VC Picks Up Speed in New Mexico, Nationally

September 27, 2010 | Reprinted with permission of the New Mexico Business Weekly Copyright 2010

Venture capital investments are climbing again.

Local deal flow is still sluggish, but New Mexico investors report a marked increase in funding this year compared to 2009. And nationally, venture activity is growing substantially, said Trevor Loy, Flywheel Ventures’ managing partner and a board member of the National Venture Capital Association.

“Things are definitely picking up,” Loy said. “Last year was particularly tough for fundraising and for investing by venture capitalists. We’re by no means out of the woods yet, but there’s more than anecdotal evidence for optimism.”

The New Mexico Venture Capital Association is still compiling statistics for the second and third quarters, but its members reported $18 million in investments in the first quarter, said Stephanie Spong, NMVCA president and a principal with Epic Ventures. That’s up from $3.7 million invested during the previous six months from July to December, and it equals 80 percent of the $22.2 million invested throughout all of 2009.

“There are definitely signs of life, optimism and willingness to invest again,” Spong said.

Nationwide, venture investments jumped 49 percent, to $11.4 billion, in the first half of 2010, up from $7.7 billion in the same period last year, according to The MoneyTree Report by PricewaterhouseCoopers and the NVCA.

An improvement in exit markets is helping, Loy said. The NVCA reported 211 mergers and acquisitions, and 37 initial public offerings, in the first six months of 2010. That compares to 271 acquisitions, and 12 IPOs, in all of 2009.

Still, fundraising is low. Venture firms raised $1.9 billion in the second quarter, down from $3.7 billion in the first quarter. But Loy said venture activity will pick up more after November’s elections.

“It’s an important milestone because, regardless of the outcome, elections will bring more stability to the investment environment,” Loy said.

In New Mexico, local investments have a long way to go to reach pre-recession funding levels.

The NMVCA reported $89.9 million in venture commitments in the first half of 2008, before the meltdown on Wall Street. Investments dropped to $29.6 million in the second half of 2008, and to $18.5 million in the first half of 2009. Funding came to a near standstill last summer and fall.

Now, however, investors sound optimistic for the first time since the recession started.

“There’s no question things are improving,” said Verge Fund Managing General Partner Tom Stephenson. “The most encouraging thing is we’re starting to see some new deals, not just follow-on investments in existing portfolio companies.”

The NMVCA reported six deals in the first quarter, including three early stage Series A investments and three Series B rounds. And since then, follow-on and first-time investments have continued.

Two new startups received funding this summer. Lotus Leaf Coatings Inc. got a $232,000 investment from the New Mexico Angels and Flywheel Ventures in July to begin marketing a super hydro-resistant coating developed at the University of New Mexico. The coating can protect surfaces such as textiles against stains and metals against corrosion.

Lotus Leaf brings Angel investments to $535,000 so far this year, said Angels President John Chavez.

Skorpios Technologies Inc. received $2 million on Aug. 30 from Sun Mountain Capital and the Cottonwood Technology Fund.

The Albuquerque company is developing technology that can lower manufacturing costs for networking equipment used in fiber optics. It merges silicon with traditional materials used in digital communications, which are expensive and hard to employ in volume production. Silicon can lower costs and pave the way for more advanced chips, said Sun Mountain General Partner Lee Rand.

“It could reduce costs by 90 percent or more, while using 50 percent less energy,” Rand said.

Skorpios CEO Stephen Krasulick said the company is addressing a $10 billion global optical communications market.

“We’re a very early stage company, but we have significant customer pull,” Krasulick said. “We have non-disclosure agreements with a number of large companies, including a letter of intent with Nokia Siemens.”

Cottonwood Managing Partner David Blivin said his fund contributed $1.25 million to the Skorpios investment because the startup’s technology is so unique.

“Nobody has put silicon in optic communications before,” Blivin said. “It has truly disruptive potential.”

The Cottonwood Technology Fund formed last fall. It made three more investments this year in Texas and New Mexico companies, but it hasn’t disclosed details.

Jack Rabbit Systems Inc., an online lodging-reservation service in Santa Fe, raised another $550,000 in a $1.2 million round that closed in April. Sun Mountain and vSpring Capital’s Kickstart Seed Fund contributed $650,000 in a first closing last March.

Skorpios and Jack Rabbit both presented at a Venture Capital in the Rockies conference in Santa Fe on Sept. 16.