A start-up is an idea, a corner of the garage, the spare bedroom and every spare minute. The Great Recession may have been Arizona’s start-up booster. “There were suddenly a lot of people with great ideas and no jobs,” says Setheraman “Panch” Panchanathan, ASU’s senior vice president for the Office of Knowledge Enterprise Development. “They didn’t have much more to lose, so they decided to take risks and start a business.”
The old way of building business in Arizona was shaken during the recession. Locally, job creation swirled around retail, services and construction. Governments measured economic development success by quantity of jobs created. After 2008, the jobs may as well have been circling the drain. The way the recession hit Arizona, those jobs were headed down the tubes.
“A big lesson learned about job creation is that growing local businesses have stronger staying power when the economy falters,” says Chris Mackay, economic development director for the City of Chandler. “It’s the reason we decided to invest in growing our own.”
Two paths diverged in the desert sun, poet Robert Frost might have said in early 2009. Arizona took the one less traveled, and it is making all the difference.
National Leader in Entrepreneurship
While all new firms are start-ups — Arizona saw a quarter million of them open doors in 2012 — start-ups diverge into two categories: businesses and enterprises. The roles are simply a matter of founder ambition and scale. The impact on the future state economy is significantly different. It’s that entrepreneurial difference that makes the state and cities perk up and take notice.
Most Arizona businesses tend to remain small. That is no reflection on a firm’s success; it’s a matter of scale. Of the more than 400,000 entities in Arizona — proprietorships, partnerships, L.L.C.s and corporations — only 16,000 have more than 20 employees, according to the U.S. Small Business Administration.
An entrepreneur is the founder of a company that just happens to be small right now. The economy’s future leaders are talking at networking events, sharing challenges over coffee with Startup Arizona and turning ideas into businesses in collaborative workspaces like Co+Hoots, Seed Spot and Gangplank.
Growing these companies requires an effective policy environment, a trained work force and a product or service with value to take to market. When a small company scales up, it puts more jobs into the economy. When it’s a local company, roots grow deeply into the community.
Currently, Arizona’s new business creation is ranked first in the nation, according to the Kauffman Foundation. The 2012 Index of Entrepreneurship Activity ranks states on the number of new companies per 100,000 adults. Arizona clocked in with 520 start-ups. California and Texas tied at second, both with 440 new firms per 100,000 adults; Colorado hit 420; Georgia, 350; and Utah, 250. The new crop of baby business boomers is a reflection of necessity, creativity and public policy shift.
Public Policy Shifts to Entrepreneurial Support
Cities realized quickly that the future for citizens and consumer businesses is encouraging successful new companies in the local area. Organizations like the Greater Phoenix Economic Council, Valley Partnership, partnership organizations in East and West Valley and the Arizona Commerce Authority connected business ideas with a new breed of civic leaders. From this cooperation, cities started investing in growing new companies instead of just recruiting job promises. Incubators and accelerators opened opportunities across the metropolitan area.
ACA’s CEO Sandra Watson and GPEC’s CEO Barry Broome shifted recruitment policy to measuring return on investment. No longer throwing money at job numbers, these government-funded or -supported enterprises became entrepreneurial and focused on companies growing roots and infusing jobs into communities. The same emphasis is given to expanding existing businesses.
Cities like helping start-ups with growth potential and do so by providing resources that build success. Any new or established business entrepreneur wanting to grow should be calling the local economic development department. Various Phoenix-area cities fund incubators or accelerators to grow those future jobs from concept to traction. Most cities will also provide some incentive to established businesses ready to grow quality jobs.
Commercial traction is the common thread placing a business into a city’s incubator or accelerator. The funding city or organization wants to take a business with a commercially viable idea and help its founders get a viable product to market. The business’s success means more high-paying jobs for local residents and more money to be spent in local stores. Arizona governments’ ability to deliver services is driven by the amount of sales tax collected — sales taxes increases from discretionary income and spending by the local workers staffing the new entrepreneurships.
Incubators and Accelerators Grow New Enterprises
Over the past four years, seven Valley cities and ASU invested in incubators and accelerators to help move an entrepreneur’s idea toward reality and capture angel or venture capital for growth. “We know that if Surprise puts the time and money into helping a business develop a market and find angel capital, the business is more likely to stay in Surprise,” says Julie Neal, coordinator of the city’s AZ TechCelerator, the oldest incubator in the state. Not yet four years old, the facility spans a four-building campus in Surprise’s old city hall complex.
“We take a formed business entity with something of value, and help nurture it to the stage where angel investors are ready to cut checks,” she explains. “The company must be scalable to eventually become a larger employer.”
Of its 11 firms and four affiliates, AZ TechCelerator is incubating some firms employing just a founder and some with several employees. All are technology-related businesses. “It’s a three- to five-year process,” Neal says. “We provide mentors, resources and a business address. The firms get some back-office services. To join, the founder needs a company, a plan, and know the direction it’s heading.” Surprise’s objective for anchoring that entrepreneur to the city is to encourage its future staff to live, work and play in the Northwest Valley.
Chandler and Mesa are focused on the same objectives for the East Valley. Mesa just announced a partnership with ASU for a technology accelerator at its aerospace lab in the Phoenix-Mesa Gateway area. Chandler’s Innovations Incubator accelerator is readying its first graduate this year. In Scottsdale, the city’s partnership with ASU, SkySong, is creating multiple paths of entrepreneurial development. Phoenix pushes collaborative workspaces like Seed Spot and Co+Hoots for newborn enterprises. Peoria is directed toward medical and biotechnology in a partnership with nonprofit organization BioAccel.
While none of the jurisdictions have a target business size, all want to incubate businesses that can grow into employers larger than the typical small business. The return on investment when a firm tops 20 employees is significant. According to the SBA, those firms hand out two of every three Arizona paychecks, with a payroll worth $110 billion annually. Businesses with more than 20 employees represent 70 percent of the total Arizona private-sector payroll.
Building Entrepreneurship Ecosystems
Entrepreneurs are business founders with ambition. Ongoing studies of who is an entrepreneur and how entrepreneurial enterprises succeed come from the Babson Entrepreneurship Ecosystem Project at Boston’s Babson College, the No. 1-rated entrepreneurship school in the U.S. and the only source of studies that measure who is an entrepreneur. “Ambition is not a dirty word,” says founding executive director Daniel Isenberg, Ph.D. “To have an impact in a local economy, a business has scale up from a small idea to a larger company.” The state and local governments want new businesses to grow, and it’s why their efforts focus on entrepreneurs.
“Arizona has an enviable ecosystem for entrepreneurs,” says Sidnee Peck, director of Arizona State University’s Edson Student Entrepreneurial Initiative. The program is designed to cross disciplines and turn out entrepreneurs. Right now, 80 percent of students going through the program graduate as founders of a functioning business enterprise.” She also notes, “We’re not just a program for students.” The Initiative includes the Rapid Startup School designed for business professionals wanting to grow a scalable business model. The program is a refresher for existing businesses and an eye-opening experience for newly formed companies.
“Arizona business professionals are very giving to help others succeed,” Peck says. “Many area executives also serve as advisors and mentors to growing companies. It’s important to the market to grow small businesses and expand Arizona’s economy.” Overall, when the state’s economy increases, it benefits everyone.
The state’s ecosystem includes informal efforts, like Startup Arizona, which launched in October of last year. The regional branch of national Startup America Partnership is led by coordinator Brandon Clark. “We bring together entrepreneurs in informal settings to share ideas, challenges and opportunities,” he says. According to Startup Arizona’s website, nearly 70 percent of startups are less than three years old, and only 10 percent are six years or older. The organization’s goal is to strengthen connections within what it calls Arizona’s “entrepreneurial ecosystem” so that start-ups will find Arizona to be the easiest place for them to connect with the resources they need for long-term success.
Entrepreneurial Efforts Grow Established Companies
Existing businesses need to instill an entrepreneurial spirit or the business will stagnate. General Motors created its Technology Innovation Centers to in-source advanced technical development. In-sourcing research and development efforts that used to be shuttled to an outside company created this entirely new department at G.M. One of its four entrepreneurial centers opens in Chandler this year with 1,000 employees. It functions as an innovation enterprise within one of America’s oldest corporations.
Owning system innovation is also a form of entrepreneurship. Avnet, Inc.’s RESULTS program instills entrepreneurial spirit through the entire organization. Derinda Ehrlich, vice president of Global Operational Excellence, says that the enterprise ideas become best practices, solutions to operational problems and improvements in customer service. “The best entrepreneurial ideas come from the people in your business. There’s no one who understands innovations and solutions better than the person who does the work,” she says.
Although not a research and development company, Avnet grows its business with an entrepreneurial system aimed at harnessing innovation. RESULTS implements solutions to problems identified by any employee. Ehrlich says that the program increases efficiency and reduces costs — a simple change in floor plan saved the company three million steps per year, the same distance as walking from Phoenix to Chicago. While an employee at any level can generate the idea, the prototype must be “sold” to department managers. Just as if a product were being developed, there is a budget and a third-party audit for vetting.
Entrepreneurship Feeds Market Clusters
The future of Arizona’s economy relies on building effective clusters in diverse business segments. Policy leaders learned painfully that over-reliance on one sector’s jobs is devastating if that sector’s economy falters. At the same time, it became apparent that the difference between small business and entrepreneurial enterprise is the measure of the Valley’s long-term economic health.
In the 2013 SRP Forum last month, IO.INC CEO Ioanna Morfessis, Ph.D., said that Arizona’s economy can grow best when it keeps building business within its strongest market sectors. The research company’s study for the East Valley Partnership found that the Phoenix market’s most sustainable job clusters are advanced business services; advanced manufacturing and semiconductor manufacturing; aerospace and defense manufacturing; biomedical, life sciences and biotechnology; and communications, clean technology and information technology.
When companies laid off workers, some new businesses were started by the formerly employed, and these generally reflected the fields in which those individuals had worked. Many new businesses were started by entrepreneurs deciding that there was opportunity to be their own bosses and visionaries in their sector. These new businesses are the seeds of Arizona’s growing sustainable market clusters.
“It’s a golden triangle,” says Isenberg. “Entrepreneurs need cash, customers and people.” The Arizona ecosystem connects entrepreneurs to capital. Locating near similar businesses provides a well-qualified work force. At the same time, locating within the clusters provides access to potential customers or partners.
Entrepreneurs start developing new ideas, improving old ones, and innovating to distinguish their positions in the marketplace. Using the market ecosystem and resources, these businesses are growing and hiring. Some grew from a couple employees to a dozen in a matter of months; others are looking at the magic number 20 as an end-of-year goal.
The importance of the new entrepreneurial enterprises is, as they grow, they are building the work force in each market sector and adding to Arizona’s already highly-trained work force. The entrepreneurial growth adds muscle for ACA and GPEC when they pitch a company looking at relocation, “Yes, you can succeed here. We have the stories to prove we know how.”
“The biggest opportunity for a growing business in Phoenix,” says Brandon Clark, “is writing your own playbook. Nothing is defined, and the new start-up leaders are crafting the story for the next 20 years.”