Minutes of the Regular Meeting of NMSBIC, April 16, 2012
A regular meeting of the New Mexico Small Business Investment Corporation was called to order on this date at 8:00 a.m. in the conference room of the WESST Enterprise Center, 609 Broadway Blvd., N.E., Albuquerque, New Mexico.
A quorum was present:
Members Present:
Mr. Joseph H. Badal, Chair
Mr. Sam Cobb [by telephone]
Ms. Roxanna Meyers, Vice Chair
Mr. Clarence L. Smith [designee of Hon. James Lewis, State Treasurer]
Ms. Launa Waller [by telephone]
Members Excused:
Mr. Alan Fowler, Secretary/Treasurer
Mr. Lupe Garcia
Legal Counsel to Board: Mr. Randy McDonald
Financial Advisor to Board: Mr. Paul Goblet
Recording Secretary: Ms. Judith S. Beatty
Guests Present:
Mr. Brad Steward, Pulakos
Ms. Michelle Hoeft, HD3
Mr. Jake Dopson, Pulakos
Mr. David Karshmer, HD3
Dr. Myron Roomkin, HD3
Mr. John W. Brown, HD3
Mr. Gregory J. Edwards, HD3
Mr. Colin Cumming, HD3
Mr. Lavi Molhotra, HD3
Mr. Larry Goldstone, HD3
Mr. Joe Trujillo, HD3
APPROVAL OF AGENDA
Mr. Smith moved for approval of the Agenda, as published. Ms. Meyers seconded the motion, which passed unanimously by voice vote.
REVIEW AND ACCEPTANCE OF BOARD MINUTES: March 26, 2012
Mr. Smith moved approval of the March 26 Minutes, as submitted. Ms. Waller seconded the motion, which passed unanimously by voice vote.
REVIEW AND ACCEPTANCE OF FINANCIAL REPORT
Mr. Goblet reviewed the March financials.
Ms. Meyers moved to accept the March Financial Report, as presented. Ms. Waller seconded the motion, which passed unanimously by voice vote.
QUARTERLY BILLING: FINANCE NEW MEXICO DISCUSSION REGARDING FINANCE NEW MEXICO
Chairman Badal stated that the Board had some discussion at the January meeting about whether it wanted to continue supporting the Finance New Mexico (FNM) contract, and agreed to hold further discussion at the April meeting. He noted that FNM maintains the SBIC website, which he thought should continue, but the question is whether the Board wants to go on supporting other aspects of the Holly Company’s $35,000 annual contractual relationship with the NMSBIC.
Mr. Goblet reviewed a memorandum from the Holly Company that contained testimonials and FNM highlights.
Chairman Badal said the issue is that the NMSBIC’s lending and equity partners have not benefited from all of the Holly Company’s efforts, and in fact the NMSBIC relies on those partners to generate their own deals.
Mr. Cobb noted that there were originally other entities partnering with the NMSBIC in the beginning of this contractual relationship, but eventually they withdrew financial support because of budget cuts. If the Board feels the NMSBIC is not getting the benefit based on how much it is spending, the appropriate thing would be to tell the Holly Company that if they can bring other partners to the table, the Board would reconsider being a partner, but probably not at the same level as now. He recalled that, about two years ago, the Board decided to continue the process assuming that some of the original supporters would get back into the mix, which has not occurred. He suggested asking the SBDCs, SBA and other such organizations to see whether or not the emerging entrepreneurial population of New Mexico is getting any benefit from this.
Chairman Badal said he thought this a very good suggestion and suggested that he and Mr. Goblet meet with the Holly Company in the next 30 days, look at ways of assisting them, and report back to the Board in May. He commented that he would have no problem supporting them if they could be more successful and more robust in getting the word out.
PRESENTATION OF AUDIT PROPOSAL: PULAKOS CPAS
Brad Steward and Jake Dopson
Mr. Steward stated that Pulakos has done the NMSBIC’s audit for the past four years, and has submitted a proposal for this year. Three years ago, Pulakos reduced their fees and this year proposes no change. He stated that Pulakos’ fee is fixed for the entire year, and they encourage their clients to call and ask as many questions as they like.
Ms. Meyers suggested that, since the NMSBIC essentially has a virtual office, the Board consider the idea of its own cloud for storage of its data and files in the future. She said this would allow retrieval of historical data from a single source; for instance, she would like to know what the NMSBIC has spent in fees and what it has executed as far as getting capital out.
Mr. McDonald said Mr. Goblet has suggested going through all of the NMSBIC’s files prior to his leaving the NMSBIC, and Chairman Badal said he thought that was an excellent idea.
Mr. Dopson commented that cloud computing has improved tremendously just in the last year, and the ability to store information offsite in a digital format, with backups, is a very valid idea.
Mr. McDonald noted that the NMSBIC adheres to its policy on document retention and destruction, which also addresses where documents are to be kept.
DISCUSSION AND POSSIBLE VOTE ON 2012 AUDIT CONTRACT
Ms. Meyers moved to approve the Pulakos contract. Mr. Smith seconded the motion, which passed unanimously by voice vote.
PRESENTATION AND REQUEST BY HIGH DESERT DISCOVERY DISTRICT (HD3)
HD3 Executive Director Michelle Hoeft introduced portfolio manager David Karshmer and board members John Brown, Colin Cumming, Greg Edwards, Larry Goldstone, Lavi Malhotra, Myron Roomkin, and Joe Trujillo.
Ms. Hoeft made a presentation on how HD3 is attempting to contribute to and accelerate the state’s high tech ecosystem. She said HD3 is housed at Sanbusco Market Center in Santa Fe.
Ms. Hoeft said there is a tremendous amount of high tech R&D that takes place in New Mexico’s public institutions and universities — $6-$7 billion in funding annually – but there is a dilemma as to why the state has not been able to capitalize on it to the extent possible.
Ms. Hoeft stated that, two years ago, HD3 began looking at “accelerators,” which is a new breed of incubators. She said the difference between publicly funded incubators, economic development type entities, etc., and HD3, is the notion of experienced and savvy businesspeople who fully embrace and mentor a company from startup to commercialization. The strategy, investment strategy, capital structure and product development are not disjointed and are fully and strategically designed toward success.
Ms. Hoeft said HD3 studied a variety of accelerator models, three of which are very similar to the HD3 model: 1) The Toronto-based MARS Discovery District nonprofit model, which was developed in 2002 with a combination of public and private money; 2) TechStars, in Boulder, the #1 startup accelerator in the world, with 90 active companies; and 3) YCombinator, in Silicon Valley, which has funded 380 startups.
Ms. Meyers asked if the HD3 board members are financially involved in the businesses, as well. Ms. Hoeft responded that they are sometimes financially involved, but are always actively engaged with the companies.
Ms. Hoeft said HD3 hosts “Discovery Day” twice a year, which is their pipeline creator – they put out an open call throughout the state for innovators, technologists and scientists to apply to come to the event, where they sit in front of a group like the HD3 board and give a 45-minute pitch on their idea, discovery and innovation. She said they then receive intense feedback from the HD3 people, after which the field of about 10 companies is narrowed down to 4-6 finalists who have promise and merit; at that point, HD3 lays down the process for developing their strategy, business plan and funding strategy, and is involved with them every step of the way from that point forward.
Ms. Hoeft stated that Discovery Day is held in May and December, and the next event will be on May 24.
Mr. Goldstone discussed the nature and progress of the five companies currently in HD3’s portfolio.
Mr. Goldstone presented the following request:
- That the NMSBIC give the HD3 a line of credit loan at a maximum of $500,000 that HD3 can draw over four years.
- Used for working capital and startup operational needs
- Matched equally by other funding and revenue sources
- Long lead time nature of startups suggests time is essential
- Loan to be repaid over 7 years beginning in year 5.
- That the NMSBIC create HD3 Fund I, which would be an equity investment fund of $1 million.
- No management fee
- Minimum 7 company diversification
- 80/20 carried interest split upon exit
Mr. Goldstone stated that the $500,000 would pay Ms. Hoeft’s salary and Mr. Karshmer’s salary, cover the rent of the Sanbusco Market Center space, and cover the cost of analysts and other resources. He said the analysts they envision hiring will be come out of UNM graduate school with expertise in computer science, marketing and finance and who can build models and do the necessary research. He said HD3 plans to pay them $20,000 annual salaries.
Mr. Goldstone stated that HD3’s other revenue sources include:
- Memberships: 34 sold to date at $100 each, which allows members use of the facility and participation in HD3 educational forums
- Private donations: HD3 Board members to contribute $50,000 per year.
- Grants: LANL and others to fund Business Development Camp investment; and USDA funding rural entrepreneurial education series
- EB5 Regional Center in NM: developed in conjunction with Allied Artists International; will attract foreign investment capital to NM [application just submitted]
- HD3 investment returns: 6% equity stake; $25,000/company/year fee for mentoring and related business services; carried interest participation in Fund I and all future funds
Mr. Goldstone discussed HD3’s financial forecasts in 5, 10 and 20 years.
HD3 Board member Colin Cumming, a former LANL engineer who is now a serial entrepreneur/investor, described a successful business he built in Oklahoma that was very similar to the HD3 model.
HD3 portfolio manager David Karshmer discussed his background and said his role at HD3 would be as a “road warrior” looking for Discovery Day applicants as well as mentoring budding technology innovators.
Ms. Meyers commented that there are incubators in Santa Fe and Albuquerque, and the NMSBIC went to great lengths to cultivate relationships with its equity partners in order to create funds and build companies, which has been costly in terms of management fees versus returns. She asked how HD3 is different in this respect.
Mr. Karshmer responded that New Mexico has set up a number of facilities for funding promising initiatives, but what has been lacking is the ability to get people prepared to develop a solid story that is fundable – this is the part of the process that HD3 focuses on.
Mr. Goldstone said the TechStars experience is very impressive – by putting their companies through the equivalent of HD3’s business development camp, 53 percent of all their companies succeed and exit and 65 percent actually get funded.
Ms. Meyers pointed out that many of the HD3 Board members are investors themselves. Speaking as the New Mexico taxpayer, she asked what would prevent them from doing exactly what Mr. Cumming did in Oklahoma, which did not involve the use of government funding.
Mr. Goldstone responded that HD3 “is doing something philanthropic for the state of New Mexico,” and Mr. Edwards added that they need a paid staff.
Ms. Meyers commented that there have been many attempts over the years, and money expended, to create a market that seems not to be there. She cited the fact that the NMSBIC started out with $47 million and is now down to $36 million almost nine years later. She also questioned how $1 million spread around seven companies, as suggested by HD3, would make much difference.
Mr. Goldstone said HD3 believes the market is out there. He agreed that the NMSBIC has tried to create a market, but has only created a lot of venture capital firms looking to develop personal wealth and who are also investing outside of New Mexico. He said the NMSBIC missed the first step in the process, which is the gap that HD3 is trying to fill. He said HD3 is a not-for-profit firm, not a VC management team that is looking to do something philanthropic for the state while taking advantage of the untapped science and technology that exists.
[HD3 representatives left the proceedings.]
Chairman Badal stated that he worked for Mr. Goldstone for six years at Thornburg Mortgage, and asked Board legal counsel Randy McDonald if he felt this constituted a conflict of interest.
Mr. McDonald responded that there is no financial conflict of interest, but there is a personal conflict of interest. He advised Chairman Badal that it would be appropriate for him to recuse himself from any vote, but that he could take part in the discussion.
Mr. Cobb stated that he is a fourth generation entrepreneur and disagrees with Ms. Meyers’ opinion that small loans are essentially ineffectual because they are not enough to impact a business. He said there are many one- and two-employee businesses that would not be in New Mexico were it not for ACCION and the NMSBIC. While the impact may not be immediate, eventually there is an impact on the state, and he feels this needs to continue.
[Further discussion was tabled until later in the meeting.]
PRESENTATION REGARDING NEW MEXICO BROADBAND HOLDINGS: Les Matthews – Mesa Ventures
Mr. Matthews said that, should the NMSBIC decide to subscribe for its portion of the Class B shares of Agave, the pro rata share of the contribution would be $16,551. He said the purchase option period has been extended to November 30, which coincides with the formal wrapping up of NMGF 1 and 2. He stated that Mesa’s controller would continue to oversee auditing and K-1 reporting requirements at the end of each year.
Mr. Matthews stated that Mesa has completed the purchase of another wireless ISP located in Grants, effective November 1, 2011, which has about 1,000 customers in the Albuquerque-Santa Fe area.
Mr. Matthews said no working capital has been called this year from Woodside, which funded part of the acquisition down payment. He said the seller is carrying paper on this purchase. He said Mesa has no plans to call capital from Woodside in the future.
Mr. Matthews stated that, in October-November, Mesa introduced a 50 megaband wireless product on which it has an exclusive licensing agreement with the primary licensee. He said MDS initially had some technical difficulty, but is being launched now, with the first customers signing on in April. He said Mesa plans to have 100 customers by the end of August and 100 more by the end of the 2012 calendar year – these are primarily business class customers who are located in the Albuquerque area.
Mr. Matthews also reported that, last month, Mesa applied for an $11.5 million loan from the Rural Utility Service, which has a broadband loan program for rural areas in the U.S. He stated that the interest rate is about 3% with a 7-year amortization. If the loan is granted (which should happen between July and September) they plan to add broadband service to 26 New Mexico towns.
Mr. Goblet stated that the NMSBIC Board has until November 20 to decide whether it wants to subscribe to its portion of the Class B shares of Agave, which would cost approximately $17,000. He said it would be outside of any of the NMSBIC’s fund relationships – so it would be a freestanding investment.
DISCUSSION ON HD3 – CONTINUED
Board members discussed how NMSBIC’s remaining capital could be used strategically to create the greatest impact, which might mean significantly less to management fees and administration fees so more could be dedicated to investments.
Ms. Meyers mentioned that the SBIC is already “over partnered” in that we have more than enough investment partners at this time.
Mr. Badal commented on the quality of the HD3 board members and that it would be nice to find a way to work with them. He asked that board to reflect on the strengths of HD3 and to come to the next meeting prepared to discuss a creative way in which NMSBIC and HD3 might work together.
Further discussion was deferred to the next meeting.
ADVISOR’S REPORT
Mr. Goblet addressed open items from the March Board minutes.
ACCION
Mr. Goblet has forwarded to Board members a detailed response from ACCION regarding questions posed by Chairman Badal and Mr. Cobb as it relates to reported loan losses by segment.
The Loan Fund
Mr. Goblet said he has posed questions to The Loan Fund regarding their new loan origination backlog, anticipated capital calls and anticipated cash balances at year end 2012. They feel that they will close the year with $13 million in their portfolio, and are in the process of trying to line up additional funding and grant partners. The Loan Fund just closed a $1 million loan with Mercy Foundation at 2.5% cost of capital. They may draw some of that, which would increase the amount of cash they have. The Loan Fund is projecting a portfolio balance of $15-$16 million by the end of 2015.
Money Market rates
Mr. Goblet reviewed money market rates as quoted by several banks, noting that they are all about 20 to 25 basis points. He noted that they are only insured up to $250,000. The NMSBIC gets 20 basis points for a non-interest-bearing account, which means the bank pledges 100% collateral.
Possible set-aside for reserves
Mr. Goblet said Mr. Cobb raised this question as it relates to management fees that may be greater than the amount of committed capital. He said the NMSBIC’s committed capital is capped in each fund, so the question is whether there are portions of this capital that haven’t been called yet that will allow them to continue to have management fees – particularly if the lives of these funds need to be extended.
Mr. Goblet stated that each fund is typically structured as a 10-year fund with the ability to extend it for two one-year periods, with the approval of the LPs. He said there wouldn’t be management fees if they called 100% of their capital, but now companies are demanding a longer funding cycle and greater amounts in response to conditions in the marketplace.
Mr. Goblet stated that the total liability to the NMSBIC or any LP is limited to their total capital commitment, so no establishment of reserves is necessary or warranted.
Mr. Goblet noted that his report includes forecasted management fees through 2019 for all of the equity funds with the exception of NM Growth Fund I and NM Gap Fund, which no longer charge management fees. NM Growth Fund II ceases management fees in November 2012.
Additional items
New Mexico Community Capital
Most of NMCC’s portfolio companies are experiencing some degree of success, although at slower rates than hoped.
NM Mezzanine Fund
NMMF is talking with their other large LPs as it relates to the changes proposed by NMSBIC. It is anticipated that the other LPs will agree to extend the investment period and the reduction in management fees if the proposed investment formula is not met. A challenge is the GP’s confidence in being able to close two transactions by September 25, 2012.
ACCION
Chairman Badal observed from ACCION’s report that, historically, the delinquency rate and loss experience has been highest among the smaller loans.
Mr. Goblet responded that many of these smaller loans tend to be to start-ups and one- to two-person businesses.
Chairman Badal suggested that the Board discuss the implications of this at a later date – if this is where the risk is, perhaps the NMSBIC should not be making these kinds of loans. He noted that the Board has previously concluded that the NMSBIC cannot be all things to all people.
CHAIRMAN’S COMMENTS
None.
ITB UPDATE
Mr. McDonald reported that the ITB went out on March 20 and he has received written questions from two individuals. According to an update submitted by the Holly Company, there were 83 unique visitors to the ITB page on the NMSBIC website.
DISCUSSION REGARDING MEETING SCHEDULE
The Board reviewed and agreed to the following: tentative schedule:
2012
Monday May 21: WESST Enterprise Center
Monday June 18: Hobbs, NM (Details and Location to Follow)
Monday August 20: WESST Enterprise Center
Monday October 15: WESST Enterprise Center
Monday November 12: WESST Enterprise Center
Monday December 10: WESST Enterprise Center
2013
Monday January 21: WESST Enterprise Center
Monday February 25: WESST Enterprise Center
Monday May 20: Regional Meeting (Location to be Determined)
Monday August 19: WESST Enterprise Center
Monday October 14: WESST Enterprise Center
Monday November 11: WESST Enterprise Center
Monday December 16: WESST Enterprise Center
ADJOURNMENT
Its business completed, the NMSBIC Board adjourned the meeting at approximately 11:30 a.m.