Venture capital is still out there, but startups remain starved for investors
Arizona’s venture capital market has received a welcome boost, but startups and early-stage businesses are still looking for financial angels. Experts in the field say a new wave of venture capital is vital if the state’s economy is to continue growing at the pace it has been in recent years. Because Arizona is an attractive place to do business, experts expect to see an increase in interest by venture capitalists, perhaps later this year. They also believe that the flagging national economy is not a factor.
Yet, a PricewaterhouseCoopers’ report shows slippage in 2007, when Arizona companies received $200.7 million in venture capital compared to $262.6 million in 2006. Providing some relief in 2008 is the recent formation of the Translational Accelerator LLC (TRAC), a private Arizona-based, $20 million bioscience venture capital group. TRAC plans to invest between $500,000 and $2 million in any one company devoted to developing diagnostics, services, prevention agents and treatments directed to cancer and central nervous system diseases, including Alzheimer’s and multiple sclerosis.
Barry Broome, president and CEO of the Greater Phoenix Economic Council, calls the TRAC fund “an example of the investors’ commitment in taking the needed risk to help drive Arizona’s economy.”
Broome says reports indicate that virtually all of Arizona’s recent venture capital funding is in late-stage activity, funding mergers and acquisitions of built-up companies.
“The key component is getting a venture-capital model more aggressively focused around seed and startups,” he says. “That’s where you’re going to get long-term economic benefits.”
Venture capital peaked in 1999-2000 with the telecommunications industry and Internet-based companies. But since the dot-com bust, venture capital has yet to recover.
“People took big losses on them,” Broome says, “and subsequently there was a cooling of venture capital.”
Terree Wasley, director of entrepreneurial services at Arizona State University, sees gradual improvement in the venture capital arena, with no huge moves forward or back.
“Things are on a slow but steady incline going forward,” she says. “But if we’re looking at some sort of downturn in the economy, I’m not sure what impact that might have.”
Wasley says ASU Technopolis, which hosted the Invest Southwest Capital Conference in December, and ASU entrepreneurial services strive to train entrepreneurs who are worthy of investments.
“Our mantra is: ‘Good ideas always find funding, even in tougher times,’ ” she says.
Arizona’s venture capitalists often partner with out-of-state firms.
“They’re looking for good deals,” Wasley says. “They hear about them from other investors. Arizona is turning out a lot of good local talent. Investors look for that.”
Investors also look to stay within their geographic area, which bodes well for Arizona’s potential to attract some of the many venture capitalists in California.
“It’s an advantage for Arizona,” Wasley says.
Dee Harris, senior managing director at Alare Capital Securities LLC, an investment banking firm, doesn’t blame the economy for a shortage of venture capital.
“The primary problem is that venture capital firms in Arizona are basically fully invested,” Harris says.
Being fully invested is a two-sided coin.
“It’s a good sign in that they were able to find some good investments,” Harris says. “But, presumably, it’s a bad sign, because until they raise their next fund — which could take months — they’re not going to be much of a player in Arizona.”
Most of the interest is in life sciences, which means venture capitalists are not investing in technology information and semiconductor companies, Harris says.
Bob Morrison, executive director of Desert Angels in Tucson, says angel investors are not necessarily swayed by the general economy. Angels typically invest their own money, unlike venture capitalists who manage the pooled money of others in a professionally-managed fund.
“It’s a fairly small percentage of their total net worth,” he says. “Generally speaking, it’s their mad money. Nobody puts their lifetime savings into very many of these ventures that can be so risky.”
He dismisses suggestions that venture capital is drying up.
“For ventures that are well conceived and have a reasonable prospect for success, there is ample money,” he says.
But angel investors are reluctant to invest in biotech, he says, because it often takes a long time to make money, especially if the project requires approval from the Food and Drug Administration.
What can the state do to improve the venture capital climate? Broome says Arizona could dedicate 1 percent of the state’s pension fund for early-stage investment, as other states have done.
“If well managed, the use of 1 percent, or even one-half of 1 percent, of the pension fund into a venture strategy would be a major source of capital,” he says.
Wasley says angel investment tax credits also could help.
“Anything that gives investors any kind of incentive to invest in Arizona versus someplace else would be welcome,” she says.