Paul Goblet, Financial Advisor, NM SBIC

When the New Mexico Small Business Investment Corp. formed in 2001, its founders envisioned the organization directly owning minority stakes in a large number of small New Mexico businesses that had received federal loans from the Small Business Administration or U.S. Department of Agriculture. While this seemed like a good idea at the time, it was a challenge to implement.

After several amendments to the founding statute, the NMSBIC formed cooperative agreements with professional capital and service providers, which the organization considered better qualified and staffed to make equity investments.

How it began

The organization’s first equity commitment — of $1.5 million, as a limited partner — was in 2004 to a small local fund, Flywheel Ventures I.  Since then, Flywheel Ventures I has raised more than $30 million for equity investments in early stage technology companies, making it the largest New Mexico-based fund. Flywheel Ventures I was the first equity fund with headquarters in New Mexico.

Shortly afterward, the Verge Fund set up shop in Albuquerque, also intent on making small equity investments in early stage technology companies. The NMSBIC was the catalyst for creating both funds, as well as the other locally headquartered equity funds that followed, including New Mexico Gap Fund, Verge Fund I.5, New Mexico Growth Fund I, New Mexico Growth Fund II and New Mexico Mezzanine Fund. To date, the NMSBIC, through its partners, has invested equity in 35 businesses in the state.

Different funds for different folks

Each equity fund is slightly different both in size and expertise. Knowing the orientation of each fund can help a business owner know which fund might be the best to approach about an investment.

The Mezzanine Fund can invest up to $1 million, but the portfolio company must demonstrate a history of cash flow sufficient to afford quarterly interest payments. New Mexico Mezzanine Fund typically invests in service companies that often don’t have manufacturing plants or heavy equipment but instead consider people their primary assets. Such companies often find it hard to get large loans because they rarely have lots of hard assets to be used as collateral.

New Mexico Gap Fund, which is managed by Flywheel Ventures, invests small amounts of equity ($50,000 to $200,000) in early stage technology-based companies that show signs of rapid investment credibility; the Gap Fund cannot provide additional capital after the initial investment. To date, the Gap Fund has invested in nine New Mexico companies.

New Mexico Community Capital invests in non-tech companies — often manufacturing or service providers. It typically invests between $500,000 and $1 million, but the company must demonstrate growth potential and rapid profitability.

More details and a direct link to each equity fund are found at http://www.financenewmexico.org/find_funding.html.

Article 147

Download 147_State Has Stake in NM Business PDF

John Chavez, President, New Mexico Angels

Because they’re investing their own money, angel investors are picky about the ventures they bet on. Of the 80 deals reviewed by the New Mexico Angels in 2008, only four were funded.

One of these was Santa Fe-based Vista Therapeutics, which is developing nanotechnology tools that can help medical professionals make accurate and relatively inexpensive assessments of organ damage. The company received an additional $1 million in March.

Biotechnology companies like Vista Therapeutics receive about 18 percent of all angel investments, according to a November 2007 Kauffman Foundation poll of 86 North American angel investor groups. Other industries favored by angel investors include software (19 percent), business products and services (16 percent), consumer products and services (15 percent), hardware (12 percent) and media/entertainment (7 percent).

Attracting an angel

Angel investors look at every potential investment as a short-term, high-yield prospect — a return of 10 times the initial investment in three to five years. They’re attracted to companies with patents, trade secrets or other proprietary advantages; solid management teams open to advice and coaching; and products or services capable of rapidly achieving market prominence. They look for evidence that the company is well managed, and it helps if they know someone in management. Some angels prefer to invest in companies that are part of an industry with which they’re familiar.

Knowing all this can help an entrepreneur tailor a proposal to a specific angel or angel group.

Making a pitch

Getting help from an angel investor begins with a well-conceived proposal that clearly states how the venture will benefit from the angel’s expertise. While many angel investors are no longer in business for themselves, they like to have a hand in helping a new business succeed — and not just because they stand to gain from it.

The 60 individuals who make up New Mexico Angels formed a non-profit business services organization to facilitate potential investment opportunities. The company is not a venture fund and doesn’t make direct investments; rather, it acts as a vehicle by which members can invest directly after New Mexico Angels negotiates the terms of a deal.

Entrepreneurs interested in working with New Mexico Angels are encouraged to submit a business plan via the Web site (nmangels.com), where a screening committee can review and vet it. Promising applicants are invited to give a presentation to the screeners and then to a meeting of the entire group.

From there, the investors subject the company to due diligence — a complete audit of the applicant’s financial, business, legal and technical documents and operations — before presenting the terms of its investment, including a strategy by which the angel or angels will exit the company.

New Mexico Angels has no specific technology or location requirements. The company is based in New Mexico but looks for deals across the U.S. Of the companies funded last year, one is based in San Jose, California; one in Washington, D.C.; and two in Santa Fe.

Learn more about the New Mexico Angels.

Article 90

Download 90_Getting Money from an Angel Investor PDF

Scott Caruso, Partner, Flywheel Ventures

In the wake of a financial crisis that spread quickly from Wall Street to the rest of the world, many small businesses are finding traditional funding sources, including debt financing, harder to secure. Many entrepreneurs are consequently turning to venture capitalists to finance the growth of their businesses.

Paul F. Goblet, Financial Advisor, NMSBIC

Mention professional equity capital in New Mexico, and technology start-ups typically come to mind. That’s because most private equity investments target technology-transfer opportunities emerging from universities and national laboratories based in the state.

With the support of the New Mexico Private Equity Investment Program, more than $350 million in capital has been committed to 22 funds that directly benefit New Mexico businesses, typically in the technology sector in the Albuquerque area. But how do non-technology entrepreneurs or entrepreneurs outside of Albuquerque get their businesses going, especially in an unstable and unpredictable economy?

Help begins at home

Realizing that business ideas exist outside of Albuquerque and the technology sector, the New Mexico legislature in 2000 created the New Mexico Small Business Investment Corporation to focus on financing small businesses. Originally funded with $10 million from the Severance Tax Permanent Fund, it has swelled to more than $87 million thanks to subsequent commitments.

The Small Business Investment Corporation’s board studied the capital needs of the state’s businesses and decided its legislative mandate required it to provide both equity and lending capital, as well as an appropriate delivery system for each. Since then, the corporation has been critical in the formation of seven New Mexico equity funds, each charged with very specific investment goals, and it has launched several loan funds.

A fund for every need

To serve the needs of non-technology businesses like those in the manufacturing, service, distribution and specialty retail sectors, three new equity-investment funds were created. These funds have invested in 13 businesses that specialize in communications, aircraft equipment maintenance, chile processing, paper manufacturing, gourmet pet food manufacturing, security services, water filtration, and oil and gas infrastructure servicing. These investments have attracted an additional $35 million from out-of-state investors.

In response to the lack of pre-seed- and seed-stage capital for technology spinoffs, the New Mexico Small Business Investment Corporation helped create two funds managed by Flywheel Ventures and Verge Fund. Both make equity investments as small as $250,000 and as large as $1 million. Flywheel has invested in five companies, while Verge has invested in 15; most were start-ups or companies in their early stages.

To meet the needs of businesses that bridge the gap between initial investment and profitability, the New Mexico Gap Fund was created. This fund, also managed by Flywheel Ventures, is limited to $100,000 in any one business, which is often just enough to take a business to subsequent investment rounds by private-equity firms. The Gap Fund has invested in six New Mexico businesses, most of which are true start-ups. One of these start-ups selected New Mexico in which to begin operations, while two emerged from technology developed at Los Alamos National Lab.

The most recent fund to be developed is the New Mexico Mezzanine Fund.  Designed to address the needs of businesses unable to borrow from local banks because they lack a large base of collateral, the Mezzanine Fund allows cash-positive businesses to borrow to meet their growth needs. Businesses pay relatively high interest rates, but there are other equity-related components designed to enable growth.

Of, by and for New Mexico

All of these funds are based in New Mexico with investments going exclusively to New Mexico businesses. Through its fund partners, the New Mexico Small Business Investment Corporation now holds investments in 35 New Mexico companies.

Without the New Mexico Private Equity Investment Program, which has attracted so many out-of-state funds, there would be little in the way of equity investment in New Mexico. And without the foresight of legislators and governors, many New Mexico businesses that now contribute substantially to the economy might not have gotten off the ground.

Article 53

Download 53_Finding Equity Investment Funds In New Mexico PDF

Paul F. Goblet, Financial Advisor, NMSBIC

Despite a nationwide financial crisis, New Mexico businesses continue to attract equity investments thanks to commitments made by current and previous legislators and governors.

Both Gov. Bill Richardson and his predecessor, Gov. Gary Johnson, saw potential benefits in supporting New Mexico businesses by providing equity capital for growth.  Using capital that had accumulated in the Severance Tax Permanent Fund, our state launched the New Mexico Private Equity Investment Program in 1994, and it has grown through the infusion of additional capital commitments over the past 14 years.

The state program, which is managed by the State Investment Council, was designed to attract professionally managed equity funds like those operating in California’s Silicon Valley in the 1990s. Its creators believed that out-of-state equity-fund managers had expertise to invest in and develop New Mexico businesses and that their investments would lure additional funds and professionals. They were right.

If you build it, they will come

Chicago-based Arch Ventures was the first to establish a presence in New Mexico, but more than 20 additional funds have followed. Early investors were attracted by the vast amount of technology generated by the state’s research laboratories and universities, but other specialty funds have also been established.

In the early years, the program pledged fairly small amounts — less than $5 million per investment. Commitments in the past five years have ranged between $15 million to $20 million per investment, for a total of $205 million in 22 separate funds. Another $150 million is committed to so-called co-investment funds, which combine with other private-equity funds to invest exclusively in New Mexico businesses.

This capital and the long-term mission of the New Mexico Private Equity Investment Program have attracted additional equity and debt investments in New Mexico companies, even from foreign investors. More than $1.3 billion in equity investments and loans have now been made to more than 50 New Mexico companies, representing almost a 7-to-1 ratio of additional outside investment capital to state monies.

Look what we can do!

The economic impact has been substantial: New jobs with salaries almost double the New Mexico average and additional income-tax and business-tax revenues have boosted the state’s economy. And these new companies have spent more than $100 million on purchases in the state.

Since a large percentage of the program’s funds focus on technology, most investments are in businesses near New Mexico’s labs and universities — primarily in Albuquerque. Albuquerque also draws investments in non-technology businesses because it offers transportation, a skilled labor force, adequate and affordable housing and other resources that support rapid business growth.

Equity investors look for high short-term returns, which are most often found in businesses capable of competing globally. While that doesn’t mean niche businesses in outlying areas aren’t good investments, it does suggest that most investors prefer businesses in metropolitan areas.

Homegrown and growing global

Professional equity capital is still a fairly new concept in New Mexico, where most businesses are privately or family owned, have revenues of less than $10 million, employ fewer than 25 people and have not had the opportunity to attract capital from outside investors.

But that is beginning to change. Over the past five years, professional equity investments as small as $50,000 have been made in a chile-processing plant, a specialty-packaging manufacturer, a printing supplier, several specialty wholesalers and retailers and a broad range of industries. Most of these companies are located in and around Albuquerque, but others are in Aztec, Deming, Belen and Los Alamos.

To learn more about private equity investment, go to www.AccessToCapitalNM.org or www.FinanceNewMexico.org.

Article 52

Download 52_New Mexico Investment Program Weathering Wall St. Woes PDF

Les Mathews, Mesa Capital Partners

The worldwide credit crunch has tightened credit availability for even the largest companies, and that has also made it more difficult for smaller companies to obtain credit for expansion and working capital. Banks, the traditional sources of loans for smaller businesses, have been forced to raise credit standards and make more cautious loans to smaller businesses, which causes a significant reduction in credit availability, higher borrowing costs and more restrictive credit terms.

As a result, smaller companies, the mainstay of New Mexico’s economy, are seeking more innovative ways to finance their operations and growth. This is particularly true for the state’s early-stage businesses: Most have no history of generating positive cash flows, and most have few unencumbered assets and minimal or negative net worth — all of which make them seem too risky in the eyes of loan officers at traditional banks.

Many owners of early-stage businesses have tried to overcome this problem by offering their personal residences as collateral for business loans. But with the mortgage market meltdown and stagnancy in the residential real-estate market, banks are getting more cautious about hedging bets even on this traditionally most stable and secure form of collateral.

John Brown, Mesa Capital Partners

In such a risk-wary climate, it’s getting more and more attractive for entrepreneurs to finance business growth with infusions of equity. Doing so strengthens the balance sheet of a company and gives lenders more confidence about advancing credit on a lower loan-to-value ratio. Lowering the amount of debt and offsetting the need for debt with equity also lower the claim on cash flow for debt service.

Now what?

Most portfolio companies we work with have ongoing needs to raise money to buy equipment and other working capital. Over the past year, it has become increasingly difficult to arrange financing for these purchases.

Even when a business presents substantial collateral in the form of real estate, accounts receivable, inventory and has positive cash flows, it’s been far more difficult in 2008 to obtain credit for the company than it was in 2007 and more necessary for us to turn to alternative lenders.

We have had success with debt financings from so called mezzanine lenders – lenders who extend credit on a subordinated basis. These lenders are more like private equity funds, tending to focus on a company’s historical cash flow and future prospects rather than on collateral. Because these lenders are subordinate to traditional senior debt, they require rates of return of around 20 percent. This can be achieved through a high coupon with deferred interest or by providing them with an equity position.

We’ve also had success with government-backed programs that guarantee loans to banks or alternative lenders that extend credit to entrepreneurs. As with mezzanine lenders, interest rates for government-backed loans are higher than they are for traditional bank loans because the bank and government program split the risk, but they’re nevertheless an option for those who don’t qualify for traditional loans. The federal Small Business Administration and U.S. Department of Agriculture and the state’s Smart Money program all offer backing for loans.

Working together

When even these alternative approaches don’t succeed, we turn to a venture capital or private equity firm doing business in New Mexico for an infusion of equity, which usually makes a business more likely to appeal to alternative or traditional lenders.

With more equity providers and alternative lenders going into business in our state in the past few years, a strong sense of community has developed among these organizations. The result has been more options for companies seeking traditional or novel ways to underwrite their growth even in times of economic uncertainty.

Learn more about Mesa Capital Partners.

Article 50

Download 50_Bad Credit Business Loans PDF

Tom Stephenson, Managing General Partner, Verge Fund

Raising equity capital for your business never happens in a vacuum. External forces inevitably affect when and how and where you hunt for investors, just as they affect your decision about how much money you’ll need to support your company for a few years until you start showing a profit.

Learn more about Verge Fund.

Article 48

Download 48_Business Financing Decisions in the Real World PDF

Tom Stephenson, Managing General Partner, Verge Fund

Creating a road map with meaningful milestones for the development of your business will help you determine how much equity capital to raise and when to raise it in such a way that you maximize ownership of your company over time.

Article 47

Download 47_Equity Financing Milestones PDF

Tom Stephenson, Managing General Partner, The Verge Fund

Once you’ve decided to finance your new business with equity capital and reconciled yourself to sharing ownership with a partner or partners for several years, it’s time to decide how much money you should raise and when to do it.

Tatjana Rosev, Los Alamos National Laboratory Communications Office

The gap between the early stage funding needs of a startup company and the expectations of a typical venture-capital firm can prevent many innovations from growing beyond a concept into a commercial commodity. Because venture capitalists and angel investors tend to support products and services in intermediate, less-risky stages of development, numerous government and academic institutions have created “pre-seed” or gap funds to accelerate the creation of new companies and sustain developing companies through the research phase so their owners can focus on preparing their businesses for later-stage equity investments.

• The Company for Information Visualization and Analysis, created in Santa Fe in 2006 to develop a commercial use for EpiCast, a modeling and simulation system developed at LANL to help epidemiologists understand the spread of avian flu in human populations.
• Packet Analytics Corporation, a Santa Fe-based company that developed a computer-security software called the Network Forensic Search Engine based on technologies developed at LANL. The system centralizes security information in computer networks so that security managers can quickly investigate suspicious incidents.
• Santa Fe’s APJeT Inc., which is developing a machine that uses atmospheric-pressure plasma technology licensed by LANL to make textiles resistant to water, stains and other substances using ionized gas rather than toxic chemicals.
• Knowledge Reef Systems Inc. of Santa Fe, a LANL spinoff that is creating a new Internet-based social network through which people can share knowledge and information.
• CNT Technologies Inc., based in Los Alamos, which produces yarns using carbon nanotubes. The technique produces yarns stronger than other materials of equal weight at speeds hundreds of times faster than other techniques.

Article 41

Download 41_Speeding Up Startups in Northern New Mexico PDF