Cautious times demand better business plans and solid management from start-ups

Venture capitalists in New Mexico and elsewhere are demonstrating a cautious, sober attitude that took root two years ago, says George
Friberg, director of Technology Ventures Corporation (TVC). There is plenty of private equity looking for a good idea and a great business
plan, however, especially for those darlings of venture capitalists everywhere: Software, networking and equipment, biotechnology and
telecommunications top KPMG Consulting Inc.’s MoneyTreeþ list of investments by industry for the first quarter of 2002.

By:
Stephanie Hainsfurther
New Mexico Business Weekly

Nine companies within the state received about $170 million in investments two years ago. Since 1994, total private equity investments in 12
New Mexico companies totaled nearly $193 million as of May 31, 2002 according to the New Mexico State Investment Council, a slight slide in
the average investment per company. "The whole world of venture capital has experienced some stress and turmoil," Friberg notes. "There is
still a lot of money out there. It’s just not as plentiful as before, and it’s more cautious than it has been."

He attributes the current decline in individual company investments to a "phenomenally large" peak of investments from 1990 to 1996. "The
dot-com, or the dot-bomb, situation really took a toll, because those who invested heavily were burned badly," Friberg remarks. "There’s been
a lot of retrenching."

Friberg also points out that much of the money from venture capital firms comes from foundations, universities and pension funds. "By nature,
those folks are fairly conservative," he says. "I don’t think that’s bad."

Start-ups looking for early stage, or Round A, financing might be deemed less desirable when it comes to attracting venture capital funds. "A
lot of these funds are doing later-stage financing," states Dante Fichera, co-author of "Insider’s Guide to Venture Capital, 2002," and
managing director of San Diego Ventureplex, a business providing capital and other resources for start-ups and entrepreneurs
(http://www.ventureplex.com). "When you’re an early-stage company, there are few funds in New Mexico going into [Round A financing]. These
companies will have to go outside the state to dig out funding," Fichera advises.

Another logical trend in private equity funding, Fichera finds, is that seasoned CEOs who have managed successful companies using a
specific venture capital fund in the past are the ones getting attention from those same funds now. "If you’re just a brand-new entrepreneur on
the block, it’s going to be more difficult to raise funding than it would otherwise be," comments Fichera. "It’s going to take more than just a good
business plan to get financing. Venture capital funds are looking for a solid management team with a track record. They’re looking for large
market opportunities with significant competitive advantages. When they cut a check, it’s going to get that company to profitability, versus
simply counting on other rounds of financing just to survive."

Matthew Ennis, president and CEO of Argus Insights Inc. in Albuquerque, sums it up. "The ones that are successful are those addressing the
concerns of the stakeholders, and know who is ultimately going to care about the technology," he states. "[A company looking for funding]
needs a present application that’s going to save somebody money or solve some problem."

New Mexico technology firms are research-heavy and must learn to commercialize their bleeding-edge technologies, Ennis says. Fortunately,
there are organized forums here for new and established entrepreneurs to meet venture capitalists and present their ideas and plans for
profitable products.

Coronado Ventures Forum (CVF) provides direct networking for venture capitalists and the businesses that court them, and educates both
investors and businesses on the opportunities for each. They also teach entrepreneurs the ins and outs of attracting venture capitalists.

"What we often find are companies that haven’t done their homework and don’t have a clue about how venture capital works," comments
Randy Burge, a director and former chairman of CVF. "They often complain they can’t get capital, when it is their business model, or lack of
one, that is the problem."

Burge has tips for these companies on what venture capitalists are looking for. "Venture capitalists, for instance, do not invest in consumer
products," he says. "They have a hard time accepting a one-product company, as well. A company has to have the ability to grow beyond one
product very quickly, because then the risk of failure is mitigated by different options, and different strategies within different product lines."

CVF counts among its successes companies like Introbotics, an Albuquerque company that initially raised $670,000 from private equity, and
Metallicum LLC, a Santa Fe company that develops and makes nanostructured metallic materials.

At TVC’s Equity Symposium in May, 15 presenters made contact with 11 venture capital firms within the state and a few visitors. "Every one of
our 15 presenters has been contacted by one or more venture capitalists," Friberg reports. "Five or six have had multiple `pings,’ and there are
going to be some announcements by the end of summer."

Although actual funding might be a little slower this year, Friberg says, it still takes at least five or six months for investors to commit. "Two
years ago, if you were in Silicon Valley and couldn’t do a deal in two weeks, people thought your idea was no good," he remarks.

Things are different here in New Mexico. "We’ve never had a horse-race mentality, because our investors have always been fairly careful,"
Friberg points out. "We would not normally expect to see someone funded sooner than five to six months after the Symposium."

Another reason for the slow pace, he says, is that TVC’s clients are mostly new kids on the block. "We specialize in starting companies, so
only about 10 to 20 percent of our portfolio is made up of those who have revenues."

Start-ups are just fine with Tom Stephenson of Murphree Venture Partners. Stephenson is also the present chairman of CVF. "We are a
seed-only stage investor," he advises. "We are usually the first money in. A lot of times, we come in after an angel investor." (An angel is a
wealthy individual who puts up the money to start a company, with or without expectation of a return.)

Venture capitalists used to expect a rapid return on their investments, says Stephenson. "In general, it was not about company-building so
much as making quick turns and being able to make quick exits," he recalls. "What we have now is a real return to fundamentals. People are
scrutinizing these firms very closely. They are interested in revenues and how the company is being run."

Slow and steady as funding may be, New Mexico technology companies are experiencing a resurgence of interest from out-of-state venture
capital firms, says Stephenson. "Venture capitalists want to look at New Mexico companies because [New Mexico companies] do have truly
differentiating technologies," he states. "On the other hand, our companies have to get to a further stage of development to be able to attract
meaningful outside capital."

http://www.bizjournals.com/industries/banking_financial_services/venture_capital/2002/07/08/albuquerque