Fewer new companies means fewer VC deals

In a recent article by the Albuquerque Business First, the New Mexico Angels were credited as having kept the venture community abreast of new investment opportunities. The full article can be found below.

SOURCE: Albuquerque Business First by Dan Mayfield on October 11, 2013

Entering the fourth quarter, the pace of venture capital investments seems to have slowed.

Not many companies this year have announced that they’ve received major influxes of cash from investors.

“What we’ve observed is the number of financings has held steady, but if you dig below the surface, there’s fewer new companies and fewer new company financing,” said Brian Birk, managing partner of Sun Mountain Capital, which helps manage the state’s New Mexico Private Equity Investment Program.

Though Sun Mountain is investing — it’s made about 10 investments this year — those investments have been follow-on funding, not initial funding, using an infusion of $20 million in state funds.

“It’s a function of two things,” Birk said, “No. 1 is the number of new companies worthy of investing in, and No. 2 is the amount of capital for those early financings.”

The state Private Equity Investment Program has investments in 39 New Mexico companies, most of which are health care-related.

Tom Stephenson of the Verge Fund, too, says his venture fund is focusing on growing the companies it works with, rather than finding new ones to invest in. But, he said, though that sounds bad for new companies, it’s not.

“My sense is that there’s a real maturing of companies,” he said.

That means, he said, exits. When a company is sold, that opens up new capital for new companies.

“There’s no question that we have not had a lot of new fund activity in New Mexico in two years. As a result, there’s a limited amount of new companies,” he said.

But, said David Blivin, funds like his Cottonwood Technology Fund are seeing more interest in out-of-state funds co-investing in local companies — just not at the level of years past.

“I would say you’re not at the level of activity of the late ’90s and early 2000s where it was a feeding frenzy,” Blivin said.

Cottonwood has invested in technology firms, such as Incitor, TriLumina and Aspen Avionics. And earlier this year it was able to bring in Canadian fund Pangaea Ventures Fund III LP to co-invest in Masterson Industries in Albuquerque.

“Across our portfolio, we have six active companies, and all of them have been able to raise new money in 2013, and all of them have been able to recruit more investors,” Blivin said. “So I would say I haven’t seen all the numbers for the last quarter, but I can say, from our portfolio standpoint, we’ve remained active.”

Despite the slowdown, the venture funds in the state are looking ahead.

“People are open to having investments in New Mexico,” Blivin said. “I think we’ll start to see some exits that will start to create a little bit of momentum.”

Much of that momentum is credited to the New Mexico Angels. The angel-funding group has been active in seeking out early investments for new companies. Many of those companies, Birk said, will be ready for an A-round of investment soon.

“Hats off to the [New Mexico] Angels to having done a nice job for ferreting out nice investment opportunities. They’ve played a crucial role in keeping the New Mexico venture scene alive,” he said.

Because of the Angels’ interest in early-round funding, within the next year Birk expects more firms will seek VC support.

“We will see more,” Stephenson said. “I’m not sure what the time frame is, but Q4, Q1, there should be some. When you look at the companies that have funding from the venture capital funds that are based here, a lot of those funds are at a point in their history where they’ve built out their funds. It very much applies to us.”

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