"It is in these times that you ought to start something because, chances are, you're going to be more thoughtful and a lot more capital efficient."
"I think New Mexico companies have an advantage in that they're already pre-built to be decently lean."
"It's important, and actually crucial, that New Mexicans invest in New Mexicans, because the rest of the country isn't investing in New Mexicans in the venture capital world to the same degree."
"The juries out a little bit to see if we bridge these gaps and create a more robust ecosystem rather than individual programs that come and go without a sustained view on how to maintain them."
Despite a couple of hefty deals, the amount of venture funding pumped into New Mexico companies saw a downturn in 2022, per Crunchbase data. But the Land of Enchantment wasn't alone.
A recent report from tech market intelligence company CB Insights shows that global venture funding dropped by 35% in 2022. A Crunchbase report shows the same trend when narrowed to funding for North American startups.
Additionally, each quarter last year saw a drop in terms of both deals made and money invested, and those trends seem to be continuing in parts of the country, according to recent San Francisco Business Times reporting.
Will these downward trends continue for New Mexico? Albuquerque Business First caught up with several investors in the state to hear their thoughts.
Responses were edited for brevity and clarity.
Beto Pallares, Arrowhead Innovation Fund
Albuquerque Business First: What's your outlook for 2023?
Beto Pallares: The outlook is only as good as you're able to focus resources on things that you believe can outperform vis-a-vis another area. You have to identify the various pockets of attributes and assets throughout the state to say, 'How do we organize these to have a fighting chance to build clusters of high-performing companies that create wealth and high-paying jobs?' I believe that the state is moving in that direction.
What I'm less optimistic about is the speed in which we have placed enough capital behind individual companies and entrepreneurs to help them scale, not just over six months but over 18 or 24 months. That means that we need Series A capital availability. So the outlook for ideas is good, [but] the outlook for company formation at a mid-stage to go past a minimum viable product is still undefined and can only be defined when you're able to attract larger pools of capital to incentivize the next stages.
Are you worried at all about recessionary pressures and their effect on venture capital? I'm not worried about it. It's much more difficult to raise capital now, that's a reality, but that doesn't worry me. It is in these times that you ought to start something because chances are, you're going to be more thoughtful and a lot more capital efficient.
Dorian McKenzie-Rader, OneTen° Capital
Albuquerque Business First: Do you have an outlook or a prediction for, let's say, the next 12 months?
Dorian McKenzie-Rader: One of the things that we've seen in venture capital over the past few years is people taking a big swing and from the investment side paying higher prices, higher valuations, that type of thing. I think that bubble has burst. I think we're back to reasonable valuations.
My prediction for the next 12 months would be the companies that will get funding will be the ones that have a real product and are solving a real problem that's more of a must-have and not a nice-to-have type of product. I think there will be more negotiation from the venture side for these deals than previously.
I'm curious if you're worried about possible economic downturns, and how you think those might affect investment and venture capital in the state? I've always encouraged all of my companies to run lean. My companies and most New Mexico investment companies aren't the companies spending $400,000 per year on a CEO. I think New Mexico companies have an advantage in that they're already pre-built to be decently lean.
I don't have an answer for what's to come, but I do think it's important and a good fiscal exercise for companies, especially those who survived the complete shutdown in 2020, to be prepared for what could happen and tighten those expenses a little bit. I don't think it's the time to take giant swings right now.
Albuquerque Business First: What are you expecting or looking forward to in the next 12 to 15 months?
Scott Goodman: I think there's going to be some good investments that could be made. This is the time that everything is returning back to regular pricing levels. With the recession looming, interest rates going up, people are a lot more cautious.
Because you don't have money that's being thrown at companies, companies are needing to lower their valuations and be more aggressive on the money they can raise, which allows for better investment opportunities this year.
I'm telling a lot of the founders that I interact with that you have to extend your runway, because maybe it's 18 or 24 months until your next raise. Your monthly burn has to be more conservative. Founders are realizing that and really trying to cut costs and just be more efficient with what they're doing.
Long story short I think there could be some great investment opportunities this year. And it's important, and actually crucial, that New Mexicans invest in New Mexicans, because the rest of the country isn't investing in New Mexicans in the venture capital world to the same degree.
Dave Blivin, Cottonwood Technology Fund
Albuquerque Business First: Are you worried about any recession fears or economic pressures affecting your investments?
Dave Blivin: It's been a hard time to be any kind of a technology company over the last few years, especially in the hard tech space. Certainly fundraising has become more difficult and valuations have come down. It's been a continuing kind of domino effect of COVID, supply chain [issues] and now the economy is not as strong as you would hope it would be.
Fortunately for our companies, most of them are in a pretty good position. Most of our companies haven't really scaled to the level where they got ahead of themselves on the cost-versus-revenues. They're continuing to make progress, but certainly it's a more difficult environment than it was prior to COVID.
If you had to summarize it in a sentence or two, what would be your outlook for venture capital in New Mexico in the year ahead? It's a little, I would say, unpredictable. You had the Catalyst Fund funds, but there was no plan to help them raise the second fund, so a lot of those funds that created a lot of activity don't have the ability to raise the next fund and continue the activity that they started. The juries out a little bit to see if we bridge these gaps and create a more robust ecosystem rather than individual programs that come and go without a sustained view on how to maintain them.
