Startup Hurdles Are Turning East Valley Into ‘Tech Wasteland’

Via azcentral.com

East Valley leaders have touted growth in tech industry jobs, even going as far as calling the area the “Silicon Desert,” but a pair of entrepreneurs are concerned that tech startups face too many barriers when doing business in Arizona.

Doug Guilbeau, a Tempe native, and Geoff Mobisson experienced those challenges as they built a Chandler-based software company, Levementum.

The two men became friends and later they decided over a bottle of wine to start their own company.

Eleven years later, Guilbeau and Mobisson are speaking out in hopes of making it easier for others. They’ve also formed a venture capital project to help fund tech startups across the Southwest.

“We want to see more Levementums out there,” Mobbison said.

But he says tech startups in Arizona face hurdles such as long leases for office space and a lack of incentives. He fears the hurdles are turning the southeast Valley into a “tech wasteland.”

Politicians use a different moniker, calling the region the Silicon Desert — a play on California’s Silicon Valley — as they point to self-driving cars, high-tech chip manufacturing and tech firms moving into the area as proof.

Founders: Software, not silicon, is king

The Silicon Desert moniker is in part due to an Intel plant dubbed Fab 42 off Dobson Road that is set to open in a few years.

The factory will make Intel’s most advanced microchips. While the expansion will add jobs, Mobisson and Guilbeau say growth in tech development, rather than manufacturing, would be even better for Arizona.

“Silicon doesn’t drive the economy, software does,” Guilbeau said, adding that high-paying tech jobs are in software development, not tech manufacturing.

Manufacturing jobs at Intel pay about $57,000 a year, according to job postings by the company. Posted salaries for software development jobs at Intel ranged from $97,000 to $113,000.

A 2015 report by Washington, D.C., think tank the Brookings Institute showed that Greater Phoenix saw a 12 percent increase in these sorts of tech-related jobs, one of the largest increases in the nation.

Greater Phoenix ranked 16th in the nation for the number of new advanced tech jobs but 51st in annual change and growth, meaning there are lots of tech workers but less expansion.

Mobisson and Guilbeau’s Levementum is one of those growing companies that focuses on software instead of manufacturing. It builds software related to customer relationship management, or CRM, which refers to technology that helps companies engage, manage and analyze consumer data.

The duo developed a program that helps people customize CRMs.

Levementum has grown fromtwoto 55 employees. As part of that growth, the company opened a second office in Indianapolis, which it says can offer Arizona lessons in supporting tech companies.

Tech’s real-estate needs

Levementum stayed within downtown Chandler as it grew, moving from building to building, all a stone’s throw away from one another, as more space was needed.

However, long building leases often restricted growth, Mobisson and Guilbeau said.

“Tech companies move fast,” Mobisson said. “We need services that align to that but that is counter to the way the businesspeople in Arizona think.”

“Startups need a place to grow that doesn’t have a five- or seven-year lease,” he said.

In Indianapolis, Levementum worked in a collaborative space before moving to a larger collaborative office space with flexible one-, two- and three-year leases.

The Union 525 in Indianapolis is where they began in the Hoosier State, and it continues to play a pivotal role in Levementum’s growth, Mobisson and Guilbeau say.

The Union 525 offers amenities that are attractive to tech startups such as a data center, month-to-month leases and conference rooms.

Having a space like the one in Indianapolis allowed Mobisson and Guilbeau to worry less about moving and focus more on what they needed to do for the company.

This differs from the tech startup locations in Tempe and Chandler, which require meetings with city officials, longer application processes and fewer amenities such as an on-site data center, they said.

“I would love to coach, teach, prod the leadership in Arizona to re-invent the drivers of the economy,” Mobisson said. “It’s not always about buying property and real-estate development.”

Startup spaces growing in the Valley

City leaders and the private sector have taken note of this issue and sought to grow the number of startup spaces.

“I’ve had a lot of people asking me about affordable space,” Tempe Economic Development Director Donna Kennedy said.

The city is looking to partner with a private developer to build an Innovation, Discover, Education and Art Campus, also known as an IDEA Campus, next to the Tempe Center for the Arts that would provide startup space.

The projected $300 million campus would be a public-private partnership as the city would provide the land and the developer would “build at their cost,” Kennedy said.

A development agreement with Utah-based developer the Boyer Co. is expected to go before the Tempe City Council in January.

Tempe also is exploring other areas of the city that could be turned into startup hubs, such as the Smith industrial area and land around Apache Boulevard.

Chandler has a startup incubator that is tech-focused. The Innovation Incubator on Chicago Street opened in 2010.

Similar spaces that aren’t run by the cities or universities slowly are popping up in the Valley, such as Galvanize in Phoenix.

Galvanize offers work space, classes and flexible hours for tech entrepreneurs and students, similar to the Union 525 in Indianapolis.

Galvanize, the Innovations Incubator program and other small tech spaces such as Gangplank in Chandler are big helps to startups but Mobisson and Guilbeau think more can be done.

Incentivizing tech

Tech space isn’t the only difference between the Grand Canyon State and the Hoosier State.

State incentives can help with mentoring.

Indiana allocates state money to training and apprenticeship programs. Arizona has one, too, but it’s only for training and has largelygone unfunded since 2015. It is set to end in 2020.

Mobisson and Guilbeau say on-the-job experience is better than sitting in a classroom. That’s why incentives in Indiana like the Skills Enhancement Fund have been a big deal to them. The incentive typically reimburses half the cost of training and apprenticeships.

The bottom line is the state incentive helps them more affordably hire people in Indiana.

“I can hire two people in Indiana for what would be the price of one in Arizona,” Guilbeau said.

Such incentives have made Indiana a hot bed for growing tech firms such as Levementum. The state has generated around $5 billion in the past 10 years from tech growth, according to the state.

Levementum has 24 employees in Arizona, 22 in Indiana and nine working in various areas across the country.

Angel investments

One Arizona incentive does give Mobisson and others hope.

The Angel Investment Incentive took effect this month and will give a tax credit to people who invest in small businesses.

“We are good at attracting young talent, but the state as a whole is having issues getting seed money.”
Donna Kennedy, Tempe economic development director
Most tech startups receive funding from outside investors, so an additional tax incentive to encourage that is a welcome sight, said Jerrod Bailey, who co-founded Scottsdale-based Click IPO, which helps everyday investors get in on the ground floor of new investments.

Without angel investments and help from fellow tech entrepreneurs, Click IPO may have never gotten off the ground, Bailey said.

“Cities need to promote these incentives,” Bailey said.

Tempe has begun looking into how they can help support Angel Investments, said Kennedy, the economic development director.

“We are good at attracting young talent,” Kennedy said, “but the state as a whole is having issues getting seed money.”

What else Arizona has going for it

Arizona is in a good position to attract startups and tech firms with its climate, low tax base, high-quality colleges and low cost of living, but Levementum’s founders caution leaders the state is falling behind.

Arizonans pay about 8.8 percent of their income to state and local taxes. Compare that with California, home to Silicon Valley, which averages 11 percent, according to the Tax Foundation.

Arizona Made: Home-grown companies
The Arizona corporate tax rate is even lower, with Arizona corporations paying 6.9 percent of their net income to the state. In California, the corporate tax rate is 8.8 percent and the state adds on a franchise or privilege tax, according to the Tax Foundation.

Guilbeau acknowledges that Arizona is in a unique position with a more moderate tax burden than other states. But that isn’t enough, he said.

“We’ve lost sight in this state that we’re competing with other states,” Guilbeau said.

The Tempe native said he wants nothing more than to stay in Arizona, but he worries the state will lose out to others.

He and Mobbison have decided to put their money were their mouths are.

Last year, Mobbison created a venture capital fund to encourage small tech startups in the Southwest. So far the fund has given out over $750,000 to three emerging tech firms, including Click IPO in Scottsdale.

“We want to be the mentors we wish we could have had when we were starting,” Mobisson said.

 

 

 

 

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