Phoenix-based venture capital firm AZ-VC sees no signs of slowing down more than a year after launching the state’s largest fund.
In 2022, the firm closed a $110 million fund with money raised primarily from in-state investors to meet a growing need for startup financing beyond seed-stage capital.
And although economic headwinds have caused some venture capital firms to pull back on funding startups this year, AZ-VC has only continued to build upon the initial momentum of its fund, said Jack Selby, managing partner of AZ-VC.
The firm has seven portfolio companies and has poured more than $30 million into startups — with more investments to be announced soon, Selby said.
“I'm really excited about the fund deployment because most of these companies are based here in Arizona,” Selby said. “We have flexibility to go out of Arizona to adjacent states and invest in companies with the condition that we then bring those companies to Arizona in some form or fashion.”
Selby has lived in Arizona for more than two decades. He’s a member of the so-called “PayPal Mafia" as one of the early employees of the fintech company. Since then, he has gone on to become the managing director of Thiel Capital, in addition to leading AZ-VC's fund.
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While AZ-VC centered its investments upon locally-based portfolio companies — including Nuclearn, Bluetail Inc. and Right-Hand Cybersecurity — the firm has also backed startups with Arizona ties or those looking to establish a presence in the Grand Canyon State, Selby said.
“So we're funding the best and brightest here in Arizona, and then we’re going outside the state, identifying world-class companies and bringing them to Arizona as well," Selby said. "That was part of our thesis and, so far, I think it has played out perfectly.”
Bulk of AZ-VC fund from Arizona investors
Some 90% of capital in AZ-VC’s fund was raised from Arizona-based investors and limited partners, Selby said.
“We have roughly about 85 limited partners and more than a third of those limited partners are part of my formal advisory board for the fund,” he said.
Pinnacle West Corp (NYSE: PNW), the parent company of Arizona Public Service, anchored the fund with $25 million. Other investors include Bridge Bank, a division of Arizona-based Western Alliance Bancorp (NYSE: WAL); Salt River Project; Trinity Capital (Nasdaq: TRIN); Todd Davis, co-founder of LifeLock; and George Getz, president and co-CEO of Globe Corp, the Business Journal previously reported.
"This is truly an Arizona effort and the community owns it in a sense because the vast majority of the folks are local investors and they want to help startups succeed,” Selby said. “And I think that's what makes us different.”
The economic landscape put pressure on all sectors of the venture capital ecosystem in the second quarter as deals, exits, and fundraising fell well below the “high water marks set in the past few years,” according to Pitchbook. As a result, some startups cut costs and pursued revenue generation to increase runway, reducing the need to raise funding rounds.
AZ-VC, however, remains in an advantageous position because it’s not spending time triaging a portfolio of distressed or massively overvalued companies, Selby said.
“What I've been observing in the marketplace, more regionally and nationally, is that for funds that have been in existence for multiple years and raised money prior to us — they were deploying capital in probably one of the most overvalued times that technology has ever seen,” Selby said. “If you allocated capital into the 2019, 2020 and 2021 markets, you’re paying extreme multiples on those investments.”
Selby: 'A remarkable time to be an allocator'
Startup valuations have since dropped from a pandemic-era frenzy, now making it a "remarkable time" to be a venture capital allocator, Selby said.
"If you're trying to raise money, the tables have certainly turned versus what they were five years ago because we're very much in kind of an economic downcycle. But as an allocator, it's great," Selby said. "We sent out our Q3 newsletter to our investors and the gist of it is that we did an analysis of our entry point, valuation-wise, for our committed investment so far and it's more than 50% lower than market averages."
AZ-VC says it was among the most active first-time venture capital funds in the Mountain West during the past year and still has a significant amount of dry powder after deploying $30 million.
It aims to continue investing in startups representing a wide range of verticals, Selby said.
“We're not dogmatic about what sectors to focus on and instead, we are just trying to find as many amazing world-class entrepreneurs as possible and the sectors they participate in — that's a secondary conversation,” Selby said. “That remains our guiding light and it will be so for the next year.”
