By : Betty Beard
Source : http://www.azcentral.com
Category : Small Business Grant
Starting a business and building it to profitability is never easy, especially in Arizona, where venture capital is often in short supply.
But in recent years, startups have begun to get more help as recognition grows that they provide jobs as well as tax revenues. A more homegrown economy can have greater stability than one overly reliant on jobs created by out-of-state companies.
The seeds of growth include more investments in local companies, a $3 million pool of state-sponsored grants and the growth of business incubators and accelerators across metro Phoenix. Last year saw an increase in venture capital -- the major source of capital sought by startups -- awarded to Arizona-based companies.
From Surprise to Queen Creek, incubators and accelerators have sprung up or are being considered. These non-profit and for-profit groups provide space, mentoring and sometimes money to young companies.
The Arizona Commerce Authority this year is offering what it believes to be the nation's largest pool of innovation grants -- $3 million -- to create more home-grown businesses, speed the commercialization of inventions and help existing small businesses grow and add jobs. It received about 300 applications for the first $1.5 million in funding.
Silicon Valley Bank, a major San Jose-based bank that helps entrepreneurs and venture capitalists, generated a buzz in January when it announced plans to open an operations center this summer in Tempe.
The bank, which has operated in Arizona for about 15 years, will step up efforts to pitch Arizona companies to outside investors, said Dax Williamson, a deal team leader for the bank's office in Tempe.
Of course, there is no guarantee that this increased help will produce the desired result: more profitable companies and jobs. The road from having a good idea, to getting financing, to making a profit can be long.
While many see progress, venture-capital experts believe that more can be done and that better approaches might net better results.
It appears that startups could use a boost. New business development fell off drastically during the recession. Only 7,272 Arizona corporations were started in 2011, a 33 percent drop from the number registered during 2007, according to the Arizona Corporation Commission.
Williamson said, "New Mexico often has more venture activity than the state of Arizona, yet the population of the Phoenix area is two times the population of New Mexico."
Capital isn't as readily available nationwide as it used to be as financial institutions and private investors have tightened standards for loans and grants. Several investors say they would like to see the state become more aggressive, such as by directing its largest pension fund to designate a certain percentage of its investments for Arizona firms as some other state funds do.Yet there is unquestionably a lot of excitement and hope growing around innovation, entrepreneurship, and incubators and accelerators among both entrepreneurs and those willing to help them.
The poor job market, combined with such Internet companies as Facebook, Groupon and Yelp going public, also whets the appetite of entrepreneurs, who want to duplicate their success, said Gary Naumann, director of the Spirit of Enterprise Center at Arizona State University.
And it makes sense, he said, to start a business now because the cost of labor, rent and supplies -- other than fuel -- has dropped in recent years and the economy will likely keep improving.
"In many respects, it is a good time to start a business. We may be at the beginning of another cycle, which is very exciting," Naumann said.
Investments growing
It appears that the investment of venture capital in Arizona companies has been growing, although exact figures on the amount of investments are debatable.
Initially, small businesses are often financed with credit cards, savings and loans from family members and friends. When entrepreneurs need more money, they often seek help from angel investors, then venture capitalists and, finally, banks and other institutional investors.
An angel investor is an individual who provides capital for a business startup, usually in exchange for ownership equity. Some angel investors organize themselves into groups to share research and pool their investment capital. Venture capital, another form of private equity, is offered to help companies that are past their need for seed funding and are poised for growth. Venture capitalists also hope to make money by owning equity in these early-stage, high-potential/high-risk, startup companies.
Two major reports on venture capital last year differed widely because they gather their information differently. One said the amount of awards tripled from 2010 to 2011; the other said the amount increased by only one-third.
PricewaterhouseCoopers LLP, which prepares a quarterly MoneyTree report in conjunction with the Venture Capital Association, said Arizona firms in 2011 received $247 million, about three times higher than the year before.
Andy Coumides, a Phoenix-based partner with PricewaterhouseCoopers, said that was somewhat skewed because of an exceptionally large deal in the second quarter: a $105 million investment in Phoenix-based i/o Data Centers. He stopped short of saying this year will be as good.
"We just had such an incredible year I would be cautious in saying it would be as good as last year, but it might," Coumides said. "I still think it will be a good year."
The Dow Jones VentureSource report said Arizona had 16 deals last year worth $132 million, compared with 23 deals worth $100 million in 2010.
But Brian Smith, a partner at Phoenix-based Grayhawk Capital, said different companies count venture capital in different ways. He considers venture capital to be money that's provided to young companies and suspects that some of those surveys included money provided to more mature companies.
"I would say that as far as the (venture capital) dollars invested, it has been fairly flat," Smith said.
Grayhawk, considered by many in the industry to be the state's major venture-capital firm, makes investments ranging from $1 million to $4 million to acquire minority-ownership positions in companies. It is now attempting to raise a $28 million fund with contributions from others.
Venture capital is proven to create jobs. For example, Parchment Inc., a Scottsdale educational-services company, plans to more than double its number of employees, to 100 from 45, this year after getting $6 million from venture capitalists. The company helps educational institutions and students transmit transcripts between each other.
Williamson, of Silicon Valley Bank, said his institution may be the major bank for venture capitalists, but it is not a ready source of money for startups. Silicon Valley generally is the earliest bank that provides financing for tech companies, but he added, "There generally needs to be meaningful equity capital invested ahead of us."
Innovation grants
The Arizona Commerce Authority, formerly the Arizona Department of Commerce, was launched in 2010 as a public-private entity to spur job creation and new investment in the state. Last year, as part of that drive, it created an Arizona Innovation Challenge program to distribute $1.5 million in grants to innovative individuals and companies. This year, it doubled the amount.
Winners of the first $1.5 million being awarded this year are expected to be announced this month. They can get up to $250,000 each. The authority also is kicking in an extra $1 million to provide mentors to increase the likelihood the startups will succeed.
The innovation grants are targeted at industries likely to create higher-paying jobs: renewable energy and sustainability, bio- and life sciences, electronics, information technology, aerospace and defense, and advanced manufacturing.
Incubators, accelerators
Incubators and accelerators, which also can be seeds of growth, have been popping up more frequently in the Phoenix area. Incubators, which typically are non-profit, provide space. Accelerators tend to be for-profit companies that provide space as well as a more hands-on approach.
SkySong, the Arizona State University Scottsdale Innovation Center in south Scottsdale, has close to 95 tenants, ranging from commercial companies to student companies in cubicles. It plans to add a third office building this year and next, as well as apartments.
The Gangplank incubator in Chandler announced in January that it was expanding to Avondale. Innovations Incubator in Chandler is adding space. Surprise and Queen Creek have created incubators. Peoria is developing one for medical devices, and Glendale turned a former bead museum into an incubator for musicians.
Business incubators are also being considered for the ASU Polytechnic campus in southeast Mesa, for Fountain Hills and at a former outlet mall in Casa Grande.
The Arizona Commerce Authority also has opened an Innovation Forward center at its offices at 333 N. Central Ave. in downtown Phoenix. There, entrepreneurs can take classes, get advice and use a large meeting room.
Accelerators exert more control over new businesses. For example, Tallwave Venture Management in Scottsdale will even put its own chief financial officers into companies it is managing. It is affiliated with Tallwave LLC in Scottsdale, which also plans to expand this year. Together, they operate three companies and are helping 19 more, said Jeffrey Pruitt, the CEO and co-founder.
Adaptive Curriculum LLC, a subsidiary of a Turkish company that landed at SkySong four years ago, is now running all of its operations throughout the U.S. and Latin America out of the Scottsdale incubator. It has grown from three to 50 workers and from three cubicles and two offices to 15,000 square feet.
The company makes interactive software to teach math and science to middle- and high-school students. Its products are in 200 American school districts.
Adaptive Curriculum works closely with ASU and has contracted with its faculty to help train and refine the programs, said Jim Bowler, CEO.
"It's hard to imagine an educational company like ours not having a relationship with some university. So we certainly would not be in Arizona if we did not have this relationship with ASU," he said.
A long history
Incubators are not new. They have been around since at least 1959 and were especially popular in the 1990s, according to the National Business Incubation Association, which was formed in 1985. The Athens, Ohio, organization has about 1,900 members, with one-quarter from outside the U.S.
Smith, of Grayhawk Capital, said incubators flourish especially during bad economies.
While some applaud the incubators that are being created, others say there are too many and that they lack focus. They are popping up across the country "like weeds," said Victor Hwang, co-author of the book "The Rainforest: The Secret to Building the Next Silicon Valley."
"They (incubators) can work, but they don't always," Hwang said. "Historically, they have not, and the reason they haven't is because most incubator (operators) treated them as real estate. They give them (entrepreneurs) space. They figure they gave them Internet broadband and they gave them cheap rent, and that was enough."
Incubators are successful, he said, when the operators understand how to bring participants together to share ideas.
A 2009 study done for the U.S. Department of Commerce's Economic Development Administration, said incubators provide up to 20 times more jobs, and at much lower costs, than do community infrastructure projects such as roads, bridges, and water and sewer works.
Smith, of Grayhawk Capital, said incubators are "fabulous" because most startups consist of one to three people trying to create their businesses part-time with limited resources and badly in need of help.
"I think they are really essential to really developing a vibrant startup community," he said.
Source : http://www.azcentral.com/business/articles/2012/03/10/20120310arizona-startups-taking-root.html
