New Mexico Angels investor group ponders its first fund

BYLINE: Kevin Robinson-Avila

The New Mexico Angels could soon establish its own version of a "gap fund."

If it does, it would be the angel investor group's first institutional fund. All its investments are currently made by individual members, who sometimes invest in groups, says Angels President Jerry Mattingly.

"We have companies that often are looking for, say, a half million dollars, but then we only have enough interested angels to pool maybe $350,000," Mattingly says. "We need a fund we can tap into to bridge that gap on investments. Otherwise, we either look for outside money or we end up funding the company with less than it needs."

The angel fund would not be a traditional "gap fund," which institutions and investment firms set up to make investments in the smallest, early-stage businesses.

Paul Goblet, financial advisor with the New Mexico Small Business Investment Corp., says gap funds generally provide between $25,000 and $75,000 in capital to promising start-ups that are still in the laboratory or the garage. The gap investment allows companies to develop a solid business plan and demonstrate market demand for their products to attract larger investments later on.

"What the angels are really looking at is establishing a fund to more formalize their investment process," Goblet says. "While the fund may make angel-like investments, it's not really what we call a 'gap fund.'"

Whether they meet the traditional definition or not, more gap-type funds are springing up in New Mexico.

The SBIC invested $1 million in a new gap fund set up by Flywheel Ventures that had its first closing in January. The SBIC is the sole limited partner in that fund, Goblet says.

The University of New Mexico also established a gap fund last fall to make $15,000 to $25,000 grants to researchers. The money is aimed at researchers with promising technology who need to develop their discoveries more before they can approach institutional investors, explains Lisa Kuuttila, president and CEO of UNM's Science and Technology Corp.

But whether it's a traditional gap fund or not, Mattingly says the proposed Angels' fund could help meet the needs of promising start-ups that would otherwise remain under-funded.

"Probably 25 or 30 percent of angel groups across the country have some kind of side fund similar to this," Mattingly notes. "Setting up a fund like this reflects the growth and maturation of the New Mexico Angels as an investment group."

The fund would be established as a for-profit subsidiary of the NM Angels.

Although the group might hunt for an institutional boost for the fund, perhaps from the SBIC, individual contributions by limited partners in the fund would be restricted to the angels themselves, Mattingly says.

"We want long-term commitments of up to $1 million over the life of the fund," he says. "But we'd start out with maybe $300,000 at first and only ask angels to put up small amounts of maybe $3,000 each to meet investment goals in a given year rather than draw on commitments all at once."

Apart from filling investment gaps, the fund could provide follow-on funding for companies that have already received angel backing.

It also could allow less-active angels to participate in deals by earning returns as limited partners in the fund, and it could allow the angels to work more closely with venture capital firms, Mattingly says.

"We could contribute small amounts to VC deals from the fund," he adds. "That would make us more of a player in the investment community."

Meanwhile, as the Angels look for new ways to boost investment activity, the state has stepped in to help.

The New Mexico Legislature approved a bill in this year's session to allow angel investors to receive a $25,000 state income tax credit for each $100,000 investment they make, up to a maximum of three investments, or $75,000, per year. Gov. Bill Richardson must first sign the bill into law.

"That tax credit could get more people to invest in deals and get angels who already invest to commit higher amounts," Mattingly says.

"It's a win-win deal for investors and small companies, and it's also good for the state because it helps create more jobs and economic activity in New Mexico."