CHAPTER 3

Small Business Climate

Chapter advisors

Many thanks to the advisors for this section: Gary Oppedahl, City of Albuquerque; Johnny Montoya, Century Link; Richard Anklam, New Mexico Tax Research Institute.


Entrepreneurship plays a vital role in the growth of the economy. If successful, entrepreneurial innovations improve living standards, create jobs, generate wealth from the entrepreneurial venture and stimulate related businesses.[1]

There are multiple tools by which to assess New Mexico’s success in building a climate that is friendly to small business and entrepreneurs. These may include:

  • Community and regional resources
  • Mindset/outlook of the culture
  • Policies and tax structure
  • The amount of venture capital and ease of access
  • National data on what works, and does not work, elsewhere

Where We Stand: Business Climate

In a national business climate study by George Mason University, New Mexico ranks 36th on fiscal health based on five categories – cash solvency, budget solvency, long-run solvency, service level solvency and trust fund solvency.[2] The areas that pulled New Mexico down are budget, service level and trust fund, where the state ranked 46th, 48th and 49th respectively. This suggests the ratio of state debt, taxes and revenues to personal income is poor and that state revenues are falling short of expenses.

Some economic developers believe that, until New Mexico establishes a business climate better adept at drawing outsiders, the health of the economy rests largely on government and the existing private sector – particularly small businesses, startups and entrepreneurs.[3] Fortunately, New Mexico’s innovators are doing a pretty good job on their own. While the national trend for job creation from startups has been down since the recession, New Mexico’s startup climate has been fertile by comparison, as shown by both statistical and anecdotal data.

The Kauffman Index of Entrepreneurship ranks states by assessing new business start-ups and entrepreneurs. New Mexico ranks well compared with neighboring states, steadily increasing since 2011. We rank third in the nation on the percent of the adult population that became entrepreneurs. [4] New Mexico even outpaced high-flying Texas and California, seen by many business watchers as startup meccas.[5]

Good Work Underway

There is a lot of excellent activity taking place in New Mexico to grow and support small business. New Mexico’s competitiveness on the entrepreneurial stage is in large part due to the private sector’s success statewide in development of a solid, collaborative entrepreneurial ecosystem that is poised for expansion.[6] Many improvements have been made to increase the amount of resources for entrepreneurs and small businesses, particularly in places near universities or national labs. These strides include creation of new business incubators and accelerators, social or professional events for entrepreneurs and small businesses, mentorship opportunities, strategic public-private partnerships, targeted educational programs and new or improved physical spaces.

  • In Albuquerque alone, the number of business accelerators expanded by six between mid-2014 to the end of 2016, with one adding a Santa Fe location. Each is addressing a unique niche – creatives and artists, women-owned businesses, high-growth, early stage, socially conscious and tech commercialization.
  • Downtown Albuquerque’s seven-acre Innovate ABQ research and innovation hub is envisioned to be the center of entrepreneurial activity for the entire state.
  • A community center for entrepreneurs, the Epicenter, has opened at the Innovate ABQ site.
  • At the grassroots level, there is a new effort called Startup New Mexico led by entrepreneurs to support the growth of startups and foster vibrant entrepreneurism statewide.
  • Encuentro New Mexico is working with Latino immigrant entrepreneurs.
  • In 2015, the first Statewide Startup Weekend was held, involving Farmington, Albuquerque, Santa Fe and Las Cruces, allowing entrepreneurs across 400 miles to pitch ideas in their communities, form working teams and create businesses.
  • In 2015, the Rio Grande Community Development Corporation launched the first nonprofit entrepreneurial incubator, Social Impact Though the Nonprofit Community (SINC).[7] SINC offers business development assistance to nonprofits.[8]

State universities are providing entrepreneurship education as part of standard course offerings and regularly engage their communities in innovation.

  • The University of New Mexico in 2015 began its Innovation Academy, a multidisciplinary program that crosses traditional university schools to create a focused approach for entrepreneurial education and development.[9]
  • CNM’s STEMulus Center programs, such as its Deep Dive Coding Boot Camp and its IGNITE Community Accelerator, are targeting community-based, lower income entrepreneurs.
  • New Mexico Tech is hosting in 2016 its first two-day Inventors and Entrepreneurs Workshop/Business Start-Up Conference devoted to facilitating the progression of ideas from conception to market, including “Shark Tank” style presentations.
  • New Mexico State University’s Entrepreneurship Institute was created in 2008 to help build businesses.
  • And more recently, NMSU created the New Mexico Entrepreneurs Alliance, an online network for entrepreneurs statewide.

The amenities conducive to cultivating entrepreneurship, including the number of business incubation programs throughout New Mexico, are vast and interrelated. Discussion of these initiatives alone could fill this report. Suffice it to say that seeds are planted and widely scattered across the state to enable growth of a healthy innovation economy.

Duplication

That said, one challenge in New Mexico’s economic development world is duplication of services. The Albuquerque Living Cities Initiative’s implementation team is tackling this by creating a technological platform to network all service providers. The intent is to make the system more responsive to the particular needs of individual entrepreneurs. (The Living Cities Initiative, operated out of Mayor Richard Berry’s Office, is a “grow our own” approach to economic development that involves generating collective impact to accelerate job creation and economic mobility.)

Challenges

But challenges remain. Little sustaining benefit to the state will result either from creation of an entrepreneurial ecosystem or from converting ideas into companies if those businesses were to leave the state to grow.[10] Reasons for leaving could include lack of access to capital, policies and taxes that are considered by some to be unreasonable or unfriendly, and merely the belief that New Mexico’s business climate is not conducive to growth.

Inherent in being an entrepreneur is the risk of failure, even the expectation of multiple failures. There is also little sustaining benefit to the state if entrepreneurs, in failing, are not incentivized to try again.[11]

Scarcity Mindset

Despite creation of a relatively robust entrepreneurial ecosystem, one of New Mexico’s greatest challenges may be our collective mentality, which is often one of scarcity. This results in a cultural belief that our current condition is unalterable and in a value system that leads individuals to act out of fear and self-protection, as opposed to in proactive, visionary ways that benefit the community.[12]

“While we certainly seem to have a perverse pleasure in massaging old wounds, the degree to which this constrains us depends on who you talk to,” said Deirdre Firth, deputy director of the City of Albuquerque Economic Development Department. The younger generations, for example, seem to have a more positive outlook.[13]

Nevertheless, there is a growing body of thought that says,“It’s time for every New Mexican to think and act like an entrepreneur.”[14] Though the idea may seem radical to some, teaching people to think – and therefore act – like an entrepreneur is gaining traction in cities across the nation. In fact, the City of Albuquerque and CNM recently partnered with the Marion Ewing Kauffman Foundation to bring the Ice House Entrepreneurship Program to city employees and to CNM students. The pilot program, teaching 100 city employees about the entrepreneurial mindset, was a first in the nation and is being viewed as a model by other cities.[15]

Whether a person has a desire or intent to start a business is irrelevant in entrepreneurship education. Rather, the training focuses on how an individual thinks – and therefore acts – not only when facing a perceived challenge but also in a neutral situation. National studies have shown that people who think like an entrepreneur have higher self-confidence, believe they have control of their destiny and are more apt to view any situation – no matter how dire - as an opportunity for improvement and positive action.[16]

From preparing students to become workforce-ready graduates or next-generation innovators, to elevating the entrepreneurial thinking of the existing workforce, an entrepreneurial mindset (defined as the underlying beliefs and assumptions that influence behavior) exposes opportunities, ignites ambition and fosters the attitudes and skills that can empower anyone to succeed.[17]

“Until New Mexicans as a social body believe something greater than the status quo is both necessary and achievable, and until residents cease to act according to a mindset that views problems as insurmountable obstacles, the vibrant entrepreneurial ecosystem now under construction will be limited to those groups and individuals already wired to buy into it,” says City of Albuquerque economic developer Gary Oppedahl.

Access to Capital

Even if New Mexico were to experience a profound shift in its cultural mindset, economists say the state will not “move the needle” unless there is sufficient seed capital to support funding for the best ideas.[18] In fact, there appears to be universal agreement that the biggest gap in our business climate is capital and that a structural shortage of debt and equity capital is the major long-term impediment to startup development and a self-sustaining small-business climate. “This is especially true in the sweet spot between $500,000 and $2.5 million,” Oppedahl says.

This is not to say that we are completely lacking in early stage venture investors in New Mexico. The Venture Acceleration Fund, New Mexico Angels, the Verge Fund and Flywheel Ventures are just a few. However, investments in New Mexico have been relatively flat since 2009, with the state falling notably below other Four Corners states.

Both the state and the private sector have been taking action. Two recent initiatives are anticipated to jumpstart a greater influx of early stage capital:

  • The NM Angel Tax Credit allows for certain investors to take a tax credit of up to $25,000 for an investment made in a New Mexico company that is engaging in high-technology research or manufacturing.[19]
  • The Catalyst Fund, a “fund of funds” of $20 million established by the State Investment Council, acts as a catalyst for private capital matches from startup fund managers around New Mexico.

The Catalyst Fund is already garnering tremendous interest from venture capital firms outside New Mexico, including one that can help fill the critical half-million to $2 million gap.[20]

There is also evidence that some startups succeed in New Mexico despite the capital challenge:

  • Skorpios Technologies, a material science firm, obtained $19 million from out-of-state investors in 2011.
  • Lavu Inc., a high-tech iPad point-of-sale software company, raised $15 million from a Washington, D.C.-based venture capital firm in 2015, allowing it to double its employees and office space in downtown Albuquerque.
  • SunPort, which built a plug that allows consumers to use solar energy simply by plugging an electronic device into a wall, is garnering national attention and funding opportunities.

Unfortunately, these companies are the exception rather than the rule because they have chosen to stay in New Mexico. It is more common for innovators to create viable companies in the state, only to leave for cities with more seed money and investors.

Low-income entrepreneurs of all backgrounds tend to have even greater difficulty when it comes to finding capital to help grow or start a company. Their unique challenges were identified in 2015 by the Albuquerque Living Cities Initiative, which found that access to capital is especially challenging for people who do not speak English as a first language, those with no credit or bad credit, and those with insufficient collateral.

Such entrepreneurs may face challenges despite the existence of alternative lenders in Albuquerque.[21] Micro-lenders include Accion NM, WESST, the Loan Fund and NM Community Capital. Innovative lending products such as Nusenda Credit Union’s Co-op Capital model also exist. It provides loans to individuals with low credit and no collateral through existing membership-based organizations.

In some cases, the inability to get funding leads individuals who desperately want to start or grow a business into the grips of predatory lending. Other barriers to capital discovered by Living Cities include:

  • Higher interest rates because of the risk associated with limited or no collateral or challenged financial histories.
  • Lack of access to business training (e.g. financial management, marketing and sales).
  • Lack of mentors and networks.
  • Lack of awareness of existing resources.

To address these problems, some economic development leaders suggest New Mexico should look at opportunities for other models of entrepreneurship, such as worker-owned cooperatives and other employee ownership models that have been shown to help increase income and long-term wealth among low-income individuals.

It might also be prudent to consider:

  • Examining predatory lending and discriminatory lending practices.
  • Modifying state and federal business lending guidelines to support more minority entrepreneurs and women
  • Increasing take-up of the earned income tax credit (EITC) among families operating enterprises and extend the EITC to single adults

Options and Intersections

Given information presented in this chapter, there are excellent options for future policy discussions. How can we leverage and support the good work that is already underway? To what degree should we reduce any duplication that may exist among small business support organizations? How might we cultivate an entrepreneurial mindset, moving away from a scarcity mentality? What steps might we take to increase access to capital?

These questions are also influenced by other sections in this report. In particular, a healthy small business and entrepreneurial climate is highly influenced by efforts to diversify the economy. (Ch. 3 & 4) The same is true for attempts to strike the right balance for federal investments in our state economy – including the many small businesses and contractors that rely on those government dollars. (Ch. 6) All those efforts rely on a highly qualified workforce. (Ch. 2) And of course, the fifth of our population that lives in poverty find it difficult to contribute to an entrepreneurial economy while also meeting basic family needs. (Ch. 1)


Chapter Endnotes

Short reference sources below; complete citations in the bibliography.

[1] (New Mexico First 2015)
[2] (Mercatus Center at George Mason University 2015)
[3] (Albuquerque Business First 2016)
[4] (New Mexico First 2015)
[5] (NM Business Journal 2015)
[6] (Knighten, Manager, New Mexico Office of Science & Technology in the Economic Development Department 2016)
[7] (Driver 2015)
[8] (Social Impact Through the Nonprofit Community SINC n.d.)
[9] (DelCampo 2016)
[10] (New Mexico Department of Workforce Solutions Economic Research and Analysis Bureau 2015)
[11] (Thompson 2012)
[12] (Oppedahl 2016)
[13] (Firth 2016)
[14] (Albuquerque Journal 2016)
[15] (Darling 2016)
[16] (United States Department of Labor 2016)
[17] (Schoeniger 2015)
[18] (Knighten, Manager, New Mexico Office of Science & Technology in the Economic Development Department 2016)
[19] (New Mexico Angels 2015)
[20] (Oppedahl 2016)
[21] (Warren, W. K. Kellogg Foundation 2016)

 

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