Editor’s Note: GeekWire has partnered with UP Global and Chase to cover four Startup Week events around the country, starting with Tampa Bay earlier this month and now Phoenix from Feb. 23 to 27. Tune in to GeekWire for more stories about the activities, and to learn more about this emerging startup hub.
The current state of the startup ecosystem in Phoenix is like a popcorn bag that’s spent 60 seconds inside a hot microwave. One minute has passed, but only a few pops are audible. Soon, though, a flurry of kernels will heat up just enough to elicit multiple explosions all at once, joining those that have already matured into white fluff.
Phil Bradstock loves this analogy. As a manager for the Business Retention Division at the City of Phoenix, Bradstock knows there’s something special cooking in the desert.
“We are at that ‘about-to-get-going’ stage,” he noted.
While Phoenix has a handful of successful homegrown technology companies, the city is not known as a hub for startups and innovation. But interviews with entrepreneurs, investors, community activists, and others in the region suggest serious potential for what some locals like to call “Silicon Desert.”
“A lot of people feel that we are on the cusp of a really big breakout,” said Hank Marshall, the economic development executive officer for the City of Phoenix.
This is a vibe that you wouldn’t have felt in the country’s sixth-most populous city more than a decade ago. Even though Motorola and Intel had operations in the area, back then the phrase “tech startup” wasn’t part of everyday lingo in Phoenix. Meanwhile, entrepreneurs and investors were few and far between; co-working spaces or accelerators weren’t around; and no one was organizing startup-related events.
“It was almost non-existent,” Bob La Loggia, a Phoenix native and CEO of AppointmentPlus, said of the startup scene. “You were kind of on your own as an entrepreneur. There weren’t a lot of resources and you just didn’t hear much about the startup community. It was very, very difficult to make it.”
But in the last ten years — and even more so during the past five — the ecosystem has quietly grown in big ways. Tech companies like GoDaddy and InfusionSoft have matured into giant businesses that employ hundreds. There are dozens and dozens of accelerators and incubators offering key resources and mentorship. Angel investment groups like Arizona Tech Investors (ATI) and Desert Angels have formed to provide entrepreneurs in their backyard with financial backing.
Courtney Klein, founder of an accelerator called SeedSpot, called it “dramatic growth.”
“There’s definitely talk around town about what’s happening,” Klein said.
The future does seem promising for entrepreneurs in Phoenix, but there are certainly hurdles in the way of growth. Investment dollars available for tech startups are still somewhat scarce, sometimes forcing talented entrepreneurs away to nearby places like Silicon Valley to find money elsewhere. There is also fragmentation problem, both from a physical standpoint — Phoenix is geographically sprawled — and a community that may not all be on the same page.
“One of the downsides is whether or not this community believes they are real or not at this point in time,” Marshall said. “I think we are our own worst enemy here. I don’t think we want to say we are real. But we are.”
Real Estate Riches
Traditionally, investments made in the Phoenix area have been mostly real estate-related.
“Phoenix, in its entirety, is a very wealthy city,” notes Bradstock. “The problem is, the money is in real estate.”
There are more than 114,000 millionaires in Arizona, more than triple the amount that live in neighboring Utah, Nevada, and New Mexico.
“If you think about that number, there is definitely a lot of access to capital here,” said Mario Martinez, an investor based in Chandler, Ariz.
But many of the real estate investors, appropriately, are wary of making investments in the tech industry — and specifically in small startups that may not yet have a solid revenue stream or user base.
Marshall, the City of Phoenix economic development chief, said the key is education. He explained how these wealthy investors need to learn more about the valuations of small tech companies and how to calculate potential returns. This would provide more comfort and ideally convince them to pour their wealth into the growing startup ecosystem versus an industry like real estate.
“They are used to buying real estate from 55-year-olds who want to sell their property as opposed to sitting in front of a pimple-faced 22-year-old who has a good business plan but no dime of business,” Marshall said.
Creating investor groups like Desert Angels is one way to minimize that risk for individual angels in Phoenix who may be curious about diversifying their investment portfolio. The emergence of these organizations has helped increase the overall investment dollars flowing to venture-backed companies in Phoenix.
Data from Pitchbook shows 74 venture capital deals made from 2009 to 2011 in the Phoenix area, with a total of $332 million invested. But from 2012 to 2014, those numbers jumped dramatically with 145 deals made and a total of $834 million.
Yet many entrepreneurs say there aren’t enough investment dollars flowing through the Phoenix ecosystem. Jonathan Cottrell, a community activist and co-organizer of Phoenix Startup Week, called it the “missing component” of the startup scene.
“There aren’t many professional angels only looking for early stage investments in tech startups,” he said.
Other entrepreneurs agreed. Hamid Shojaee, who founded one of the more successful Arizona-based tech companies in Axosoft, said shortages in investors was the “biggest thing Phoenix lacks.”
And it’s not just early stage funding — there aren’t many local options for bigger, later stage rounds, either.
“You don’t really use Arizona as the main place where you focus on finding an investor,” noted La Loggia.
But La Loggla, the AppointmentPlus CEO and an investor with both the ATI and the Desert Angels, also downplayed the funding issues.
“If you’re looking to raise outside of $1 or $2 million, you have to go outside Arizona for that — but it’s no big deal,” said La Loggla, who was in Silicon Valley last week meeting with investors. “Arizona is not very different from other places. As a matter of fact, I prefer that people like me can be a conduit to these investment firms in other locations.”
While Phoenix may not be flooded with investors to the level of Silicon Valley, there is still progress being made — particularly in the past five years. Shojaee, who bootstrapped Axosoft since founding the company in 2002, is now working at a new startup called Pure Chat. He’s looking for investors and said there’s been interest from angels in Phoenix.
“There was no chance of that happening five years ago,” said Shojaee, who also helped start tech news site AZTechBeat. “It’s a night and day difference.”
Producing — and Keeping — Homegrown Talent
One key catalyst to the startup ecosystem growth in Phoenix has been the increase in incubators, accelerators, and co-working spaces.
Klein, who launched the social entrepreneur-focused accelerator SeedSpot in 2012, said that there were a few co-working spaces and “maybe an accelerator” in Phoenix five years ago.
Now, though, dozens of incubators and more than 20 co-working spaces provide a place for entrepreneurs to build out their ideas, network with like-minded folk, and find mentorship. Cohoots, CEI, and AZTechCelerator are just a few that have launched in the past five years.
“The growth that happened is incredible,” noted Klein, a Phoenix native who launched her first startup in 2005 as a senior at Arizona State University.
Jeffrey Pruitt, a corporate executive-turned-entrepreneur, helped launched Tallwave in 2009 as a unique accelerator that combines consulting practices and incubation services.
“We saw a lot of great ideas in Arizona, but not the connectivity or ecosystem you had in Silicon Valley,” Pruitt said. “The idea for Tallwave was to build a startup ecosystem.”
The existence of these spaces have helped foster more entrepreneurs across Phoenix. This is also evident at Arizona State University, where more than 80,000 students attend the nation’s largest public university.
As of late, there’s been a huge push to encourage an entrepreneurial mindset at ASU to all students and faculty, regardless of field. Programs like the Edson Student Entrepreneur Initiative, which awards students with $20,000 in seed funding and office space, or the Innovation Challenge competition provide places for students to learn more about startups.
In addition, ASU runs two accelerators: The ASU Startup Accelerator, and the Furnace Technology Transfer Accelerator that helps commercialize research performed on campus. ASU also offers other resources for funding and co-working spaces for students to develop their ideas, along with its SkySong Innovation Center in Scottsdale.
“They are producing students who are hungry to learn about what’s possible in the startup space,” said Cottrell, who is organizing the Phoenix Startup Week events later this month and is CEO of Storybyte.
The university is clearly placing a priority on cultivating new entrepreneurs. One challenge, though, is keeping those ASU students in town after they graduate.
“A lot of young people exit the state,” Klein noted.
It Takes Time
So how does a city retain talent that it produces? And how does it attract out-of-state entrepreneurs to come and build their companies in the desert?
These are questions Phoenix is trying to answer, by way of accelerators, investment groups, the efforts at ASU, and events like Startup Week. Local and state government are also showing support with programs like the Arizona Innovation Challenge, which awards $3 million to startups each year.
But bringing all of these pieces together collectively is critical to how fast Phoenix can establish itself as a startup city. That can be difficult in Phoenix, which has suburbs like Scottsdale, Tempe, Chandler, and Glendale.
“We’re missing that density you find in other urban areas,” said Cottrell, a former manager at GoDaddy. “It’s such a sprawled out community all over the map with different cities and hubs.”
On top of the geographical fragmentation, Marshall, the economic development executive for the City of Phoenix, noted how the startup community needs to simply believe in what it can accomplish as a whole.
“They need to know that when they come together, they can realize the value and strength of power and unity,” he said.
That shouldn’t be a huge problem, though. Nearly everyone that was interviewed for this story described how willing the entrepreneurs, investors, government officials, and other key stakeholders are to help one another.
“I have a lot of experience in U.S. markets, and I can say that Phoenix is one of the most inclusive and open source markets for new entrepreneurs to come in and get networked quickly,” said Chris Camacho, CEO of the Greater Phoenix Economic Council. “At the same time, we have some of the lowest burdens from a tax and cost perspective.”
“There are so many people willing to give their time, effort, and energy,” added La Loggla. “These people are crazy busy superstars, but they feel so strongly about the ecosystem here that they are doing their part to give back. It is a beautiful thing to see.”
Phoenix has a lot going for it — low living costs, favorable tax policies, nice weather, a supportive community. But while companies Yelp and Weebly have satellite offices in Phoenix, and corporations like Apple are building data centers in the region, the city still lacks a major tech giant headquartered in the area, which is key to any thriving startup hub.
Marshall hopes that will change soon — not from a company that re-locates to Phoenix, but rather one that is born there.
“We need a couple of home-grown companies to make it big, where the owners can pull money out and reinvest in local companies,” Marshall said. “We haven’t hit that pivot point yet.”
Above all, most everyone agreed that what Phoenix really needs is time — time for the community to band together, time for real estate investors to learn about tech startups, and time for today’s entrepreneurs to build companies and funnel their success back into the startup ecosystem.
“It’s a collection of timing, awareness, and interest,” said Pruitt, the Tallwave CEO and Phoenix native. “We are energized now, and a lot of people are walking around with a little swagger. Our town is starting to come together.”