How I grow a company quickly with VC

Michael Schafer
Michael Schafer is managing director of New Mexico Community Capital, a venture capital fund started in Albuquerque in 2004. Schafer first moved to New Mexico in 1998 when he was recruited to the state by Tullis-Dickerson & Co. He brought his extensive VC background to NMCC in 2010.

What is one of the greatest misconceptions about the venture capital field?

That it’s easy. Most people don’t know what to think when you say “venture capital.” Those who have heard of the field believe it involves giving money to young entrepreneurs and waiting for them to create the next Google. To be a good VC, you have to be well-versed in all aspects of quickly growing a business and be willing to put in the hours. It’s very hard to do well.

What’s more important in the VC world — an understanding of how to utilize and leverage the power of money, or a broad interest in a wide variety of businesses and companies?

Neither. It’s understanding the requirements needed for, and the process of, rapid growth. For 30 years, I’ve been asked by entrepreneurs, “Why should I accept money from a venture fund?” Understanding business is not hard. It’s not magic. With hard work, any entrepreneur can be successful. However, the real question is, “When do you want to be successful?” What will take the entrepreneur 10 years to achieve on his/her own will take four years if I invest in you and we work together.

What’s the difference between New Mexico Community Capital and the other funds that invest in New Mexico companies?

NMCC is the only “double bottom line” venture capital fund in New Mexico. “Double bottom line” simply means that, like all venture funds, we drive to generate a better-than-market internal rate of return for our investors. However, unlike most venture funds, we also drive to create social good/value. For us, social returns include things like saving/creating jobs, improving wages and providing healthcare coverage for all workers, cleaning the environment, easing access to clean water and healthy food and creating wealth within New Mexico communities. This means that we’ve invested in companies that don’t meet all of the standard venture capital criteria. Companies like Armed Response Team (Albuquerque), Aero-Mechanical Industries (Rio Rancho), Preferred Produce (Deming) and Desert Power (Aztec). Remarkably, eight of the 10 companies in NMCC Fund I are still operating.

As someone who has spent many years in the field, what is your assessment of this moment in time for startups and fledgling companies in New Mexico? Are we building something?

I’ve never been so fearful for New Mexico’s venture funds as I am now. The state’s lack of investment in the asset class over the past 10-plus years has generated a reputation in the venture capital world that New Mexico is an unfriendly place for equity investors. On top of this, programs that were created to foster investment in New Mexico companies and venture funds were victims of unfortunate timing. Funds formed in 2003 through 2007, most of the current venture funds in the state, ran headlong into the financial crisis of 2008 and the subsequent uncertainty in 2009-2010. Venture capitalists held on to their cash in order to support their existing portfolio companies during this period. New investments and liquidity events flatlined. As a result, pre-2008 venture funds now find themselves managing portfolios that have required at least three years of extra time to generate liquidity events, thereby killing the internal rate of return for fund investors. Fund formation, either new funds or follow-on funds, is nonexistent in the state. This bodes poorly for young companies needing access to capital and to the skills/experience of professional VCs. Not only will those companies with the greatest chance to succeed have to leave New Mexico to attract growth capital, but New Mexico-based venture fund managers will leave, too. Are we building something? Yes, a great environment for small, low/no growth lifestyle companies that, without institutional venture capital, will lead to a future of small, low/no growth lifestyle companies. I’ve never been this discouraged about the future of New Mexico’s venture funds.