New Mexico Pulls in Venture Capital

The state is a hotbed for venture investing

by Amy Barrett

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Durgin's fund is backed by a state initiative Douglas Merriam

True, it's no silicon valley. but new mexico is becoming a venture capital hot spot. According to the National Venture Capital Assn., the number of venture-backed deals done in that state in 2007 surged 167%, to 24, compared with a 5% increase nationwide. Those transactions raised more than $128 million, compared with $32 million in 2006, and made the state the fastest-growing for venture investing last year.

One reason is that the state is home to the Los Alamos National Laboratory and Sandia National Laboratories. Over the past decade the federal government has increased its efforts to commercialize technology from both labs.

The state also has a program that invests in venture funds on the condition that the funds open offices in New Mexico and put some of their money to work there. It also encourages them to recruit other venture firms to invest in the state.

The New Mexico Private Equity Program started in 1994 with about $60 million, and by 2007 the state had increased its commitment to about $500 million. Every dollar invested by participating venture funds has led to an additional $6.70 commitment from other investors, says Greg Kulka, director of private equity for the New Mexico State Investment Council.

That's because any money New Mexico ponies up must be matched by other investors. So if the state puts $10 million into one venture capital firm, the firm can invest $5 million from its own fund in New Mexico companies if it also arranges for other venture players to put another $5 million into New Mexico startups.

"Once VCs from outside start coming here for one board meeting, it becomes easier for them to look at other deals," says Trevor Loy, a managing partner at Santa Fe-based Flywheel Ventures. Flywheel received $15 million of the $32.5 million in its flagship fund from the state. "This would be an appropriate model for any state that has a strong high-tech base," says David Durgin, general partner at Albuquerque's Verge Fund, which was launched in response to the state program. Some $10 million of Verge's $22 million came via this initiative.

BUILDING MOMENTUM

Entrepreneurs also have noticed the difference. "There are more firms looking to do deals here now," says Jim McNally, president and CEO of Albuquerque's TruTouch Technologies, a 16-person maker of sobriety testing devices. TruTouch is the third New Mexico startup McNally has been involved with since 1997. This time around he raised $1 million in venture funding, and all four investors were participants in the state program.

Mark Heesen, president of the National Venture Capital Assn., warns that this kind of model won't work everywhere. "You need good colleges, good universities, and a good social environment," Heesen explains. "If you don't have that basic infrastructure, it's going to be hard [to encourage VC investing] no matter how much money you throw at it." But with the right seeds in place, New Mexico's experience shows that a little bit of nurturing from the public sector can yield a powerful return.

Back to BWSmallBiz April/May 2008 Table of Contents

Barrett is a senior correspondent for BusinessWeek SmallBiz.