Clay Holtzman, NMBW Staff
An industry-anticipated return this year to riskier, early stage venture capital investments could be just the news New Mexico's emerging tech companies and venture funds need to hear.
Early stage investing, which typically entails capital provided to companies that are nearing their first sale, had fallen out of favor with venture investors in recent years. That was largely due to the market's dive in 2000 and 2001. Since then, venture funds, thankful some of their portfolio companies survived, have been shoring up their commitments, but avoiding the riskier early stage deals.
While the early stage investing trend has yet to catch on — funding remained flat in 2005's first quarter, according to a recent industry report — there are signals indicating early stage opportunities might be moving back into the limelight.
In 2004, early stage venture funds raised $10.9 billion, accounting for 45 percent of all fundraising that year — up $5 billion from 2003's early stage fundraising total that accounted for 38 percent of all money raised. Now, investors are starting to see more liquidity opportunities as the public, and mergers and acquisitions markets improve. Those factors are influencing investors to think about re-investing their earnings in new early stage funds.
“This is exactly what we would be expecting to see at the beginning of the next great market,” says John Taylor, vice president of research with the National Venture Capital Association.
Also, venture capitalists say, early stage companies have bided their time in recent years, waiting for their own valuations to increase. Now that the venture market is bouncing back, they are ready to take on equity investors — who trade cash for a portion of company ownership.
“We're coming out of a nuclear winter, so confidence is being restored across the entire gamut,” says Len Rand, managing director of San Francisco-based Granite Ventures, an early stage venture firm.
Rand, who frequently travels to his second home in New Mexico, agrees that early stage deals will likely come back into favor soon and the trend could help New Mexico with its low level of competition for deals and its new crop of early stage funds.
“I think that the trend lines are very positive for New Mexico,” says Brian Birk, regional representative for Cincinnati's Fort Washington Capital Partners. Fort Washington manages the New Mexico State Investment Council's $30 million co-investment fund.
Birk says not only would New Mexico-based funds benefit from having more firms to fill out their investment rounds, they could see those financings lead to participation in larger, follow-on rounds.
In the past year, a handful of seed and early stage funds have popped up across New Mexico. In addition to the state's own fund, firms like Santa Fe's Flywheel Ventures, Albuquerque's seed fund Verge and Utah's Wasatch Venture Fund have all launched early and seed stage funds in the last year or so.
“I think that we will see an increase in early stage investing [in New Mexico],” says Tom Stephenson, general partner with Verge. But, he says the venture scene is so new here and is growing so fast, the increase can be as much a byproduct of local activity as part of a national trend.
Whatever the reasons, there are signs that early stage activity in New Mexico is occurring and that it is attracting outsiders. At the end of 2004's fourth quarter, Advent Solar, maker of an advanced photovoltaic panel, received an $8 million Series A round infusion that included participation from the state's fund and two East Coast venture firms.
Representatives from technology transfer organization, Technology Ventures Corp., say they, too, expect to see a rise in early stage investments in New Mexico this year.
“It's our anticipation that there will be lots of activity in the second quarter,” says George Friberg, senior director at TVC.
The upswing could prove beneficial for TVC as later this month the nonprofit hosts its two-day Equity Capital Symposium. The event, now in its 12th year, attempts to match New Mexico companies, many of which are early stage, with would-be investors.
During 2005's first quarter, TVC recorded a single investment of about $450,000 made by a lone angel investor. According to the recently released Money Tree Survey, produced by PricewaterhouseCoopers, Thomson Venture Economics and the NVCA, two investments totaling about $5.1 million, were made during the first quarter in New Mexico-based companies.
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