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Early-stage capital shrinks for smaller startups

Copyright © 2013 Albuquerque Journal

When it comes to scarcity of venture capital in New Mexico, it’s the little guys who suffer the most.

Those are the startups that have potentially great ideas for new products or services, but who lack access to “early-stage” capital from venture investors. They need that funding to get their companies up and going, and to continue developing their technologies enough to attract the larger, later-stage investments they’ll eventually require to get to market.

That “seed” and “early-stage” capital, which ranges from tens of thousands of dollars to about $2 million, has slowed virtually to a trickle in New Mexico in recent years, according to quarterly surveys of local investment activity by the New Mexico Venture Capital Association.

BIRK: Managing director of Sun Mountain Capital

BIRK: Managing director of Sun Mountain Capital

“There just aren’t as many active sources of early-stage financing doing deals today in New Mexico,” said Tom Stephenson, managing partner of the Verge Fund and chairman of the association’s quarterly survey.

From January-June, just $3.6 million in venture investments flowed into six new local startups, according to the latest survey, released Oct. 18. That compares to $28.5 million that went to six established companies in the same period.

In part, the early-stage funding crunch reflects an overall contraction in venture capital since the economy tanked in late 2008, said Brian Birk, managing director of Sun Mountain Capital.

Since the recession, the number of venture funds nationwide has shrunk by about 40 percent, Birk said. In addition, institutional investors who finance venture funds are now more cautious about committing more capital until they see significant returns on previous investments.

“They’re not just looking at potential returns now,” Birk said. “They want real cash coming back, not just value on paper.”

That’s made new fundraising more difficult for local venture investors, because most of them are still working on building up the value of existing companies in their current portfolios. And, until some of those existing firms start getting acquired by larger corporations – which is when venture capitalists earn a return on their investments – it will be difficult to attract more institutional commitments to new venture funds.

As a result,there’s less capital available in the venture system, which has led to a sharp drop in activity overall.

Last year, local venture investments fell to just $39.9 million, compared to about $120 million per year in both 2007 and 2008, before the recession.

Moreover, with less money available, local venture funds tend to covet their reserves for their existing companies, leaving fewer funding opportunities for new startups.

That’s a problem for the overall health of the local venture industry, because it interrupts the continuing cycle of venture investment, said David Blivin, managing partner of Cottonwood Technology Fund.

“We need a full ecosystem with all stages of capital available so that a steady pipeline of early-stage companies gets built to the point where they can attract more capital to New Mexico for later-stage rounds of financing,” Blivin said.

In the end, of course, it’s a problem for New Mexico in general, since the effort to build a robust venture industry here is aimed at creating new, homegrown companies that can offer good-paying, stable jobs.

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