Governor Jan Brewer touts her policies and business regulatory climate as the reason Arizona is growing new businesses. That may be a factor, but it’s not the major reason Arizona topped the Kaufman Foundation Index of Entrepreneurial Activity in 2012. If it were the case, Arizona would have been on top again in 2013—instead of plummeting to 20th nationally.
“Just because there are a lot of startups,” observes Barry Broome, CEO of the Greater Phoenix Economic Council, “doesn’t provide a measure of the economic growth in the Valley.” A startup can be someone opening a consultancy, a contractor or the next Apple. Self-employment is a form of startup. The challenge is nurturing a startup so it grows with high value jobs.
Local governments and the Arizona Commerce Authority see major value with growing Arizona startups into enterprises. Chris Mackay, economic development director in Chandler says, “There’s staying power when a business is local. It’s connected to the local community and if the economy falters, the owners are more willing to keep going locally as opposed to closing up shop.” That local staying power is one reason Mackay says Chandler makes big investments in growing future enterprises.
Planting the seeds
Arizona’s new economy needs startups to scale up into enterprises. Those growing small businesses become hiring employers offering high value jobs paying home-buying income. Government policy supporting businesses that can scale up is based on simple economics.
Businesses with more than 20 employees, says the Small Business Administration, generate two of three Arizona paychecks. Those same businesses cut checks for more than 70 percent of Arizona’s private payrolls. The value in 2012 was over $100 billion.
All new businesses are “startups,” but not all startup businesses will be entrepreneurial enterprises. “There is no relation between starting a business and starting a company,” says Dr. Daniel Isenberg, Professor of Entrepreneurship Practice and founding executive director of the Babson College Entrepreneurship Ecosystem Project in Boston. “Ninety percent of companies formed don’t grow high value jobs.”
Isenberg says that the difference between a start-up and enterprise is a matter of scale. He is an international advocate for scaling a business to grow as opposed to opening a business. An entrepreneur, he points out, is a business founder with a large company that just happens to be small right now.
Arizona State University, as the new American university, is at the cutting edge of helping turn ideas into enterprise. Recently, the college joined the elite ranks of schools offering a stand-alone degree in entrepreneurship. It’s on that list with Harvard Business School, Babson, and University of Texas. Its goal is getting new businesses that can grow into the market.
ASU says more than 70 percent of its W.P. Carey School of Business MBA graduates remain in Arizona. Keeping these graduates in state provides the human resources necessary to building new enterprises fueling the future economy.
“Starting a company — as opposed to just starting a business — is hard work,” says Isenberg. “An entrepreneur looks at the business and sees it growing. It’s a time of sleep deprivation, hard work, and endless pitches.” Few startups achieve quality growth—less than ten percent, he believes. “The golden triangle of a growing enterprise,” he continues, “is cash, customers and people.”
“An entrepreneurial endeavor isn’t limited to startups,” Isenberg emphasizes. “University research, family businesses, mature companies, all can be turned into a growing enterprise. Most startups tend to stay small.” The key to the economic contribution of startups in Arizona is scalability. He is adamant about it, “Ambition is not a dirty word. A business founder without ambition does not significantly contribute to overall economic growth.”
“There are a number of entrepreneurial success stories arising from a new direction for an existing, mature business,” Isenberg reports. Sometimes it takes a new owner with a vision; sometimes the existing management team finds a new direction. It can be a license from a university, a new product, or an innovative use of an existing product. Entrepreneurship can occur anywhere in a business’ lifecycle.”
Bringing ideas to market
Arizona colleges are on that licensing bandwagon. Entrepreneurs complain that it takes years to license patents or transfer technology from most universities. In ASU’s Office of Knowledge and Enterprise Development, the Arizona Furnace Technology Transfer Accelerator — first project of its type in the world — slashes technology transfer time from years to months. The AZ Furnace is a joint venture of ASU, University of Arizona, Northern Arizona University and Dignity Health. Funding partners include the Arizona Commerce Authority, BioAccel, and additional support from Thunderbird School of Global Management.
“There are hundreds of patents sitting on shelves at universities that could be in the market earning money for creators, colleges and businesses,” enthuses Gordon McConnell, assistant vice president, Entrepreneurship & Innovation Group in OKED. “We started a program to get patents into the market quickly.” The startups selected for incubation in AZ Furnace are either entrepreneurs in search of an idea to market or idea-creators ready to market through a business entity. The fledgling enterprises are capital-ready in 12 months or less.
Enterprise starts with a leader and a vision. The scale of the vision is what makes the difference, says Isenberg. The vast majority of business owners are thinking of a model that gets them to the point that they’re putting money in the bank. He says, “Entrepreneurs are thinking of a model that finds smart people, willing customers and puts the cash to back into the enterprise.”
“Angels invest in businesses they understand or CEOs they respect,” says Broome. “There’s a need for more of that in the Valley. We’re just not seeing the next Apple or Google evolving here.”
“The biggest challenge about getting angel and venture money is visibility,” says Brandon Clark, region coordinator for Startup Arizona. “If you’re a promising digital startup locally, it’s a little harder to get noticed nationally being from a region not known for its digital startups. That’s starting to slowly shift.” National publications, FastCompany and Entrepreneur Magazine, have eyed Arizona as an emerging technology region.
The development opportunity for the small business is capital. Combine the “Broome Factor”—known businesses; known leaders—with the large number of startups, and there are too many funding requests heading towards too few checkbooks.
What makes early investors open pocketbooks to startup businesses is scalability. Businesses with potential to grow create the greatest return on investment for the angels. “It’s also makes a difference to the local economy,” says Isenberg. “Local policymakers need to change their focus from ‘startup’ to a ‘high value growth business’.”
Cities like helping scalable startups — and provide resources that build success. There’s a loyalty factor when the business grows; it typically remains in the hometown that helped it succeed. This is important to Chandler, Mesa, Peoria, Phoenix, Scottsdale, and Surprise. These five cities have specifically invested in incubators and accelerators to nurture and graduate businesses achieving market traction. Chandler, Phoenix and Tucson have involvement with collaborative workspaces — Gangplank and Co+Hoots — as well.
While an employee or two in a collaborative workspace works well for a while, the time comes when a move up is needed. Clairvoyant, an enterprise and analytics startup now in Chandler Innovations started with Gangplank. “We grew from four employees in March to 12 in April,” smiles Amber Anderson, a firm partner and its business developer. “We needed a place to meet with clients and work with a growing team.” Still self-funded, the growing entity plans to hit 20 employees by January.
Mackay explains, “We help a company like this grow and hope that as it expands it continues to locate in Chandler.” To that end, the city is working with landlords in its Price Corridor to offer “teenage” space that lets a business move from the heavily subsidized rents and back office support of the incubator into its own place—without too much sticker shock.
Support from cities
The difference by which startup is accepted into a city’s incubator is the ability to scale up from the garage to commercial space; from one employee to more than 20. Chandler and Mesa are looking for businesses with this capacity. Innovations gives lab and office space to businesses that have formed entities — LLCs, corporations, partnerships — and a business plan. Mesa’s new Technology Accelerator is planned with a similar focus, but is looking for businesses at an earlier stage. Surprise’s Arizona TechCelerator wants to shepherd a business to the angel investor stage.
In Surprise, scalability is one of the criteria to be accepted into Arizona’s oldest incubator. The TechCelerator is looking for businesses offering something outside the box or creating a new niche. “The company has to be started before we’ll consider them,” says Julie Neal, the economic development coordinator for the city’s enterprise. “They need a mentor, a plan and have to know where they are going.”
“Scaling up is difficult,” says Isenberg, “but doing it right defines the difference between the successful entrepreneur with a growth business and a startup that just stays small. Marketplaces are competitive. The startup has to acquire customers. That means overcoming inertia or changing buyer behavior. While established companies are cruising on their business platforms, the startup has to hire people, start a company, raise money, and all the while, it’s competing in the marketplace. That’s tough work.”
After incubation, the business must gain market traction. At this phase, the fledgling enterprise has product going out and customers paying for it. The kinks are being smoothed, and it’s time to move up to the next stage and grow. Isenberg says that the high growth criterion is simply 20 percent annual increases in sales or staff for five years.
To make this leap requires high levels of capital — the checks venture capitalists cut. The biggest challenge in Phoenix is that there are few sources for local venture capital. The venturists hang out in places like Silicon Valley, Boston, San Diego and Seattle. “There are even a couple of funds with deep ties to the Valley,” worries Clark, “but they have very little involvement in local startups.”
Clate Mask, CEO of Infusionsoft, had to travel out of town for his venture capital. “At one time, I was told that a fund wouldn’t cut a check for a firm in Phoenix because we didn’t have the workforce for success,” he says. “That’s no longer true; venture funds are seeing that there is a real climate for success in the Valley.”
Another resource for a growing business is the Arizona Commerce Authority’s “Growing Your Arizona Business” services. The quasi-public agency provides mentorship, regulatory assistance, access to incentive programs and site selection. It also works as a liaison connecting the growing business with other business resources. The agency mentors businesses in accessing federal procurement and grant opportunities as well as serving as an entrée to international trade.
Overall, the major resource in Arizona for start-up businesses is the universities. Anemic legislative funding for the schools causes their efforts to help to face the same struggles growing businesses face. Their efforts to improve Arizona’s long-term economy are stymied by a declining source of capital.
“ASU is underfunded,” complains Barry Broome. “The school has done an amazing job despite being financially crippled by budget cuts. It’s suffering from a lack of resources to take its programs to scale.” “Scalability” is applicable to the business-development programs at the universities and other public agencies just as it is for growing enterprises.
“Getting money for those programs is the top job for the next governor,” predicts Broome.
Opportunity in Arizona will come from the core of businesses growing today. They will create the jobs for the new economy and drive economic success for the next generation.