The power players

When Adam Stepanovic chose to relocate his tech company from its Santa Cruz headquarters to Arizona in 2020, he said people questioned whether it would be beneficial for the company.

Stepanovic, co-founder and CEO of DashLX, saw potential in the northern Arizona city of Flagstaff: a better quality of life, an opportunity for the company to grow and abundant athletic activities that align with the startup's industry partners. DashLX, formerly known as PWR Lab, leverages “lived experience” data sourced from wearable technology to make it useful for consumers and businesses.

“We took a look at Flagstaff and decided to make the jump because it seemed like a good lifestyle choice,” Stepanovic said. "It was actually where things really started to take off.”

Since relocating to northern Arizona, DashLX took home the tech category award for Venture Madness 2022 — the state’s longest-running pitch competition — and attracted new venture capital investors who chipped in $2.5 million in a seed funding round.

“We finally were able to get traction in Arizona,” Stepanovic said. “It was very hard in California, but as soon as we got to Arizona, it became mathematical and logical to get fundraising, where (potential investors said), ‘This is what you need to do for me to invest in you.’”

DashLX is among several startups benefiting from Arizona's fast-growing tech ecosystem, which has been bolstered in recent years by a business-friendly environment, university research, entrepreneurial support programs and an uptick in venture capital dollars that industry leaders expect to continue flowing into the state.

In fact, Arizona is in the midst of a venture capital boom, with the number of funds expected to nearly double in the near future as longtime Valley tech entrepreneurs get into the game. And in the wake of the pandemic, more venture capitalists from Silicon Valley and elsewhere are expected to move into the region to fuel startups.

'Renaissance' for new VC fund development

Valley tech veteran and investor Andy Lombard anticipates this year could be a "renaissance" for new venture capital fund development in the state. 

Lombard launched Arizona Venture Development Corp. (AVC) in July as a nonprofit venture capital firm that aims to close funding gaps, create jobs and promote economic growth in the state.

AVC, which is funded through The American Rescue Plan Act, is especially looking to increase access to capital for underrepresented entrepreneurs, Lombard said. 

AVC plans to invest $87 million in Arizona-based startups, including seed to series A capital. It has already catalyzed more than $230 million in investments statewide with over half of its deals inked with founders from underrepresented communities, he said.

Citing statistics from Boston Consulting Group, he said it's critical to invest in Arizona’s underrepresented startups as it could boost Arizona’s GDP to $20 billion.

AVC has closed three direct deals with companies and three limited partner investments. Four more deals are in due diligence and the firm is also looking at another five to seven fund investments.

“For me, we're on a mission to make sure that Arizona gets to a top 10 venture capital ecosystem in terms of investments in the next three to five years,” Lombard said. “From there, I think we have top five potential. If you look at all of the ecosystem layers — the business climate and number of startups — putting venture capital into it is so huge.”

As general partners of Silicon Valley-based investment firms relocate to Arizona, it will likely drive an increase in the number of funds created in the state, he said.

The pandemic prompted people — including investors — to reevaluate where they wanted to live, and Arizona’s economy and thriving ecosystem created momentum for the tech industry, Lombard said.

“This is big because now they’re going to join and participate in the ecosystem," he said. "They’re going to come on panels. They’re going to start to look at deal flow in a little bit of a different way while they are living here."

Arizona has about 16 active venture capital funds, but that number could potentially increase to more than 30 in the coming years, Lombard said.

“Right now, we may be behind Utah, Colorado and Texas. But I think we're going to surpass all of them in the coming years because our foundation is solid,” Lombard said. “We might not be racing out to the larger numbers they have in venture capital, but our bedrock is very, very solid right now.”

'Incredibly exciting' time for VC sector

Another positive sign for Arizona's VC prospects is the fact that Pangaea Ventures, a global venture capital firm headquartered in Vancouver, Canada, relocated its New Jersey office to the Valley in 2019

“We looked at Washington State, but it was too close to Vancouver. In California, there’s really high taxes,” Janelle Goulard, partner, health investment at Pangaea Ventures, said. “Phoenix is the right size for us and our fund and we liked that it’s a growing ecosystem. Hopefully, we can catalyze opportunities here.”

Pangaea Ventures, which has a large network of limited partners worldwide, is in the process of raising a $150 million fund, which marks the firm’s fifth to date, Goulard said.

“There’s a lot of energy here. It reminds us of when we first started 22 years ago in Vancouver,” Goulard said of the Phoenix market. “There’s some great companies that are hungry and excited for new venture capital dollars that are being deployed.”

Meanwhile, Scottsdale-based Grayhawk Capital, the state’s longest operating venture capital firm, has made close to 40 investments across three funds with an aggregate exit value of more than $4 billion since it was founded in 2000.

Grayhawk primarily invests in business-to-business software-as-a-service companies in emerging tech hubs — including in the Southwest — and is deploying its current $76 million fund across various sectors that include health care IT, cybersecurity, cloud enterprise and financial technology.

The next decade will be “incredibly exciting” with continued opportunity for startup and venture capital growth in Arizona, Leib Bolel, partner at Grayhawk Capital, said. 

Bolel said he’s seeing companies and capital growing simultaneously in the state. He attributes the growth in both capital and startups to workers from local universities, out-of-state entrepreneurs relocating to Arizona and resources that support companies, including StartupAZ, a nonprofit that fosters the state's innovation ecosystem. 

Startup founders turned venture capitalists

Because of the struggle they had in raising funds years ago, some Valley startup founders whose companies had successful exits are starting venture capital firms and studios of their own. Last year, Gregg Scoresby opened PHX Launch, a venture studio that partners with founders to grow SaaS companies in Arizona.

Scoresby, also the founder and managing partner of venture capital firm PHX Ventures, recalled the struggle to raise seed round funding in 2014 for Chandler-based CampusLogic, a startup he founded in 2011 and sold to Ellucian last year. 

He raised $4 million in $25,000 increments from angel investors because venture capital checks in the $500,000 to $1.5 million range did not exist at that time, Scoresby said. 

“That’s the whole reason I started PHX Ventures. It’s a problem that continues to exist, but it's changing,” he said. "... For someone with a little bit of traction and early revenue, it’s really hard to raise a seed round and that’s a problem we’re solving."

If Arizona continues to increase founder support and attract more software companies, venture capital dollars will follow, Scoresby said. 

“Software is the No. 1 category that venture capital investors look for," he said. "The reason you’ve seen Utah, Denver and Austin scale up is because they have way more software companies than we have.”

Fundraising challenges persist

Nationwide, venture capital investments are “readjusting as businesses assess the current economic landscape,” following years of frenzied activity and soaring company valuations, according to a recent Pitchbook Venture Monitor report.

A lethargic pace of company exits was a key indicator to slowing momentum with $71.4 billion in total exit value generated in 2022, a 90.5% decline from a record-setting $753.2 billion in 2021, according to Pitchbook.

VC funding in the Grand Canyon State mirrored those national numbers, with investors pouring more than $1.21 billion in 160 deals with Arizona-based companies in 2022. A year prior, startups in the state raised $2.13 billion in 180 deals.

Despite a decline in investment activity, last year marked the greatest amount of capital raised by venture funds nationwide with $162.8 billion across 769 funds, the second consecutive year that number exceeded $150 billion.

The momentum of brisk investment activity last year was partly carried over from 2021 and venture capital was concentrated in fewer, but larger funds led by established firms, said Max Navas, a venture capital research analyst at Pitchbook.

“What that meant is limited partners were less willing to take a gamble on first-time fund managers or emerging managers as a response to the changing tides in public markets,” he said.

DashLX, which has 15 employees, is looking to reach its product development and sales milestones in the next 15 to 18 months, Stepanovic said.

Support from mentors, investors and organizations within Arizona’s tech ecosystem has been key to growing the startup, he added.

“The support that you get from them is very pragmatic,” Stepanovic said. “It is stuff that is key to growing a business.”

Venture Capital Firms in Arizona

*Source: Phoenix Business Journal research