Valley tech startups struggle to secure capital, organizations try to fill gap

Speakers Justin Kan, Steve Huffman, Daniel Kan and Greg Head (from left to right) address the crowd at Venture Madness 2017. (Photo courtesy of Invest Southwest)

MESA – Spencer Thomason’s startup beat out 63 others at this year’s Venture Madness competition.

His pitch: “The internet has two big problems: Porn and cat videos. You might be asking, ‘But what’s wrong with cat videos?’ Well, nothing per se, but cat videos represent the 44.5 hours per week on average that kids spend online.” His Mesa-based company, Clean Router, provides parents a way to filter the internet content their kids see.

The pitch impressed the judges and Thomason walked away with the competition title and a $10,000 cash prize but wasn’t able to attract the potential $300,000 in funding from regional investors.

“As soon as I said the word ‘hardware,’ they ran,” Thomason said.

Thomason’s situation illustrates a problem all too common in the Valley: The struggle technology startups face when trying to secure capital. Experts said although the Valley’s reputation as a growing tech hub has flourished in recent years, funding these kinds of startups is a relatively new – and potentially risky – prospect for many Valley investors.

Several organizations have stepped in to fill those gaps by hosting everything from competitions such as Invest Southwest’s, Venture Madness and billionaire Steve Case’s Rise of the Rest to networking and educational events, such as PHX Startup Week. One of the latest efforts brings together the East Valley Partnership, the city of Chandler and Arizona Tech Investors.

They call it the Angel Investor Initiative, and it consists of hour-long workshops where potential angel investors will learn how to invest in East Valley tech startups. It kicks off Oct. 4.

“Arizona has not had the same amount of capital as the other states, especially the Bay Area, Boston, San Diego, Seattle, so this initiative is an attempt to try and change that,” said John Lewis, the president and CEO of the East Valley Partnership.

Venture Madness

Attendees gather for the annual Venture Madness competition, which took place in March. (Photo courtesy of Invest Southwest)

‘Two parties have to mutually agree’

Thomason said while there is a lot of talk about investing within the startup community in Arizona, few investors want to follow through.

Invest Southwest, a nonprofit that focuses on helping startups raise capital, partners with the Arizona Commerce Authority to run the bracket-style Venture Madness competition. It promotes the competition as a way to gain experience and connect with potential mentors and investors.

“Invest Southwest is a great organization, and now we have great bragging rights and exposure,” Thomason said.

The competition also dangles a potential investment pool of hundreds of thousands of dollars.

However, Thomason said the organizers shouldn’t promote the potential investment dollars “when few of the investors actually have any intention of investing.”

“They gave us the opportunity to pitch to investors, but winning the competition didn’t guarantee that the investors would pick you,” he added. “They chose only a couple of pitches to go to, so not everyone got the chance.”

Nate Mortensen, the chair of Invest Southwest, said the competition is purely to get the word out about new companies. While private investors can provide funding, they are not required to do so.

“Invest Southwest can’t control private dollars going into companies,” said Mortensen, principal at Tallwave Capital, a company that invests in business-to-business technology companies. “Two parties have to mutually agree on funding.”

Although Thomason did secure a few investors from the competition, they eventually pulled out. Thomason said that ironically, the company is actually doing better without help from investors.

Why does Arizona struggle?

Nearly 78 percent of all U.S. venture capital investments get funneled to three states: New York, California and Massachusetts, according to Downtown Phoenix Inc.

Yet state and local officials have tried hard to draw focus to the state’s tech opportunities.

Phoenix ranked sixth for tech cities competing with Silicon Valley, according to Entrepreneur Magazine. The magazine considered the city’s booming 1.5 million population, a one-year increase of 188 percent in technology job listings and a low median house selling price.

During the state of the city address in April, Phoenix Mayor Greg Stanton said that during the past five years, technology companies in downtown have grown at four times the average rate.

The Arizona Founders Fund, a seed-stage venture capital fund, noted that although the state’s tech presence has grown steadily, “our locally led capital sources have not kept pace with our deal flow,” according to its website.

Michael Winer, an economic development specialist with Chandler, said in cities such as the Silicon Valley area, the concept of angel investing is commonplace, whereas it’s a foreign concept in the Valley.

“Out here, it’s more of a recent thing,” he said. “And a lot of people that are investing are doing so in real estate, so we’re trying to shift the mentality toward other avenues for investment, specifically tech startup companies.”

That’s one of the reasons why organizers started the Angel Investor Initiative. It’s open to individuals who possess a net worth of $1 million, or an annual income of $200,000 or a family income of $300,000, according to the guidelines.

Lewis said the group wants to identify, educate and activate potential investors: “There are individuals who have the materials to possess, but they know the real estate market, and this tech innovation market is a little new to them in terms of wanting to take money and invest in it.”

Arizona Tech Investors joined the initiative to provide knowledge in the technology industry and community of interested investors, Lewis said. The organization consists of investors who specifically invest in technology companies across Arizona, according to ATI’s website.

Jim Goulka, the managing director of Arizona Tech Investors, said the absence of a concentrated tech community – such as Silicon Valley – makes it difficult for startups to compare notes and develop synergy.

Venture Madness

The annual Venture Madness competition helps startup companies gain exposure. (Photo courtesy of Invest Southwest)