There are many encouraging signs for Arizona’s technology sector. Jobs are on the rise, our education system is more focused on STEM initiatives and Arizona has become a desirable place to move to for high-tech companies from innovation hotbeds such as California.
The outlook for 2017 is even stronger. It may, in fact, be our most robust year following the recession. But there is one area in which Arizona has to improve before we can take the next step towards becoming a leader in technology. We need increased investments and capital. More specifically, we must attract risk capital for early-stage companies by improving incentives for investors.
For a startup to raise money, the typical process is bootstrapping, or self-funding; followed by asking friends and family for money; then courting angel investors for capital. This last infusion of cash from angel investors is the money that will take a startup from an idea to being able to develop a proven product.
Once startups have a proven product, they become an early-stage company and the focus shifts to scaling. This stage is often referred to as a “cliff,” mainly because it becomes incredibly hard to keep the money flowing. This is especially true in Arizona, where venture capital and angel investors for early-stage companies are currently few and far between.
The technology industry would like to see the level of investment that real estate generates. Arizona has a great history of investment and development in real estate, and, as a result, there’s a lot of available money in our state. In fact, Arizona has around 113,000 millionaires but only roughly 500 are angel investors. This is largely because real estate has always been viewed as a less risky investment and Arizona’s technology industry is short on incentives to promote investment and mitigate risk.
The most promising method of spurring investment in technology is the Angel Investment Tax Credit program. Since its beginning in 2006, the objective of the program has been to expand early-stage investments in targeted Arizona small businesses. This goal was accomplished by eliminating Arizona capital gains tax liabilities associated with the disposition of investments in small businesses certified by the Arizona Commerce Authority (ACA).
According to the ACA, the tax credit program has proven to be extremely successful with a track record of more than a 2.3 to 1 return on investment (ROI). More than $420 million in financing is attributable to this program, in addition to the $62 million raised through the credits for investments. That combined ROI is 1,750 percent, making the total economic impact to Arizona’s economy an estimated $1.3 billion.
The Arizona Technology Council has directly observed these results among its members — that is, until the program ran out of money and investments dropped significantly. Convincing our lawmakers to recapitalize the Angel Investment Tax Credit remains a high priority for the Council.
Funding tax incentives as economic development tools will help improve the money available for companies but Arizona leaders also need to do their part to support the growth in technology. Venture capital deals were on the rise here in 2015 and 2016 but they still trail U.S. leaders. It is pertinent to the health of our developing companies and startup ecosystem that we commit to recruiting venture funds to start here and to invest in Arizona companies.
There are more than $40 billion in investments nationwide and Arizona attracts less than five percent, despite having one of the nation’s most attractive corporate tax structures and a lower cost of living than the leading investor markets. The only way we can truly compete with the nation’s technology leaders is to bring more experienced investors with capital into our state to take advantage of growing opportunities.
Investment in early-stage companies and total investment capital are areas where Arizona falls behind California and other states with a strong focus on technology. If we can help promising startups grow in the most critical stage of their life cycle and recruit more venture capital firms that invest in Arizona companies, we will produce more innovative companies and our economy will thrive.