are paying attention and even if they haven’t invested here yet, as they actively look at emerging opportunities, it will highly likely lead to meaningful follow-on investments and growth for local companies,” Rose told the Journal. “… The last eight to 10 years of development got us here, and we’re now in the right place at the right time. I’m very optimistic about the future.”

 

 https://www.abqjournal.com/2558244/sic-private-equity-investments-battered-by-down-markets.html