Here’s how Metro Phoenix is attracting more venture capital

Innovation and Arizona State University (ASU) are essentially synonyms. For the seven years that U.S. News & World Report has offered an innovation category, ASU snatched No. 1 every time, outperforming other juggernauts such as Stanford University and Massachusetts Institute of Technology.

One outlet for this creativity is Skysong Innovations, the vehicle that brings ASU research into the market. In November 2021, ASU passed a significant milestone when it announced that startups in its portfolio attracted $1 billion in external funding.

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“It’s a testament to the quality of the ASU technologies that are coming out of this university,” says Kyle Siegal, senior vice president and chief patent counsel at Skysong Innovations. “It speaks to the growth in Arizona companies’ ability as a whole to attract venture capital investment from outside of the state.”

Historically, the Grand Canyon State hasn’t been a top contender for venture capital. CBRE’s Q3 2021 Life Sciences Trends report shows that three markets attract 70% of life science venture capital funding: Boston-Cambridge, San Diego and the San Francisco Bay area. The same report identifies where the remainder of the 30% is allocated, and Phoenix didn’t attract enough to warrant a “hot spot” label.

Joan Koerber-Walker is president and CEO of the Arizona Bioindustry Association and chairman of the Opportunity Through Entrepreneurship Foundation.

Still, Joan Koerber-Walker, president and CEO of AZBio, is bullish on the state’s future as a magnet for venture capital. “We are making great progress. Every time I get new reports, Arizona is getting more and more venture capital,” she says. “But we’re still not in the top 10, because other states have a complete ecosystem. If you’re missing even one component, it doesn’t work efficiently.”

An integrated system

An ecosystem is composed of separate-but-related parts that impact one another. If a herd of deer doesn’t have a predator, the group will overpopulate and stretch the available resources until the population recalibrates itself. Even though the wolf preys on the deer, they both need each other for a healthy existence.

Luckily, entrepreneurs are far more collaborative than the denizens of the natural world. Brandon Clarke, co-founder and CEO of StartupAZ, describes the startup ecosystem as the humans, assets and resources that comprise a vibrant community. “Universities are participants in the ecosystem, along with accelerators, incubators and mentor networks,” he says.

Clarke launched StartupAZ in 2015 because he saw a need for an organization dedicated to founders learning from one another.

“As you get into the stage of finding product market fit, talent and capital becomes essential, but so does having a peer network of other founders going through the same thing. We took some principles from other CEO mastermind type groups, and focused on early stage, founding CEOs of high growth tech companies,” he says. “We felt if we could develop that category of leader, it would have a big impact on our ecosystem. And more importantly, it could help establish a stronger, more resilient economy rooted in high growth tech in the coming years and decades.”

Convincing investors that successful technology or life sciences companies will come from Greater Phoenix is a challenge because, as Siegal notes, venture capital firms want to co-locate near innovation hubs.

“Historically, it’s been challenging for entrepreneurs in Arizona to raise early-stage capital, because the majority of wealth created in the state has been through real estate, not technology related investments,” he says. “It’s a matter of making the case to the venture capital ecosystem over a period of many years that they should be paying attention to what’s going on here.”

What that initially looks like is out-of-state venture capital providing funds into local companies, then, hopefully, relocating to the state and becoming a part of the ecosystem. Clarke notes that over the last three years, active StartupAZ members have collectively raised over $201 million, approximately 80% of which has come from outside of Arizona.

“It’s a sequential process, but we’re well on our way,” Siegal adds. “If we talk about ASU, we’ve launched more than 190 startups. Many of our spinouts are based in Arizona, and most of their financing does come from out of the state. That means folks outside of Arizona are noticing the quality of innovations.”

Internal growth

One of ASU and Skysong Innovations’ spinout companies, OncoMyx Therapeutics, is built around a treatment that uses an engineered virus to attack cancer cells developed by Grant McFadden, a professor and director of ASU’s Biodesign Center for Immunotherapy, Vaccines and Virotherapy. In December 2021, the company announced $50 million in Series B funding.

“That’s the exception, not the rule,” Koerber-Walker says. “It’s harder to get venture investment here than it is in places like Boston, San Francisco or San Diego. It’s not that our companies aren’t any better than what they have. It’s because we don’t have very early-stage venture capital, sometimes called seed capital. The companies don’t get to a level where they are venture ready.”

AZAdvances, an initiative of AZBio and the Opportunity Through Entrepreneurship Foundation, is designed to address the lack of venture capital in the state, what Koerber-Walker describes as a significant issue in the way of building up the life sciences industry in Arizona.

“Venture capitalists look for certain milestones that a company has hit before they’re ready to write a big check. Getting through those gates cost money,” Koerber-Walker explains. “AZAdvances is not currently deploying capital, but the goal is to build a $200 million endowment that will then yield $10 million a year in early seed capital in Arizona forever. That will allow the most promising companies that are based in Arizona to progress through these gates so they can attract more capital.”

Ultimately, she believes that devoting resources in our innovation sectors, whether it’s technology, life science or advanced manufacturing is one of the greatest opportunities Arizona has coming out of the pandemic.

“As we invest in these companies, they will grow and hire people here. These industries tend to have high wages, which builds the money supply that circulates in our state, so every business benefits,” Koerber-Walker concludes. “Every time that money recirculates, the state gets a little piece and it builds our tax base, so we have more money for the important things, such as roads, education and taking care of our people. This is a wonderful opportunity for Arizona, and it’s time to capitalize on it.”