Venture Capitalists Plant Fresh Seeds in Local Startups

July 31, 2010 | Reprinted with permission of the New Mexico Business Weekly Copyright 2010; by Kevin Robinson-Avila, NMBW Staff

Venture capitalists can usually find bargain deals in a down economy.

Companies are more willing to accept lower valuations to attract investors, and less capital is required because operating costs are less expensive.

As a result, investors aren’t exactly on a shopping spree, but they are investing significantly more in seed and early stage deals in New Mexico and nationally since the beginning of the year, said Trevor Loy, managing partner of Flywheel Ventures.

“We continue to see an increase in seed-stage and first-time funding for companies,” Loy said. “These are deals that won’t see a return for five to 10 years, but investors are looking beyond the downturn to take advantage of opportunities that emerge in times like these.”

Flywheel is no exception. Since last year, it raised more money for its gap fund, which makes seed investments in early-stage startups in New Mexico. That led to a follow-on round this year for one of Flywheel’s nascent gap portfolio companies, plus a first-time, $100,000 investment in a new startup, airsMobile Inc.

That company is marketing global positioning system-based software to help taxi companies serve passengers more quickly. Taxi dispatchers pay a monthly fee to use the GPS software in their cabs, although passengers can download and use it for free on smart phones.

Once installed, passengers just push a button and the service automatically locates the closest taxi, said airsMobile spokeswoman Wendy Doyle.

“Once the closest taxi and passenger are connected, they both get progress information on how far away the cab is and how long the customer must wait,” Doyle said. “It’s ‘green technology’ because it cuts down on the time and distance that cabs have to drive.”

The company will use Flywheel funds to beta test service in Washington, D.C. and then roll it out in other markets.

Flywheel General Partner Scott Caruso said the gap fund helps Flywheel tap emerging opportunities.

“The current economy is similar to when the dot.com bubble burst,” Caruso said. “It’s spawning incredible opportunities.”

The New Mexico Venture Capital Association said three local seed deals worth $1.8 million took place in the first quarter of 2009. Those were the first seed deals reported in New Mexico since 2007, said Tom Stephenson, managing general partner of the Verge Fund.

“We’re seeing a fair number of new seed financings,” Stephenson said. “That’s a healthy and somewhat expected development in a down economy.”

Two more early stage deals also took place in July.

Verge made a follow-on investment in Vibrant Corp., a Verge portfolio company that conducts nondestructive testing of aerospace components. Vibrant didn’t disclose the amount it received, but CEO

Lem Hunter said it will help his company navigate the recession.

“The new money extends our runway considerably,” Hunter said.

Vital Alert, a startup that presented at Technology Ventures Corp.’s Equity Capital Symposium in May, also announced a $2.5 million investment on July 27 from two Canadian venture firms. That company offers emergency wireless communications in places where most systems break down, such as underground.

Notwithstanding the new seed and early stage investments, venture capital activity remains depressed.

Venture firms invested a total of $16.1 million in five deals during the first quarter of this year, according to the NMVCA. That’s nearly twice the $8.5 million invested in fourth-quarter 2008, but it’s still much less than the amount reported from January-September, when total investments averaged $37 million per quarter.

New Mexico investments mirror trends at the national level.

Venture activity nationwide plummeted to just $3.2 billion for 603 deals in first-quarter 2009 – a 47 percent decline in dollars and a 37 percent decline in deals from fourth-quarter 2008, according to the National Venture Capital Association.

Activity in the second quarter barely changed, with $3.7 billion invested in 612 deals.
On the other hand, seed and early stage financing surged 67 percent, from $885 million in first-quarter 2009 to $1.5 billion in the second quarter.