Startup City

Written by Suzanne Heyn Category: Valley News Issue: January 2014

Rows of young and not-so-young business visionaries sit in rapt concentration at their computers, surrounded by high, exposed black ceilings and a cerulean blue wall. Near the door, a huge screen lists the week's events: guitar lessons, a software engineering reading group, a lunch-and-learn. A 3-D printer idles against the back wall. The people in this "collaborative workspace" are like the printer – beta-stage innovators sustained by potential and promise.

Concentration breaks in the back hallway, where multiple conversations converge as people circulate through off-shooting rooms. It feels chaotic. "It's very chaotic," agrees Shon Burton, founder of Gangplank-based HiringSolved, which aggregates job candidate data into its search engine. "Welcome to Gangplank."

Along with a dozen or so similar ventures around the Valley, Gangplank represents a key piece of an emerging framework with one lofty purpose: to remodel our local economy. Offered free through a partnership with the city of Chandler to support entrepreneurship, Gangplank is the full-time headquarters of 22 businesses, with about 50 more who use the space intermittently – all members of an "entrepreneurial ecosystem" that Valley leaders hope will reduce our dependence on real-estate-driven economic swings and create a future defined by high-paying technology jobs, innovation and homegrown, household-name companies.

Some of the state's most powerful economic stimulators are buying into the vision. Over the past several years, the Arizona Commerce Authority (ACA), Arizona State University (ASU) and the Greater Phoenix Economic Council (GPEC) have implemented plans to support local startup ventures, particularly in technology. This year, GPEC president Barry Broome plans to promote a $2 billion public investment to modernize the Valley's economy.

Although about two-thirds of startups flop or break even, their existence creates a culture of innovation that supports existing companies, experts say. And the Valley appears to be startup-fertile. In 2011, people in Arizona created more businesses per capita than anywhere in the nation, according to a report by the Kauffman Foundation, an entrepreneurship think tank. In 2013, a Kauffman report ranked the Phoenix metropolitan area No. 13 nationally for high-tech startups. Though a "startup" can refer to a business in any industry, technology startups dominate the conversation among economists and business advocates because successful ones grow quickly, creating large numbers of high-paying jobs.

About one-third of startups turn a small profit. Occasionally, a breakaway hit emerges. Phoenix needs those hits. "The key to whether or not this will become a major tech center is how successful some of those startups are," says Scottsdale-based serial entrepreneur Pat Sullivan.

However, the Valley's sprawl can retard the networking and mentor-protégé connections so vital to a startup ecosystem, entrepreneurs say. Sprawl coupled with limited startup capital has kept Phoenix off many nationwide shortlists of startup hubs. "The depth and breadth of startup activity we have here is, I think, a little bit of a secret," says Brian Sherman, ACA's senior vice president of business development. "This is a story that's about to happen."

PHM0114 SUC2

Phoenix: Technology Powerhouse?
Real estate dominates Arizona's gross domestic product, according to U.S. Department of Commerce data. In 2011, real estate accounted for 14 percent of the state's total GDP, the single highest total of any industry. But it wasn't always that way.

During World War II, aerospace and defense powered the state's economy, and those industries, along with semi-conductor manufacturing, flourished until the late 1980s and 1990s, when many companies scaled back or abandoned Arizona operations due to changing economic conditions. Motorola, for example, opened a Phoenix facility in 1949 and grew to be the state's largest private employer, only to shed the majority of its workforce through a series of cutbacks. By 2003, only 6,000 of Motorola's one-time 20,000 Valley workers remained.

Meanwhile, real estate started booming in the 1950s and never really stopped. Development and housing remains the bedrock of the Valley's economy, but one that often strains under the burden of a 2-million-person labor force.

"The real estate community absorbed all of our entrepreneurial spirit and created a lot of wealth for people, but long-term, it didn't do much for the market's economic position," says Broome, the GPEC president. "Turning dirt was too [profitable]."
Consequently, the housing bubble of 2008 was particularly painful for Phoenix. At the bottom, 10.5 percent of Valley residents lacked jobs.

"That's what a simple, one-trick pony consumption economy will give you," Broome says. "What the market needs to do, while it's still young and dynamic enough to do something about it, is to build a case to move forward." For Broome and his colleagues, that means selectively piping money to promising businesses and industries. Most of them in the technology field.

GPEC – a public-private economic development organization that receives funding from Maricopa County, area cities and businesses – formed in 1989, during the infamous Savings & Loan downturn. At the city/county level, it performs much the same function as the Arizona Commerce Authority, created by Governor Jan Brewer to replace the Department of Commerce in 2010. Led by a public-private board composed of top-level public officials and prominent business leaders, the ACA was designed to align state policy more closely with business. The ACA oversees tax incentives, such as an income tax credit for angel investors, runs programs such as Venture Ready, which connects entrepreneurs with mentors, and invests public money into startups.

While traditional economic development focuses on recruiting established businesses into an area – which the ACA does, having recently laid the groundwork for the planned Apple factory in Mesa – the organization is also a robust champion of startups. Seated in his office in a Downtown Phoenix skyscraper, the ACA's Sherman says he's bullish about the Valley's growing startup momentum. To support emerging technology companies, the ACA started the Arizona Innovation Challenge, which has granted $3 million annually to promising startups since 2011. Sherman says the award ranks as the largest of its kind nationally. "[High-paying technology jobs] are why we're in this game," he says.

Startups that apply for the Innovation Challenge must survive several stages of elimination. The competition culminates in a panel of judges grilling candidates about their businesses to ensure wise selections. In 2013, Scottsdale-based ReplyBuy – a perishable-item discount broker (see sidebar) – won $250,000 in innovation funds to supplement the $690,000 it raised from investors. When owner Josh Manley started ReplyBuy in 2011, he worked out of coffee shops and funded operations himself. Today, he has five employees and expects to add up to 20 positions, including senior staff and support, over the next 18 months.

For the well-connected, the Valley's diluted technology competition – relative to hotspots like San Francisco and Austin (see map) – can prove an asset. The Valley attracts less capital than more established ecosystems, but investors also receive fewer pitches, says ReplyBuy Chief Technology Officer Tony Saia.
Meanwhile, San Francisco and its rich cache of investors and technology titans is a mere two-hour plane trip away. "Some of our first investors were the guys who helped create YouTube," Manley says.

For the unconnected, the relative lack of experienced business people and mentor figures in Phoenix can represent a significant hurdle, says Troy Busot, founder of the Gangplank-based company Athlinks, an online race-tracking tool for athletes (see sidebar). "I feel like if you are living in San Francisco, you are living in the middle of a TED conference," Busot says, referencing the nonprofit that organizes conferences promoting new ideas in technology, entertainment and design. "I just don't see those people here."

Busot was so discouraged by the lack of collaborative tempo that he considered moving his business out of state. But then he found the ecosystem he was looking for. Hiding in plain sight.

PHM0114 SUC3Sharing Culture
Many first-timers don't have connections. They often work alone, out of garages or bedrooms. As an alternative, ASU Assistant Vice President Gordon McConnell wants them to work in the Eureka Lab – a free, public, collaborative workspace in Scottsdale's Civic Center Library. The lab, which opened in 2013, features streaming sessions of ASU's Rapid Startup School and access to university mentors. Negotiations are underway to open additional spaces throughout the Valley. "Our job is to look at the ecosystem and say, 'Where do we fit? How do we fill the gaps?'" McConnell says.

Then-student Courtney Klein used one of these programs, the Edson Student Entrepreneur Initiative, to secure funding, office space and training as she started her first nonprofit. In 2012, Klein co-launched Seed Spot, a Phoenix incubator focused on helping so-called "social impact" startups – businesses targeting areas such as health, human rights, or education. During the first cycle, 56 ventures, chosen from 191 applicants, underwent a four-month, full- or part-time program. Participating ventures received help refining business plans and time to practice pitching their companies in front of a live community audience. A polished pitch helps secure investors.

The full-time program costs participants $3,500, which partially covers the cost of running Seed Spot. Companies participating in Seed Spot's first program cycle have collectively hired more than 40 people, according to the organization's first annual report. Companies undergoing the program's second round include Sly Fox Nutrition, a healthy snack bar brand, and My Counterpane, which aspires to be a YouTube-like online community for people suffering from chronic illnesses.

In addition to its organized program, Seed Spot rents desks to companies seeking affordable office space and an entrepreneurial environment. Spaces with desks, like Seed Spot and Gangplank, are proliferating across the Valley. More have opened in the past year than the previous six combined, says Jenny Poon, founder of Downtown Phoenix's first co-working space, Co+Hoots. The collaboration inside nourishes more than just tech startups.

Poon came up with the idea for Co+Hoots in 2010 while searching for office space for her graphic design business. Most of the office rentals she found were either too big or too small. Still, she was desperate to move the business out of her home, where she felt isolated. "One day, [I] went to a coffee shop and people were talking about a natural disaster that happened," Poon recalls. "I didn't even know about it because I don't watch television."

Two years later, Dean Heckler began renting Co+Hoots space for his metal furniture business, Heckler Design (see sidebar). One day, a Heckler employee happened to take a seat next to Beth Cochran, owner of Wired PR. A working relationship developed. The group-subsidized space kept Cochran's rates competitive, and gave Heckler room in his budget for a PR firm, which he says helped his company grow faster. Today, Heckler Design occupies 6,000 square feet inside a historic Grand Avenue building. He employs six and says many of his vendors count him as a top-three largest client.

When it comes to building something from nothing, collaborative workspaces can prove invaluable. Like Busot and other emerging tech innovators, HiringSolved founder Burton was so discouraged by the lack of intellectual infill that he entertained thoughts of leaving Phoenix. That changed when he discovered Gangplank, where free desk space eliminates barriers to participation. Recently, Burton sold about one-third of HiringSolved and secured a seven-figure capital investment to expand. By 2015, Burton plans to employ 50, mostly salespeople and engineers.

Ultimately, the decision to stay in the Valley was wise. Because of high costs, "there's no way we could have done what we did with HiringSolved in San Francisco," Burton says. Yet low rent and affordable tech salaries can only take a local industry so far. To change the dialogue about Arizona, and help transformative businesses grow, the Valley will need a high-profile game-changer or two.

"What Arizona needs is five or six big wins," says ReplyBuy's Manley, referring to companies that sell for big sums, which founders can then reinvest in future companies, fueling the ecosystem.

A 20-mph Ferrari
GPEC President Broome agrees. He believes the Valley has the human capital but lacks the resources to "scale" companies – which is to say, design and fund them for a mass market – and create thousands of high-paying jobs. "We have better startup talent than Silicon Valley right now; we just don't have their culture," he says. "We've got people driving Ferraris 20 miles per hour."

His prescription for getting the Valley's tech industry into gear: create a top-tier engineering school at ASU. Essentially, it's a trickle-down version of startup investment. Under Broome's plan, $2 billion in public funds will jump-start a handful of "technology targets" – partnerships between private companies and ASU to create scalable enterprises based on tangible technology, as opposed to the Internet-based businesses now common in the Valley. For example, a "target" might partner Barrow Neurological Institute with a major pharmaceutical company, powered by ASU research, that otherwise would sit on a shelf somewhere.

Broome's plan will allocate $400 million to ASU's School of Engineering, partly to hire about 250 faculty engineering researchers with private-sector experience. Broome wants the program to compete with top-tier schools such as Stanford that consistently appear high in college rankings. ASU's graduate engineering program now ranks No. 44, according to U.S. News & World Report.

The idea is to create industry-led partnerships, harnessing the scalability and glamour of big companies, while powering them with university innovation, a tricky equation that Broome says requires public money. "Private capital isn't going to be put to work so we can [create a high-wage] economy. Private capital is going to be put to work where private capital can get the most profit."

Startups would benefit from the growing industry relationships, Broome says. He wants to see ASU grads with a disruptive, scalable idea be given the chance to enter into a joint venture with their alma mater and Intel. Economies richly jeweled with small companies and a strong university research base offer more resiliency than those based on a few large companies that "roll up and go away" like Motorola, Broome says.

Only top-down engagement, not sales-intensive startups and Gangplank-style workspaces, will create companies capable of generating thousands of high-wage jobs, Broome adds. "You're not going to do it in little suites where people are having conversations at a community college or a university," he says. "You do it by... building an intense capital play around science and technology that draws the attention of the U.S. market and the global market."

The extent to which the government should involve itself in creating the Valley's entrepreneurial ecosystem is a matter of some debate in business circles. Scottsdale-based entrepreneur Pat Sullivan says success breeds success, without top-down intervention. "Companies go public, they get acquired, and it creates a lot of wealth, much of which stays right here."

Sullivan started building lead-tracking software for salespeople in the 1980s. His companies Act! and SalesLogix were both acquired and remain widely used. In late 2013, Sullivan launched his newest sales-software company, Contatta, raising $6.25 million and employing 19 before shipping a single product. By Sullivan's estimation, success attracts money, which creates jobs. It sculpts mentors, who advise subsequent generations. It generates excitement, which feeds the ecosystem. "I think we're in perhaps the first decade of a surge of a lot of tech startups in Arizona," Sullivan says. "There is a very, very active, vibrant community of young, bright people starting things here."

On this point, Broome agrees. But he also believes a bigger spark is necessary to ignite a sustainable chain reaction of tech success. "You [need] the culture to say, 'I want to build an empire'... and then you have to have the combination of science and engineering to produce the idea that can do it and take it to scale."

Playing off his fast-car analogy, Broome says, "Once we take 'em to scale and people start seeing the Ferraris going 100 miles an hour, now you're going to know what it means to take off."

• • • •

Based in Scottsdale, ReplyBuy connects people to deals on so-called perishable items — concert tickets, hotel rooms and tee times — through text messages. Customers sign up for ReplyBuy's system by entering their cell phone number and payment information, and identifying categories of interest.

Companies work with ReplyBuy to access those customers and unload tickets, products or services that would otherwise go unused. All purchasing a deal requires is responding to the text message.

As of press time, the company was operating on a limited basis. It expects to raise additional funding for expansion in 2014.

Heckler Design
Heckler Design sells metal desks, office accessories, iPad stands and business point-of-sale equipment. Founder Dean Heckler approaches his products with a modern, minimalist aesthetic and focus on technology.

For example, the One Less Office System includes one stand each for monitor, keyboard, printer and file cabinet. The stands fit inside each other, like Russian nesting dolls, to stack up against a wall when not in use. Multiple colors are available, and Heckler creates custom colors with a minimum order.

Heckler started his business in 2007, and recently expanded into a 6,000 square-foot-facility that includes both office and product storage space. Products are
manufactured in Phoenix.

My Counterpane
A virtual community for those suffering from multiple sclerosis, My Counterpane allows people to search through videos posted by others, categorized by emotion.

Whether someone feels guilty, overwhelmed, angry or scared, she can log onto the site and find others feeling the same way. Users also post their own experiences to share with others.

Founder Kate Milliken started the site after her multiple sclerosis diagnosis. She originally published her own videos on, and then decided to expand the project. The site will eventually include additional illnesses. The company went through the fall 2013 session of Seed Spot's four-month incubation program.

Through Athlinks, endurance-race athletes track their scores online, connect with fellow athletes and learn of upcoming events. Founder and triathlete Troy Busot first conceived the idea in 2002 after growing frustrated with the difficulty of tracking his own race results. The company's current incarnation emerged in 2006.

In 2013, Indiana-based ChronoTrack acquired Athlinks. ChronoTrack manages large races, organizing everything from registration to sign-in.

Busot retains an ownership stake in the company and will stay involved for the next five years. He plans to continue working from Gangplank, where he and about 12 employees will operate the company.