Go West VC In a never-ending search for the best valuations, VCs are beginning to turn some attention to the Southwest, a region –

In a way, venture firm Tullis-Dickerson & Co. Inc.’s two New Mexico offices owe their existence to venture capital’s explosion in the Southeastern United States more than to anything that happened in the Southwest.

Tullis-Dickerson in 1994 launched the TD Javelin Capital Fund, a $34 million vehicle focused on the Southeast. The fund, based in Birmingham, Ala., has a right-of-review agreement with the University of Alabama at Birmingham, a relationship that emerged from Tullis-Dickerson co-founder and Chief Executive James Tullis’ personal connections to the area. The Southeast soon blossomed as a venture capital hotbed, and Javelin took off.

The regional vehicle’s success prompted Tullis-Dickerson to look for other areas that offered the same benefits as the Southeast, places that had a lot of research and development and little venture capital. And one such place that “jumps off the map,” says Tullis-Dickerson Vice President Mike Schafer, is the Southwest. The region conducts billion of dollars in federal research every year, with almost no venture capital to show for it. Thus, the firm opened offices in Albuquerque and Santa Fe, N.M. in the summer of 1998 , and launched TD Origen Capital Fund, a Small Business Investment Company (SBIC) that ultimately will be able to leverage close to $40 million in venture capital for investment in New Mexico, Arizona, Texas, Colorado and Southern California.

As the fund-raising boom continues to push the record pool of venture capital higher each passing year, competition among VCs in traditional entrepreneurial hotbeds such as Silicon Valley and Boston’s Route 128 has become increasingly fierce, leading many firms like Tullis-Dickerson to evaluate the oft-overlooked Southwest in the hope that they can steal a few more winners for their portfolio.

Home on the Range

According to Venture Economics Information Services, a data company affiliated with Venture Capital Journal, only 178 of the 2,692 companies to receive venture financing in 1998 were located in the Southwest, putting the region ahead of only the Rocky Mountain and Northwest regions.

While states like Arizona and New Mexico have struggled for VCs’ attention, their neighbors to the north and south have been emerging as entrepreneurial centers for some time. What did Colorado and Texas have that other states in the region did not?

Brad Bertoch, president of Wayne Brown Institute, a non-profit organization in Salt Lake City committed to attracting venture financing to capital-poor areas, cites two answers. First, Colorado and Texas have much more to offer than Arizona, New Mexico, Utah and Nevada, in terms of healthier economies and larger talent pools. More so, however, each state has benefited from a Wild West-style, risk-oriented mentality, typified by maverick oilmen, Mr. Bertoch says.

Whatever the reason, Venture Economics in 1998 ranked Texas ($841.61 million) and Colorado ($601.83 million) third and fifth, respectively, among the top states to receive venture capital. In comparison, the venture capital markets in Arizona ($141.28 million), ranked 21, and New Mexico ($14.60 million), ranked 35. But while Southwestern states such as Arizona and New Mexico might never catch up to their much larger neighbors, many VCs are beginning to see an opportunity in their isolation.

Silicon Valley is the venture industry’s nerve center for a reason: VCs – like nurturing parents – want to be close to their high-tech babies, and the Valley is where the entrepreneurial action is. A standard rule of thumb often cited by VCs is that any company within a two-hour plane ride is a possible portfolio company; anything farther is too far away. And as high-tech opportunities emerged in other areas such as Boston – and later in Texas, Colorado and the Southeast – VCs opened firms and set up offices in those places to be close to these new emerging VC markets.

While companies in perceived remote locales, such as Arizona and New Mexico, certainly have not provided the high volume of deal flow as those in Northern California, they do not deserve to be ignored by VCs. Phoenix, one of the largest metropolitan areas in the country, has a talented, if largely untapped, pool of entrepreneurs spawned by two large nearby universities and the presence of Motorola Corp. and Intel Corp., and New Mexico’s Los Alamos and Sandia National Laboratories receive billions in government research dollars each year.

However, in the past, VCs, perhaps for no better reason than convenience, did not show much interest in the market – why go beyond your own backyard if you can find good deals there? And when a firm did happen to stumble upon a ripe early-stage opportunity in a place like Phoenix, its VCs often would persuade the entrepreneurs to move their operations to Silicon Valley, where they would be closer to other investors and potential strategic partners.

But all that might be changing. While VCs still prefer to be near to their portfolio companies, the rise of the Internet and e-mail as communication mediums has made it more feasible for entrepreneurs to remain where they started their companies and resist moving to Northern California. And intense competition in the Valley and an increasingly crowded VC market in the Southeast have softened VCs’ resistance to companies based in places like Arizona and New Mexico.

The Valley of the Sun

The rise of a venture capital market in Arizona has been slow, but has recently displayed some promising signs of life. Several new funds were launched in 1998 that were either based in-state, such as Valley Ventures II and VentureCap Management Partners, or planned to invest a substantial amount of capital in the market, including invencor inc.’s International Venture Fund, Wasatch Venture Fund, a Draper Fisher Jurvetson satellite backed by Utah-based Zions Bank, and TD Origen Capital Fund.

Quinn Williams, an attorney at the Phoenix law firm Snell & Wilmer who for the past decade focused his practice on private equity, says he certainly has noticed more interest in the local deal market lately. “I get a call every few weeks from VCs looking for deals,” he says. However, he warns, attracting out-of-state capital is not the ultimate solution to create a thriving venture market. “It’s hard if you don’t have some local VC firms in town to lead deals.”

Firms such as Valley Ventures and VentureCap are trying to fill that void, while a few new players are also attempting to provide limited partners with the best of both worlds: the cache of Silicon Valley with the untapped deal flow of the Southwest.

Invencor, a maiden San Francisco-based vehicle slated for investment in Arizona, New Mexico, Utah, California and Hawaii, was founded by Silicon Valley Bank veterans Debra Guerin, the firm’s chief executive, and Kirk Westbrook, its president (VCJ, December 1998, page 12). The firm is trying to appeal to limited partners by bringing a Silicon Valley presence with which to leverage overlooked, undervalued deals in the Southwest. “Because these areas are undercapitalized, someone has to scratch the surface,” Ms. Guerin explains.

Raising a first-time fund can be difficult in any market, but especially so when the vehicle’s target area of investment is as unproven as the Southwest. “There’s a lot of challenges with these undercapitalized areas,” Mr. Westbrook says. “There’s a perception that there isn’t a large, talented management pool.”

The state’s business community has aggressively marketed itself to VC investors, Mr. Williams says. The attorney started his law career focusing on real estate, an industry that for years drove the state’s economy. However, witnessing the impact of technology on the economies of neighboring Texas and Colorado, some of Arizona’s business leaders saw the need to foster the state’s high-tech and venture capital industries. Mr. Williams helped establish the Arizona Venture Capital Conference, now in its eighth year, and, more recently, helped form Arizona Angels, a formalization of several ad hoc angel groups modeled after Silicon Valley’s Band of Angels.

Mr. Williams sees several factors contributing to the rise of venture capital in Arizona. First, the area has several successful deals under its belt, which have boosted investors’ confidence. Second, Phoenix is a major metropolitan area, featuring two nearby leading universities and the necessary business infrastructure. Plus, the city is not too far from Silicon Valley and offers a comparatively cheap alternative for starting a business. Finally, he says, one would be hard pressed to find better valuations in any other market.

“It’s a great place to live, there’s a low cost-of-living and the hassle’ factor is low,” he says. “Arizona has all the amenities of a large city in a resort-type area.” Mr. Williams expects as many as 10 new venture firms in the market in the next two to three years.

From the Ground Up

New Mexico may have started its effort to attract venture capital from an even more unenviable position than Arizona. Despite being home to billions of dollars in annual federal government research, five years ago the state was home to zero venture firms, says Sherman McCorkle, president of the Albuquerque, N.M.-based non-profit Technology Ventures Corp. (TVC).

TVC was formed about a half-decade ago to stimulate the state’s economy by helping to find investment opportunities spawned by Albuquerque, N.M.’s Sandia National Laboratories. Besides working with the state government and Sandia to facilitate deal flow, TVC provides free office space and communications infrastructure to VCs who want to open an office in the state. The organization has helped attract seven firms to New Mexico, including Technology Funding, Valley Ventures, Tullis-Dickerson and Vestor Partners.

However, to go from zero venture firms to seven in just five years raises the question whether there is enough deal flow in the market to warrant opening a VC office there. “Am I worried about [deal flow]?” Mr. McCorkle rhetorically responds. “You bet.”

It is impossible to tell whether the state is overpopulated with VCs, Mr. McCorkle explains, because the industry there is so young. TVC’s focus is to nurture and stimulate deal flow, help with the market research and intellectual property process and advise entrepreneurs seeking capital.

However, investors in the market seem pleased with the deal flow thus far. “I’ve been pleasantly surprised with the level of deals and the breadth of knowledge in the market,” Tullis-Dickerson’s Mr. Schafer says. “There’s a tremendous number of incredibly bright people working [at Sandia].”

Both Sandia and nearby Los Alamos National Lab emerged out of the U.S. government’s atomic bomb development effort toward the end of World War II. After the war, President Harry Truman courted AT&T Corp. to “render an exceptional service to the national interest” by managing the facilities. Thus began the labs’ histories as government-owned, contract-operated research facilities. AT&T gave up its stake in the facilities in 1993, replaced by Lockheed-Martin Corp., which continues to operate the labs to this day.

While the labs’ original mission remains the provision of all non-nuclear components of the nation’s nuclear weapons, they also have helped many talented employees develop a broad base of research capabilities with potential commercial applications. To ease the transition of research and development to viable start-up businesses, Sandia has even created an “entrepreneurial leave” program, in which lab employees can take a leave of absence to pursue a technology spin-off from the lab, with an assurance that their job would be waiting for them if the venture does not work out. More than 60 lab employees have taken advantage of the program in the past several years, says Sandia’s Vice President of Laboratory Development Dan Hartley.

Despite the deal flow the Labs are beginning to create, however, entrepreneurs in the area are having trouble finding funding for their companies, Mr. Hartley adds. “When it gets around to [the time for] venture capital funding, [these businesses] don’t have access to the coasts.”

A big reason for VCs’ lack of interest in Sandia is directly related to the fund-raising boom of the past several years, and the runaway size of the average VC vehicle. “Most of what we see in New Mexico is seed- and early-stage,” Mr. McCorkle says. “A lot of big firms are no longer interested in that.”

What Lies Ahead

As gray-haired VCs turn their attention to later-stage deals (VCJ, March, page 39), does that open the door for new funds to invest in the emerging technologies of the Southwest? Easier said than done, Wayne Brown Institute’s Mr. Bertoch warns.

“The problem is you still need money to fund your fund,” he says. While the Southwest may provide a viable alternative for small, specifically tailored early-stage vehicles, most of the industry’s limited partner money is controlled by gatekeepers, who normally do not invest in first-time funds, he explains.

Even the funds that do get off the ground in the region often have help. Tullis-Dickerson is based in Greenwich, Conn., and it operates under a “hub-and-spoke” strategy, in which a feeder fund, Tullis-Dickerson Capital Focus II, allocates capital to smaller, regionally focused funds like Javelin II in the Southeast, Origen in the Southwest and a yet-unnamed fund in Michigan.

And despite operating offices in both Santa Fe and Albuquerque, Mr. Schafer is not limiting himself to the desert. Origen’s first deal was in Southern California, and he estimates his target area for prospective deals to be the familiar-sounding phrase, “anywhere within a two-hour flight,” which spans as far as Austin, Texas and Colorado.

Nor do organizations like TVC expect VCs to exclusively concentrate on the region. “None of these funds are … going to invest [solely] in New Mexico or the Southwest,” Mr. McCorkle says.

Yet the ever-expanding VC industry cannot be contained by the Redwood-encrusted hillsides of Silicon Valley forever. Perhaps it is not quite yet the Oklahoma Homesteaders rush for land in 1889, but more like venture capital’s Manifest Destiny, slowly establishing the industry in the nether regions of the country, until there is no frontier left to conquer.

Go Southwest, VC.

1998 Disbursements by Region




Northern California 987 761 588 360 5006.22 5.07 6.58

Northeast 714 558 523 360 3318.21 4.65 5.95

Southern California 289 220 296 213 1472.42 5.09 6.69

Midwest 301 235 268 198 1386.24 4.61 5.90

Southeast 320 256 303 219 1281.27 4.00 5.00

Mid-Atlantic 296 235 270 208 1131.83 3.82 4.82

Southwest 237 178 267 205 1055.76 4.45 5.93

Rocky Mountain 155 114 182 137 766.19 4.94 6.72

Northwest 130 100 150 120 515.39 3.96 5.15

Unknown 41 35 34 30 83.48 2.04 2.39

TOTAL 3470 2692 2881 2050 16017.01 4.62 5.95

Source: Venture Economics Information Services

1998 Disbursements in the Southwestern U.S.




Computer Related 72 52 104 84 345.91 4.80 6.65 3.33 4.12

Non-High-Technology 75 58 73 65 315.86 4.21 5.45 4.33 4.86

Communications 45 32 76 62 172.45 3.83 5.39 2.27 2.78

Medical/Health/Life Science

27 22 62 48 136.11 5.04 6.19 2.20 2.84

Biotechnology 5 5 15 14 52.11 10.42 10.42 3.47 3.72

Semiconductors/Other Elect

13 9 22 18 33.33 2.56 3.70 1.51 1.85


237 178 352 291 1055.76 4.45 5.93 3.00 3.63

Source: Venture Economics Information Services

Representative Investments




Peak Medical Corp. N.M. 1 1 1 7.00

IPNI Communications Corp. Ariz. 1 3 3 5.00

MBA Technologies Inc. N.M. 1 3 3 5.00

SpinCycle Inc. Ariz. 1 1 1 5.00

Xantel Corp. Ariz. 4 6 4 4.99

Authentix Networks Ariz. 1 3 3 4.80

Sandbox Entertainment Corp.Ariz. 3 4 4 4.15

Quality Care SolutionsInc.Ariz. 1 1 1 4.00

Vivid Semiconductor Inc. Ariz. 1 3 3 3.90

Fulcrum Direct Inc. N.M. 2 1 1 3.60

PHASE-1 Molecular Toxicology Inc. N.M. 1 2 2 3.00

Source: Venture Economics Information Services