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Feet on the street – Human capital is most valuable part of a state investment program

Maybe it’s all about the people.

An afterthought of a statute requiring venture capital firms that get state money to open a New Mexico office, which was added poste facto to the State Investment Council’s regional investment program, might turn out to be the most valuable part of the legislation in the long run.

Clay Holtzman
NMBW Staff

http://www.bizjournals.com/industries/banking_financial_services/venture_capital/2004/12/06/albuquerque_focus1.html

The State Investment Council’s (SIC) regional investment program was created by legislation in 1993. Its purpose is to attract venture capital to New Mexico, providing a base of funding for startup businesses too immature for bank financing. The legislation allows the council to invest a percentage of the market value of the Severance Tax Permanent Fund, now worth more than $3.5 billion, into venture capital funds, provided they open a New Mexico office and invest at least a portion of the money in state companies. Subsequent legislation increased the amount available — currently 6 percent of the market value of the severance tax permanent fund is available for investment in regional funds and direct investments. So far, the state has committed about $183 million to venture funds under its regional investment program, according to the SIC. Most of that activity has occurred since late 1998.

According to a group assembled by Albuquerque economic developers, the total pool of venture capital available to New Mexico companies, including firms that have received SIC commitments and are looking for in-state deals, is between $750 million and $1 billion.

Along the way, the SIC’s program has seen a side benefit — one that the local business community says has been more profitable than the actual investments themselves — the creation of a venture capital community. Start with this simple fact: In 1994, there were no venture capital companies with offices in New Mexico. Today there are at least 16 venture funds operating in New Mexico including at least three headquartered in the state. Altogether, those firms have nearly 20 partners, special limited partners, principals or associates based here whose jobs are to seek out possible investments.

In addition, relocated venture capitalists have been partially responsible for founding the New Mexico Venture Capital Association, sponsoring equity capital events, infusing energy into organizations like private investor groups, Coronado Ventures Forum and the New Mexico Private Investors, among other activities. A few have formed a nonprofit, Social Venture Partners, that helps other nonprofits grow just as a venture firm would help a technology startup — with money and expertise. They also assist private investors and groups, sit on the boards of their portfolio companies, recruit managers from across the country and have worked together to create a new venture capital firm. The value of these talented young venture capitalists interested in making a mark, and bringing their knowledge and contacts to the state’s companies, far exceeds the actual capital return for the state, say some involved in the industry.

And all of that might not have been possible without the state’s staffing requirement.

"It’s an absolutely critical part of this [state’s] venture infrastructure," says Dick Harding, partner and New Mexico representative for Menlo Park, Calif.-based International Venture Fund (IVF). Harding, like many of the other relocated venture capitalists, had a loose connection to the state: he owned a home in Santa Fe for years before joining IVF to oversee its New Mexico investments.

As an investment condition, the state requires that venture funds invest the state’s commitment, or cause an equal dollar total to be invested in New Mexico companies. So, if a firm receives a $10 million commitment, it must invest that $10 million in state companies or cause that much money to be co-invested, or a combination of the two. Out of the state’s $183 million worth of capital that has been committed by the state, about $59 million has been drawn down by regional program venture funds, according to the SIC. To date, about 10 venture capital firms that have received investments as part of the regional investment program have established offices in New Mexico.
Out of compliance

It hasn’t all been positive. In 2003, the state promised an investment in Anila Fund, which had no office in New Mexico, although it planned to open one. Later, the state withdrew its investment when it found its due diligence was incomplete. And, while Greg Kulka, alternative investments portfolio manager for the SIC, says he is largely pleased with the results of the council’s regional program and its staffing requirement, one firm has been unable to comply with the state’s staffing mandate ever since it received the final approval for its $10 million commitment nearly two years ago.

Denver-based venture firm, Altira Group, is one of the founding members of the New Mexico Venture Capital Association, and earlier this year, made its first investment in a New Mexico company — a $2.25 million Series A Round in Albuquerque-based Enerpulse.

Despite the recent investment, the SIC says it is concerned about Altira’s failure to comply with its staffing rule.

"We’ve had discussions with them recently about it," Kulka says. "They are very concerned about getting someone who is well within the firm’s investment style."

Contacted by email, Dirk McDermott, Altira’s managing partner, stated that his firm does have a full time representative actively looking for deals in New Mexico from Denver and that finding a professional with experience in energy technologies and early stage investing is no easy task. He also writes that Altira’s investment in Enerpulse could end up accounting for a large majority of the state’s $10 million commitment and that members of his firm continue to travel to New Mexico regularly to look for deals and to work on a project for a Farmington initiative focused on oilfield investments in the San Juan Basin.

Despite the firm’s efforts throughout the state, the SIC says it may take action if Altira does not eventually find someone to work in its New Mexico office.

"Repercussions are entirely possible," says SIC spokesman Charles Wollmann.
The young and the hungry

Still, most say the local staffing requirement has been a boon to the local economy. The venture capitalists working in New Mexico feature some seasoned professionals like Harding, but for the most part they are a young and hungry group out to prove themselves in the industry and within their own firms.

That match with New Mexico, itself a young and emerging equity capital market, is a good one, says Kulka.

"Sometimes that’s more important than experience," Kulka says.

Once the SIC approves a commitment to a venture fund under its regional program, it is usually kept abreast of who the firm is planning to staff its New Mexico office with, according to the SIC.

"Usually, they do clear it with us before they make an offer to someone," Kulka says.

Brian Birk, the New Mexico representative for Fort Washington Capital Partners, the Ohio firm hired by the SIC to advise its regional program and manage the state’s $30 million direct investment fund, says many of the state’s young venture capitalists work closely with a senior member of their firm — in a kind of mentoring relationship.

"You have to have senior leadership and you have to have the right junior guys," he says.

That description fits several of the venture capitalists working in New Mexico, including Damien Thomas of ITU Ventures, a local tapped to work for ITU, and John Dunning of Wasatch Venture Fund, a San Francisco native who came to New Mexico from the Wasatch office in Phoenix.

Both funds have made a pair of investments in New Mexico companies since receiving commitments from the SIC and, in Dunning’s case, he has managed to help his firm secure a follow-on commitment from the state, something that ITU is reportedly talking to the SIC about.

The level of activity for ITU and Wasatch are good examples of how the staffing requirement has proven to be a good mandate because it makes out of state venture funds look at New Mexico for more than just the minimum number of investments, Birk says.

"You can’t be effective in a market unless you have a presence there," Birk says.
Accelerating industry development

Possibly one of the best examples of how the state’s staffing requirement has helped grow the state’s venture capital infrastructure could be the $12.5 million Verge venture fund, based in Albuquerque.

Verge was founded last year by three general partners, Dave Durgin, Ray Radosevich and Tom Stephenson. Durgin and Radosevich are both New Mexico representatives with Arizona-based Valley Ventures and Stephenson returned to the state to work for Austin-based Murphree Venture Partners shortly after the staffing legislation was passed.

Although all three have strong New Mexico ties, the staffing requirement gave Stephenson a chance to return home to New Mexico. He says he has no doubt that Verge, or a seed fund like it, eventually would have sprung from the energy created by the out of state venture funds in New Mexico.

"[But,] I’m not sure if it would have come around as quickly," Stephenson says.

The professionals working in New Mexico for out of state venture funds have greatly contributed to the state’s infrastructure and without them, the current level of momentum probably would have taken much more time to occur, if at all.

"There’s no substitute for feet on the street," Stephenson says.

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