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Venture investment recovering erratically

Copyright © 2012 Albuquerque Journal

Dan Meyer, president and CEO of the local venture-backed company Comet Solutions Inc., said venture capital made his firm what it is today.

The company, which started in 2004 with technology originally developed at the University of New Mexico, offers simulation software for engineering firms to integrate all product development into a single platform.

Since launching, Comet has received about $10 million in venture capital, including $4 million last February. The funding has allowed Comet to fully develop its product in Albuquerque, open regional offices in Cincinnati and Detroit and aggressively expand sales into Asian markets.

Annual venture investments in N.M., 2005-2011
(In millions of dollars)
2005 93
2006 68.9
2007 121.3
2008 119.5
2009 22.2
2010 54.8
2011 60.3
Source: New Mexico Venture Capital Association

Revenue grew by 150 percent in 2011, and the company has leased a new, 2,000-square-foot office suite in Uptown. It’s hiring more sales and technology staff to better manage growth.

“Venture capital has given us the chance to succeed,” Meyer said. “It’s the life blood that has enabled us to develop our product and go to market.”

Comet is one of the lucky startups that received funding from local investors when the venture industry was growing before the economy collapsed in 2008.

A wrecked landscape

The recession dramatically altered the venture landscape, making capital harder to come by for new startups, and making less money available for companies overall.

The industry is rebounding nationwide, but in New Mexico, it still has a long way to go to return to pre-recession levels.

“We’re still in a bit of a state of flux,” said Tom Stephenson, managing partner of the Verge Fund in Albuquerque. “We’ve slowed down a great deal.”

Historically, venture investing was limited in New Mexico until about 2004, when the State Investment Council started pumping more money into local venture funds.

Many such firms established operations here, and investments in local startups steadily climbed, peaking at a record $121 million in 2007, according to the New Mexico Venture Capital Association. Scores of local companies launched in those years, many of them commercializing technologies developed at the state’s research universities and national laboratories.

But the recession cut venture investments to just $22.2 million in 2009. Many startups went out of business, and venture firms redirected funds to portfolio companies like Comet to keep them going, rather than fund new companies.

Investments have rebounded somewhat, reaching about $60 million last year. But that’s still only half of the annual private equity flow before the recession, and quarterly investment remains erratic.

Lots of volatility

“We continue to see a great deal of volatility in the local funding environment,” said Flywheel Ventures General Partner Kim Sanchez Rael. “In general, we are seeing both funding and activity increase since the 2009 lows, but with great variability from quarter to quarter.”

With less money to go around overall, and more of it going to existing companies, new startups have a harder time finding money. In the first quarter of 2012, venture funds pumped $14.7 million into five local companies, but all of it was follow-on rounds for existing firms, with no seed or early stage funding for new startups, according to the Venture Capital Association.

New Mexico is unlikely to see a return to pre-recession funding levels anytime soon, in part because the industry as a whole is a lot more selective in choosing investments after many inexperienced investors cut their losses and got out in the recession, said Flywheel Managing Partner Trevor Loy.

“Since the recession, about one-third of the venture firms have disappeared,” Loy said. “In laymen’s terms, the tourists have gone home and the venture capitalists that remain are the most experienced ones with the most know-how in creating successful startups.”

More cautious now

Moreover, many venture firms are more cautious now about New Mexico’s business environment because of pay-to-play scandals at the New Mexico State Investment Council, plus uncertainty over the stability of the council’s private equity programs.

“In the last couple of years, we’ve seen a lot of political infighting over investment policies,” Loy said. “No matter what one’s individual perspective on those discussions, the antagonism created has had the unintended consequence of fueling a great deal of uncertainty about the stability of making investments in New Mexico.”

Still, as venture firms direct more of their scarce resources to existing portfolio companies, such as Comet Solutions, those businesses are steadily building value. That could mean more successful exits with lucrative returns when the market for initial public offerings and mergers and acquisitions fully rebounds. That’s essential to attract more venture capital to New Mexico.

“A whole bunch of companies that survived the crash are growing,” Stephenson said. “I believe we’ll see strong exit activity a little farther on.”