Venture capital firm in Scottsdale shows growing diversification of Arizona economy

As a venture capital firm has decided to open up shop in Scottsdale local economist say that action points to the growing base of the Arizona economy. (Independent Newsmedia/Terrance Thornton)

As a venture capital firm has decided to open up shop in Scottsdale local economists say that action points to the growing base of the Arizona economy. (Independent Newsmedia/Terrance Thornton)

The entrepreneur and small business owner are the backbone of the American economy.

Up until the last decade, the Phoenix metropolitan area was widely regarded as a leader in the high technology marketplace but not because of the brilliant minds or innovative manufacturing processes.

Companies like Motorola and Intel employed thousands in the Valley of the Sun during the 1980s and 1990s who worked for fewer dollars then their contemporaries lured by the allure of cheap homes to buy, sun to soak up and pitching wedges to swing.

But as one economist points out as the Internet grew in strength and the global manufacturing world grew smaller, cheap labor was found overseas leaving many in the Arizona technology manufacturing world wondering where the next data sure strip will be punched.

Lee McPheters

Lee McPheters

“You have to be able to keep up with the changing world,” said Lee McPheters, research professor of economics at the W. P. Carey School of Business. “Of course everything is relative and that is the heart of the situation we are in for this region.”

As all things become relative, Professor McPheters points out Arizona has seen population grow about half at the rate historically needed to see a swift economic recovery.

“Population growth is really struggling,” he said. “This recovery, we really haven’t seen as much population growth as we have in the past. The overall numbers compared to expectations don’t look very strong; however, compared to every other state, Arizona is top 15 in job growth.”

While Arizona population growth over the last two years has underperformed at 2 percent — where over the last half century significant economic growth and recovery is spurred by a 4 percent growth rate — Professor McPheters says high wage, high-tech jobs are growing here locally.

“We are seeing some good growth in certain high-wage finance and technology,” he explained.

While population growth has not excelled like Arizona economists might have hoped, Professor McPheters contends job growth in the high-wage field is attracting attention from folks with deep pockets.

“Banks have been very tight-fisted and not willing to make the same quantity of loans as years before,” he says. “To have outside dollars coming into Arizona through venture capital is just one more arrow in the quiver of economic development.”

That quiver just got an arrow shot of support from what many in the private sector consider the foundation for exponential economic growth: Venture capital.

After a nine-month due diligence process, it was announced last month Arizona was selected as the most promising location for Wasabi Ventures to open a new office. The group also maintains a presence in Silicon Valley, Greater Boston and Baltimore, Md.

Wasabi’s principal office will be based in Scottsdale, at Deskhub, an innovative co-working space located at 4900 N. Scottsdale Road, suite 400. Wasabi Ventures in Scottsdale will be run by CEO Jay Chernikoff and Community Manager Gabe Gasca.

Wasabi Ventures is an early stage venture capital firm.

SkySong, The ASU Scottsdale Innovation Center, which is within the Scottsdale McDowell Corridor, is meant to attract cutting-edge and innovative companies and their base of knowledge workers from around the world, integrating the resources of ASU with the opportunities of the private sector. (File photo)

SkySong, The ASU Scottsdale Innovation Center, which is within the Scottsdale McDowell Corridor, is meant to attract cutting-edge and innovative companies and their base of knowledge workers from around the world, integrating the resources of ASU with the opportunities of the private sector. (File photo)

Silicon Scottsdale?

Local economic development professionals says venture capital coming to town is a big deal.

Danielle Casey

Danielle Casey

“It is an excellent indicator of the interests of the private sector, and helps bring positive national media attention supporting heightened awareness of our business brand which we are working to elevate to a level that complements our amazing tourism brand,” said Scottsdale Economic Development Director Danielle Casey in a July 8 written response to e-mailed questions.

Ms. Casey contends venture capital taking interests in the Phoenix metropolitan area is a positive economic indicator.

“Wasabi Ventures coming to Scottsdale makes a statement on a national level that we are indeed an up-and-coming-hotbed of growing technology firms and an attractive location for new investment opportunities,” she said. “Simply put, access to capital stimulates and attracts firms to the market that often creates a multiplier effect in the community.”

In a prepared statement, Wasabi Ventures CEO Jay Chernikoff echoes that sentiment.

“Wasabi Ventures’ decision to open up shop in Phoenix is a reflection of the strong and growing tech scene in Phoenix and across Arizona,” he said. “We are pleased to host them and look forward to collaborating in offering regular programming to the community. We are delighted to begin this partnership and expand it to San Diego in coming months.”

Scottsdale is no stranger to the affluent entrepreneur, Ms. Casey says.

“Scottsdale has a reputation of a very high level of entrepreneurial activity,” she said. “This is backed up by recent figures from the investment monitoring firm CB Insight that shows it has witnessed the highest number of venture capital ‘deals’ of any city in the metro Phoenix area.”

Wasabi Ventures General Partner Tom Kuegler says he sees an economic ecosystem blossoming in Arizona.

“The combination of strong universities, visionary government leadership, plus an active and increasingly cohesive ecosystem full of strong talent gives us great confidence that the Silicon Desert is a great place to be,” he said. “We are committed to be an active contributor to building that ecosystem, and will do that in partnership with some of the leading actors in the space across the state. We plan to start 20 companies in Arizona in the next 24 months, and will run cohorts in Flagstaff, Phoenix and Tucson.”

A ground level view

Phoenix resident Mike Kristiansen says the life of a small business owner is one of discovery.

“The last person who gets paid, everyone else comes first,” he said in a July 14 written response to e-mailed question. “Being an entrepreneur means being the person who assumes the risk.”

Mr. Kristiansen says he has been an entrepreneur in the Phoenix area for more than 20 years and is a web developer who owns Net More Now.

“Growing up, there is a strong pull to find your way, that can mean a vocation that is in line with what you feel you love to do,” he said. “That is not a straight line to self employment. In my case, my own way meant finding self employment. Looking for opportunity to learn what it is you need to know to become your own employer led to working for others who could mentor you.”

But if you are not willing to take risks, entrepreneurship may not be your cup of tea, Mr. Kristiansen contends.

“Entrepreneurs are people willing to risk it all, believe in themselves enough to not consider failure as an option,” he explained. “It certainly happens, but it does not stop you. Small business owners are entrepreneurs facing limited resources and making success happen to a degree that keeps them in the game. There’s all sizes of greatness and a lot has to do with how others believe in you enough to loan you their skill, resources, and treasure to see you succeed.”

The almighty dollar reigns supreme when getting small business ideas off the ground, Mr. Kristiansen explains.

“No access to capital and little capital to start with takes a serious amount of planning to self-finance a business to the point capital becomes accessible,” he said. “I’ve learned another lesson that the ability to borrow has great risks attached, mainly the repayment structure has to be in line with other overhead expenses and variable expenses. Income has to service the debt and pay all ongoing expenses before income for the owner is realized.

It’s possible to finance receivables. Financing a second mortgage on a home can provide working capital that has a long repayment schedule that should be lower than the revenue generated from investing more into the business.”

Much of a start-ups early legacy is based on trust and a willingness for the marketplace to embrace your product, service or company.

“The way I financed my first business was borrowing from vendors, starting with one-week credit and building up to longer credit lines over time that were revolving, he said. “That allowed for seasonal changes in business volume. VC firms coming to Arizona means capital investment in the state rises, which in turn can support higher paying jobs that increases overall spending in the state.”

A diversified economy is something Arizona can achieve and having new avenues to capital shows the region is on the right track, Mr. Kristiansen says.

“Exciting times for Arizona are taking place, the possibility of breaking the real estate boom/bust business cycle will disappear, replaced with growth in industries that provide a bright future such as health, biotech, and even cyber security,” he said. “High paid skilled knowledge workers means everyone’s standard of living can rise faster.”

Creative capital investment

On Friday, July 3 Equity Crowdfunding legislation went live as Arizona Gov. Doug Ducey last spring signed into law a measure allowing small business owners to obtain capital through Arizona residents.

Through the new law, investors are able to invest up to $10,000 in exchange for shares of a company and businesses are able to raise up to $1 million in a 12-month period. According to the legislation, The Arizona Corporation Commission will be the overseeing governing body on all crowdfunding solicitations and companies must register with them prior to pursuing funding.

Rick Murray

Rick Murray

Arizona Small Business Association CEO Rick Murray, who helped draft the legislation, says more opportunities for entrepreneurs to have access to capital is a good thing for the Arizona economy.

“One of the biggest reasons businesses fail is lack of capital,” he said. “All small business does is create new jobs. There are more than 500,000 small businesses registered in Arizona. A vibrant small business community is a vibrant community for all.”

Through venture capital taking interest here locally and the new crowdfunding opportunity, small business in Arizona has new avenues to funding a few years ago would have been a figment of imagination, Mr. Murray points out.

“I think this steady climb out of the recession is actually building a diverse economic foundation for business in the future,” he said. “But in a lot of cases these business owners’ financial statement won’t support what they are pursuing — Banks need literally almost a dollar for dollar.”

New avenues for capital point to the state’s bright economic future, Mr. Murray contends.

“It is a great indicator of where things are going,” he said of both crowdfuning and venture capital opportunities sprouting in Arizona. “I think we are seeing the more types of industry that VC likes to see.”

The economic world of Arizona is changing, Professor McPheters says.

“What we are seeing is that Arizona had a history of a big company, high tech centers,” he said. “But when you compete globally the thing you have to deal with is low-cost labor. For decades people had been willing to come to Arizona for wages that were somewhat below the average.”

As cheaper labor has been found elsewhere globally, Arizona manufacturing has become almost nonexistent compared to decades earlier, Professor McPheters says.

“What we do see is manufacturing is basically flat. Construction is still down 100,000 jobs from its peak years. What we have is a recovery, but modest compared to our longterm growth.”

Northeast Valley Managing Editor Terrance Thornton can be contacted at tthornton@newszap.com

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