Hello From Arizona: Where Venture Dollars Are On The Rise

Reporting on startups opening offices in Phoenix without crunching data on homegrown companies raising capital doesn’t do Arizona justice.

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While this is often the talking point–how Arizona’s tech and startup scene serves as a less expensive option for companies based elsewhere to open offices–the state’s local startups are attracting more venture dollars than in years past.

For a sense of the overall funding health of companies based in the state, we looked at what these startups are raising on their own.

Let me get my bias out of the way right now and start by saying I do love Arizona. I’m a proud alumna of Arizona State University (Go Devils!) and the Phoenix metro area is where I consider to be home.

So after seeing the news of Zoom, arguably the most talked-about enterprise company right now, opening up a research and development hub in the Phoenix area, I wanted to look at the state of funding for Arizona-based startups.

In short, the past two years have set records for venture dollars going to Arizona-based startups in the past decade. According to Crunchbase data, $800 million in venture capital across 133 deals went to startups based in Arizona in 2018, the highest dollar amount of any year for the past decade. Last year also reached a high, with $723 million in funding across 114 deals.

So far this year, startups in the state have raised $84 million, with the most recent round being Scottsdale-based Paradox’s $40 million Series B.

But why?

Arizona’s startup scene is maturing, according to C’pher Gresham, CEO of social impact startup incubator Seed Spot.

“Arizona’s startup ecosystem has gotten more sophisticated in the past 10 years and there’s been a dramatic increase in programs to help entrepreneurs, with Seed Spot being one of them,” Gresham said.

Living and doing business in Arizona is also more practical, local advocates say. The cost of living is much lower than places like the Bay Area, New York, or Boston, it’s home to the country’s largest university (ASU), and Phoenix is the fifth-largest city in the United States.

Policies like the angel investment tax credit provide incentives for investors to bet on companies based in Arizona. The program, which was established by the Arizona State Legislature in 2005 and runs through fiscal year 2021, provides up to $2.5 million in tax credits every year (plus credits that were unused in previous years, according to the Arizona Commerce Authority).

The main goal is to attract early-stage investments in Arizona companies.

And early-stage investments have been coming to the state. The majority of the deals last year were pre-seed through Series B, though there were some large late-stage rounds as well–perhaps most notably Nikola Motor Co.’s $250 million Series D in September 2019. Nikola announced that it would be moving from Utah, where it was founded, to the Phoenix area in 2018.

Knowing your competition

Venture capital investments tend to be concentrated on the coasts, mostly in the Bay Area and New York, but the greater Phoenix area isn’t focusing on competing with those hubs, according to Greater Phoenix Economic Council (GPEC) CEO Chris Camacho

It wants to go head-to-head with technology markets like Denver and Austin.

Arizona (as a whole) hasn’t caught up to markets like Denver and Austin when it comes to VC investments. Last year, there was more than $1.8 billion invested in Austin-based startups, according to Crunchbase data. The city broke into the top 10 U.S. markets for VC funding last year.  Denver, on the other hand, had $877.8 million invested in 2019.

But Phoenix has a shot. Its startup scene has grown rapidly, and it has plenty of access to talent, given that ASU’s Ira A. Fulton Schools of Engineering is the largest in the country, with more than 23,900 students.

In fact, U.S. News and World Report ranked the university “No. 1 in innovation” for the past five years–something ASU will never let you forget.

Part of Arizona’s attraction is its “generous ecosystem” where there’s plenty of access to mentorship and support, Gresham said. That combined with the quality of life, affordability and access to a large market makes the state an attractive place to put down roots.

From the incubator POV

Incubator Seed Spot receives a few inquiries from investors based in places like Texas, California and New York “at least every other week,” Gresham said. Investors want to know what deal flow is looking like, and Seed Spot has mostly gotten interest from seed-stage investors or firms that invest in Series A-stage companies.

As an economic developer, GPEC wants to work with the state legislature on an economic acceleration plan, with one of the main pillars being to rapidly grow ASU’s engineering program and “triple down” on engineering capacity, Camacho said. The organization also wants to see more Arizona-based companies evolve through the funding stages and is creating more infrastructure to support that.

GPEC brought in around a dozen VC firms from the Bay Area to Phoenix around the time of the Waste Management Phoenix Open golf tournament. VCs met with about 30 of Arizona’s leading tech companies to meet leadership teams in Arizona. Norwest Venture Partners, Altos Ventures, Founders Circle Capital and Village Global were among the firms that attended the Waste Management event.

“They were surprised [by] how much technology and capability was here,” Camacho said. “And so we’re going to continue to cultivate those relationships with the leading VCs so we create better engagement with our tech companies and those capital sources.”

Illustration: Dom Guzman