A lot more seed and early-stage capital could begin flowing into fledgling startups at New Mexico State University this summer thanks to a new innovation fund being set  up by NMSU’s Arrowhead Center Inc.

Arrowhead, which manages all of the university’s technology transfer and commercialization programs, announced its intent last year to establish a $2 million Arrowhead Innovation Fund to make $50,000 to $150,000 investments in startups that either work to develop and market new NMSU technologies, or that were launched by NMSU faculty, staff, students or alumni with compelling ideas for new products and services.

The NMSU Foundation committed up to $500,000 as the fund’s anchor investor. That money is conditioned on Arrowhead’s ability to raise $1.5 million more from private investors. But, once Arrowhead has raised at least $750,000, the first $250,000 of the foundation’s commitment kicks in, allowing the fund to begin operating while Arrowhead continues to raise more money. At that point, the foundation will contribute 25 cents for every new dollar of private money raised, providing up to $250,000 more for the fund.

The fund, which is set up as a for-profit subsidiary of the nonprofit Arrowhead Center, has raised $300,000 to date, including $200,000 from Hunt Holdings Limited Partnership LLC – the investment arm for Hunt Cos. in El Paso – and $100,000 from unnamed NMSU alumni, said fund Manager Estela Hernandez. Arrowhead expects to close on the first $1 million by June to begin investing in startups over the summer, with a second close in November when it hopes to reach the full $2 million target.

“We have a number of soft commitments now,” Hernandez said. “We’ll be doing a fundraising road show in May and June to hold information sessions for potential investors around New Mexico, including Las Cruces, Albuquerque and Santa Fe.”

Arrowhead will apply for money from the State Investment Council’s new $20 million “fund of funds” once the SIC begins evaluating applicants. The fund of funds, which the SIC approved last January, will invest money into micro funds around the state that provide seed and early-stage capital to startup companies.

Sun Mountain Capital, charged with managing the fund of funds, is already eyeing Arrowhead as a potential target for investment.

“They’re definitely a candidate,” said Sun Mountain partner Lee Rand. “They’re still putting the fund together, but they’re definitely in our pipeline as a good fit that we’d like to look at.”

Seed and early-stage capital are critical to the future success of new companies being formed with help from the Arrowhead Center. In the past few years, the center has created two startup incubators, one to facilitate development of companies taking NMSU technology to market, and the other to train and assist students and others who want to take the entrepreneurial plunge with their own ideas. The latter, dubbed Studio G, has to date helped about 100 startup ventures.

But very little local capital is available to assist those companies in launching and growing their businesses, said Studio G Director Kramer Winingham. Arrowhead has successfully connected many with grant funding, particularly from federal agencies, but not with private equity.

“We’ve managed to tap into federal funding, such as the National Science Foundation’s Innovation Corps program, with grants of $50,000 each awarded to five NMSU companies last year,” Winingham said. “But private investment capital is probably our biggest challenge right now. Public money is good to start, but we need the private capital and the expertise that comes with it to build these companies.”

In fact, the $50,000 NSF awards are the largest single source of funding raised through individual grants to date, leaving a critical funding gap in the $50,000 to $200,000 range, Hernandez said. That next level of funding constitutes the seed money needed for startups to further develop their products and services, test markets and potentially show enough proof of concept to attract more private equity to move forward.

“That’s the ‘valley of death’ that we need to bridge,” Hernandez said. “There’s a real funding gap there to help entrepreneurs get their companies and technologies to the next level of development.”

By helping promising startups bridge that gap, NMSU and its supporters hope to generate more interest from private investors and entrepreneurs to look at university startups and commit money to the local ecosystem.

“NMSU has lots of unique and interesting technologies, but it needs the seed capital to bring them to market and attract other later-stage investments,” said Beto Pallares, an El Paso-based venture investor who is working with Arrowhead to develop funding opportunities. “It will help a lot when this fund is up and running. There are many people who do want to invest here because they see some very good opportunities.”

Pallares is cofounder and former partner in Cottonwood Technologies, a New Mexico-based seed and early-stage investment fund. He is also founder of Joseph Advisory Services, which advises Hunt Holdings, the El Paso venture firm that’s now putting money in the Arrowhead fund.

“I manage investments on a national basis and what I’ve seen at NMSU in terms of unique technologies competes with anything I’ve seen elsewhere,” Pallares said. “They’re percolating technologies right now that we can pull the trigger on when the fund is operating and I believe that will open the door to lots of co-investors.”

To qualify for investments, startups will need to meet prudent milestones for review by both the fund’s investment committee and the its board of directors, Hernandez said. That includes significant proof of concept for new products and services, plus market research that shows likelihood of success and ability to compete in targeted industries.

NMSU expects to invest most of the fund in startups over three or four years. As companies succeed, investment partners will earn returns and the original capital will be cycled back into the fund as an “evergreen” source of investment, Hernandez said.

Arrowhead is the first venture fund that the NMSU Foundation has committed to. Endowment managers unanimously approved participation to help build a sustainable ecosystem for innovation and entrepreneurial development at NMSU, and in the local community, said foundation President Andrea Tawney.

“What better way to do that than to invest in ourselves, in our university and our community,” Tawney said. “We need to do that to get this fund off the ground and to help get other investors on board.”

Source: Arrowhead innovation fund preps to distribute