Sowing the seeds-Arizona continues to struggle for its share of venture capital dollars

Arizona has been struggling to increase venture-capital investments for many years; however, there is some hope the environment will improve over the next couple of quarters if the economy rebounds.

By:
Mike Sunnocks
The Business Journal of Phoenix

The Southwestern United States has long lagged significantly behind other regions in venture capital both in terms of number of dollars and quantity of VC firms. For the third quarter of 2002, the Southwest received only 1.3 percent of venture dollars invested, according to California-based GrowThink Research.

Those numbers mirror previous quarter figures put out by GrowThink and much watched data compiled by PricewaterhouseCoopers and the National Venture Capital Association.

The Southwest’s minor league investment numbers are especially frustrating to Arizona economists and business leaders considering two of the world’s top venture markets — Silicon Valley and Southern California — are on Phoenix’s doorstep.

San Francisco/Silicon Valley routinely account for between a quarter and a third of the venture cash. Southern California usually snags about 10 percent.

The situation has not been helped by the relocation of Koch Ventures from Scottsdale to Dallas. In October, the venture-capital arm of Wichita, Kansas-based Koch Industries exited Arizona. The company said it wanted to be closer to its Kansas corporate base and focus on investing more in Texas and south central states.

Koch has more than $75 million under investment management and was one of the largest venture firms in Arizona.

"Seed capital is lacking here," said Robert Pothier, managing partner of Wasatch Venture Fund’s Tempe Office. "We need some more seed VCs in here."

The dearth of early stage and seed venture capital is a substantial problem for Phoenix and other second or third-tier venture markets. The fear and reality is that entrepreneurs who cannot get early-stage venture money in markets such as Phoenix, Pittsburgh or Orlando, Fla. will be forced to relocate to more prosperous VC pastures in San Jose, Calif., Austin, Texas, or Boston.

Investment and economic officials say another hurdle to venture-capital growth in Arizona is the fact the state’s financial and banking sector is significantly smaller than that found in Georgia or Texas. Arizona also traditionally has not been high on the list of university research spending.

New Arizona State University President Michael Crow has made R&D one of his top priorities. R&D often begets innovation and business ideas. Technology and business leaders also plan on making another push at the State Capitol for tax credits and reforms that are friendly toward corporate investments.

But some venture and economic officials are optimistic about potential investment in Arizona and the Southwest overall.

Wasatch is putting together a $20 million to $30 million fund aimed specifically at Arizona. The fund should be up and running in 2003 and will be geared toward in-state firms. Pothier said the fund will expand its swath by relying on matching funds from Wasatch’s Utah base and possibly his firm’s Silicon Valley partner Draper Fisher Jurvetson.

Two Arizona venture firms — Scottsdale-based Valley Ventures and Tucson Ventures — have combined to create a new fund dubbed Valley Ventures III.

That $50 million fund will have a presence in Phoenix, Tucson and Albuquerque, N.M.

"The venture-capital opportunity in the southwestern U.S. is significant and underserved," said Valley Ventures partner Jock Holliman when the new fund was announced in September.

New Mexico could provide both competition and help for Arizona in terms of venture investment. New Mexico may have one of the smallest state economies in the country, but it is benefiting mightily from the presence and increased spending at federal laboratories.

Pothier said there is approximately $5 billion a year in research and development going on at New Mexico labs.

"There’s just a lot coming out of the labs," said Pothier.

"We’re looking aggressively."

The New Mexico equation could cut both ways. On the positive side, it could bring more interest in the Southwest in general, benefiting Arizona, Utah and others.

But with venture funds still on the frugal side of things, a boost for New Mexico firms could mean less cash available in Arizona.

Of course, lack of venture cash is the current situation.