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Network of growth Expansions and emergence of technology companies reflect an exploding industry in Arizona

By MICHAEL GOSSIE

D

on Hawley is the quintessential product of Silicon Valley. He went to college at the University of California, Berkeley, became a serial entrepreneur and founded and developed many successful technology companies in the San Francisco Bay area.

So why is he doing business in Arizona?

“Arizona is infinitely more business friendly,” said the founder, chairman and CEO of Scottsdale-based Innovative Green Technologies, which creates environmentally friendly products that reduce emissions and save users money. “Favorable tax rates make it less costly to do business in Arizona compared with California, which makes Arizona attractive to newer companies that have to watch their pennies. Arizona is also blessed with Arizona State University and the University of Arizona, which supply a constant stream of high-quality young talent, which is a great resource.”

Hawley isn’t alone. The recently expansions of Zenefits and Weebly into the Valley and the emergence of Valley-based WebPT and Infusionsoft as technology powerhouses reflect an exploding technology sector in Phoenix that is transforming the state’s economy.

“The technology ecosystem in Arizona has never been more robust and these recent business attractions are going to become more commonplace,” says Steven G. Zylstra, president and CEO of the Arizona Technology Council. “One of the vital attractions for startups in the Silicon Desert as compared with Silicon Valley is the drastically lower cost of living, especially in the area of housing. The word is getting out about Arizona.”

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GPEC Home-grown talent Valley economic developers are doing more than using lower tax rates and the promise of eternal sunshine to convince tech companies to relocate here, the state is also helping to build home-grown success stories. A great example is WebPT, which launched its cloud-based physical therapy software in 2008 and has evolved from startup into one the fastest-growing software companies in Arizona, creating more than 200 jobs in Phoenix.

“There are great incentive programs available to businesses looking to grow,” says Brad Jannenga, co-founder, chairman, president and chief technology officer at WebPT. “The Angel Tax Credit program offered by the state is a great opportunity for investors to have peace of mind when backing startups because they know they can take a tax break when doing so.

This was a major win for us when we went out for our Series A round back in 2010. Investors were lining up around the block, partly because of the early stage success we had, but also largely because of the Angel Tax Credit.”

The successes of emerging companies like WebPT are driving the robust growth of Arizona’s technology sector, says Barry Broome, president and CEO of the Greater Phoenix Economic Council (GPEC) from 2005 until press time.

“What we’ve done on the policy side was working with the legislature and governor so they understand that even though the headlines belong to Apple and Intel and companies like that, it’s the hundreds if not thousands of small and medium techbased enterprises that have the chance to be the next GoDaddy,” Broome says. “Maybe you get lucky and you get a Google or a Microsoft or maybe an Infusionsoft becomes a Microsoft. Having the ability to get those small companies to go to scale and having the economic development programs and policies in place to help them are where we’ve been most helpful.”

Jannenga credits organizations like GPEC for helping the technology sector grow by tirelessly looking at new ways to diversify the economy and working closely with Arizona’s universities to produce the next wave of talent needed to feed the workforce demands of the technology sector.

But Phoenix Mayor Greg Stanton put it simply: “WebPT is a game-changer, not only in terms of showing the growth in the tech sector in Phoenix, but growth in the warehouse district in downtown Phoenix.”

Laying the foundation Experts say Arizona has actually done a number of things well to build a business environment that fosters innovation and an entrepreneurial spirit.

“The state has emphasized economic development through the support of key economic development groups like GPEC and the Arizona Commerce Authority,” says Jacque Westling, partner at Quarles & Brady in Phoenix. “(Arizona) has created and maintained some key tax incentives, such as the Refundable Research and Development Credit and the Angel Investment Tax Credit Program, promoted tech transfer from the universities and supported emerging areas of strength such as biotechnology, data centers, energy and other areas.”

Zylstra says having facilities with ready-to-go infrastructure in desirable hot spots such as downtown Phoenix and downtown Scottsdale has been a major part in attracting and growing technology companies in the Valley.

“Knowledge workers like the type of amenities available in these locations,” he says. “When you add Arizona’s ample workforce, low taxes and low cost of doing business, the foundation is very strong.”

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emerging technology sector and what it means to the state’s economic future has been helpful to WebPT and other early stage companies.

“I think when people began to recognize that we couldn’t rely on the traditional engines that had previously fueled our growth — tourism and migration from colder climates chief among them — to provide the type of jobs we need, it caused a basic shift in how progressive leaders thought about the future,” says Don Pierson, CEO of SpotlightSales, which developed a tech-based sales performance optimization tool.

Where do we grow from here?

With the foundation for building a successful technology sector in place, Pierson says he has seen tremendous growth in the software industry and expects that growth to continue.

“I think biofuels are really interesting,” he says, “and I’m always amazed by what comes out of the biotech area.”

Greg Head, chief marketing officer at Infusionsoft, agrees with Pierson that Arizona is quickly becoming a center for software businesses.

“Right now, there are thousands of entrepreneurs incubating new innovations, hundreds of software businesses growing and employing more people and several bigger software companies like GoDaddy, LifeLock, Infusionsoft and WebPT that are growing fast,” Head says. “The Arizona software community is growing up quickly.”

Experts agree that diversifying Arizona’s tech sectors will power its growth. Zylstra expects aerospace and defense and semiconductor and electronics to continue to be strong, “but IT, especially software and data centers, healthcare, bioscience and alternative energy will help lead us into the future,” he says.

“We need to have all tech industries thriving in Arizona,” says Mike Auger, CEO and founder of PikFly, a technology-driven same-day delivery network for local businesses. “A focus in one area puts us into a corner. Semiconductors have been great for our state, but that is really what we are known for — we need to be known for all types of tech.”

Arizona’s shortcomings While Arizona’s growth in the technology arena is impressive, the state must tackle one major issue to maintain that positive trajectory.

“I spend more of my time as mayor in economic development recruiting and retention than I do anything else,” Stanton says. “The reality is this: the companies are concerned about workforce development. Do we have the pipeline of employees they are going to need as their companies grow?”

Jannenga agrees that Arizona needs to invest heavily in all levels of education and diversify our skilled workforce.

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GPEC “The places where we’re falling short is we’re not delivering the engineering talent necessary for the tech sector to really take off,” Broome says. “We need to make a big move on the production of engineers and make a big move on the production of information communication technology people.”

Broome says that big move can come from community colleges, higher education and specialty certification programs that are putting students through six-month boot camps and producing a qualified workers. He cites the Maricopa Corporate College as a unique training program that is developing and delivering customized workforces.

“You’re going to see continued movement in creating new educational options and a huge infusion of these intermediate training strategies to build the technology sector,” Broome says.

Creating a viable workforce to feed the needs of the industry is a must to maintain the state’s robust growth and quality of life, experts say.

“We either grow the tech sector of the economy or we will fail,” Broome says bluntly. “That’s how important it is. It’s where the wages are. It’s where the high-end people are. It’s the part of the economy that is most sustainable. If you’re not building a

tech sector, you’re relying on your current industries to remain relevant and we know from history that just doesn’t happen.”

Broome says the Valley has learned from companies like Motorola and General Motors that mature companies in mature industries contract and fade away. It forces the business community to continually recycle its economic strategy around new industries.

“From my perspective, you’re looking at a make-it-or-breakit situation,” Broome says. “The reason the economy is so sluggish is because it’s waiting for consumption. It’s waiting for government spending and it’s waiting for retail spending and it’s waiting for construction and home buying. When your economy can only recover on that basis, you’re going to continue to have ebbs and flows and dips and falls. Even a place like San Francisco, which has a very difficult business climate because it’s expensive to the point of being unimaginable, its net yearto-year economic growth is much more robust than Phoenix and the rest of the country because its economy is built around talent, innovation and the high-tech sector. If we do a good job and build that out better, there’s no reason why Phoenix can’t be the most exciting community in the United States.”

Maintaining momentum Here is what industry experts say Arizona needs to do to keep growing its technology sector: Mike Auger » CEO and founder of PikFly: “We need continued involvement by the government and cities to encourage relocation of business to Arizona. We also need to continue to build a thriving investment community.

History has proven that if the money is here, the businesses will come.”

Alan Chambless » Vice President of customer success, Weebly: “Continuing to invest in technology infrastructure companies like Centurylink will help to drive other tech companies to the area. Keeping a strong investment and emphasis on local education will also help to fuel growth of the workforce in the IT sector and make the area that much more appealing to tech companies in the future.”

Greg Head » Chief marketing officer, Infusionsoft: “The ball is already rolling with all the entrepreneurial activity happening now, so we need to continue support our entrepreneurial community by creating an environment where more startups can succeed and grow big ...

We could do more to acknowledge the success that is already happening here to overcome our outdated reputation that Phoenix isn’t a software town.”

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Don Pierson » CEO, SpotlightSales: “Primarily, stay the course. The Arizona Angel Investment Tax Credit has been especially helpful in helping startups attract capital. That needs to continue.

And organizations like GPEC and the Arizona Commerce Authority need to continue to be funded so they can be aggressive and progressive on behalf of the Arizona tech industries.”

Jacque Westling » Partner, Quarles & Brady: “One of the most critical things Arizona can do is to continue to support and grow its home-grown companies.

Developing a group of serial successful entrepreneurs and celebrating our local successes will continue to foster outside investment capital for our local companies and help create a desirable environment to encourage companies outside our state to come here.”

Steven G. Zylstra » President and CEO, Arizona Technology Council: “One area we still need to improve is in the area of capital availability. Arizona lags behind our competitors in terms of access to capital. That’s why extending the Angel Investment Tax Credit Program and creating a venture capital fund for early-stage technology companies is so vitally important.”

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Taking advantage of Arizona’s generous R&D tax credit

By JOSE TEZANOS, PETER HENDERSON and TOM SANGER, MOSS ADAMS LLP

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esearch and development (R&D) tax credits are available to companies that bear the financial risk of developing new or improved products or processes. And claiming them can be lucrative, since they offset a company’s tax liability, making more cash available to invest in ongoing projects. Companies that perform qualified R&D and meet certain requirements can claim a 20 percent tax credit at the federal level, and many states offer their own R&D tax credit, usually at a rate of five to 10 percent.

But both federal and state levels considered, Arizona takes the cake, offering companies that perform R&D the most generous tax credit rate in the nation at 24 percent. Furthermore, it offers this benefit in the form of a refundable credit to qualifying businesses.

Why refundable matters In some cases companies may not be able to use the full amount of the credit Arizona awards them. This could be because they’re operating at a loss or because the amount they’re awarded exceeds their Arizona tax liability. With the refundable credit option, qualifying businesses may elect to receive the excess in the form of an immediate cash payment rather than carry it forward to offset a future liability. The refundable opportunity is limited to companies with fewer than 150 full-time-equivalent employees; the nonrefundable credit has no such limit.

depleted by the end of February. It’s uncertain how quickly this reserve will go for the 2014 tax year.

Eligible refundable credit applicants must obtain preapproval by submitting an application prior to filing their tax return, and a full R&D credit calculation needs to be submitted with this application. You’ll need to begin an R&D study immediately to allow for its timely completion and submission.

Who can claim the credit?

Both the refundable and nonrefundable Arizona credits are available to individuals, companies, and all types of passthrough entities, such as S corporations. You may be surprised to learn that the tax definition of R&D is quite expansive: A wide range of businesses can qualify for the credit, from companies in the food and beverage, apparel, and agriculture industries to those involved in construction, manufacturing, and energy production. Don’t let the common misconception that R&D tax credits are limited to large high-tech companies keep you from taking advantage of this lucrative opportunity.

Next steps

Act quickly

Whether you’re interested in pursuing the refundable or nonrefundable Arizona credit, consult a team dedicated to understanding the technical requirements of the R&D credit— including Arizona’s particular requirements — to help you navigate the process.

While Arizona places no annual cap on nonrefundable R&D credit claims, the total amount of refunded payments allowed each year is limited to $5 million, so timing is critical if your company hopes to claim the refundable credit. Funds are allocated on a first-come, first-served basis until the $5 million is exhausted. For the 2013 tax year, the refundable option was

Jose Tezanos is senior manager, Peter Henderson is manager and Tom Sanger is partner at Moss Adams LLP.

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Nation’s best economic development group creates an environment for innovation

By MICHAEL GOSSIE

The Greater Phoenix Economic Council (GPEC) has built quite a reputation.

Its recent successes range from luring Zenefits, a cloud-based human resources technology company that will create more that 1,300 full-time jobs, to Tractor Supply Company, a rural lifestyle retail store chain whose new distribution center will bring more than 250 jobs.

“We just got named the No. 1 economic development organization in the country and we want to continue that level of excellence,” said Barry Broome, president and CEO of GPEC from 2005 until press time. “In the last six months, two GPEC employees were named CEOs — one in Detroit and one in Portland — and two were named to “40 under 40” nationally. I want to maintain our reputation as being a razor-sharp and talentbased organization.”

GPEC’s success caught the attention of Site Selection magazine, which honored the economic development group with its Best to Invest Top U.S. Group award.

Broome sat down with Az Business to talk about the impact GPEC has on Arizona’s economy.

What effect will the Super Bowl have on economic development?

It’s amazing what happens when the Super Bowl is in town. It changes the entire momentum of the community. All eyes are put on the market. It helps us tremendously from a brand and reputation standpoint. People get to see the beauty of the Greater Phoenix region. It’s the only venue that we know of where we are guaranteed to get CEOs there. The chairman of the board of a Fortune 500 company will always accept your invitation to the Super Bowl.

How does GPEC hope to benefit from the Super Bowl?

I hope business leaders who visit get a better understanding of the market and that increases our buzz. We’re still striving to be considered more sophisticated. A lot of CEOs consider us an upgrade from Las Vegas, but we are a lot more dynamic than an upgrade from Las Vegas. People have to come and experience the community to realize its strengths. Hopefully, we will get enough deals to pay for the community’s investment in hosting the Super Bowl.

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...I’m looking forward to seeing Arizona’s spectacular beauty broadcast to a worldwide audience.

How can the Super Bowl change Arizona’s branding?

When I came to Phoenix 10 years ago, it had a great brand.

It was unknown, but the brand was, “This place is fun and very interesting.” One of the things that really hurt us in the immigration debate is people didn’t see us as a fun place anymore. We were unfairly portrayed in a lot of ways during that debate. What the Super Bowl will remind people is that this is one heck of a destination. Quality of life. Regional assets. You can enjoy 75-degree weather at the W in Scottsdale and ski in Flagstaff two hours later. The coverage of the Super Bowl always features great backdrops and I’m looking forward to seeing Arizona’s spectacular beauty broadcast to a worldwide audience.

families have lost opportunities here. We are the people that are supposed to keep that flame bright for families, knowing that jobs are coming and jobs are prevalent and they will have access to opportunities here that they don’t have elsewhere.

How will recent efforts to boost trade with Mexico impact our economy?

The relationship between Arizona and Mexico is very favorable and positive. A significant portion of our community descends from Mexico, so a trade relationship is going to normalize the friendships and relationships and correct the attitudes toward Mexico when people realize it’s the fastestgrowing Latin American economy. It’s pretty good to have a country like Mexico next door. Imagine if Mexico was Iran, Iraq or Syria, then we’d have a real border security problem.

The business sectors that are going to see the greatest impact from our efforts in Mexico are conventions and tourism and foods and services. Ultimately, you’ll see things like energy and technology through engineering. Mexico has done a great job leveraging its energy position for a new market and they’ve done a great job producing talent.

What are GPEC’s primary goals for the next three years?

We’ve done a lot of positive things for the community, but we haven’t demonstrated enough from a leadership standpoint to be transformative. We’ve made major moves, but I don’t think we’ve transformed the community and I hope we can do that in the next year or two.

Why is being transformative so important to GPEC? We talk about being the last line of defense for our families.

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Bank on it GPEC helps Metro Phoenix excel in job growth for financial services sector

By CHERYL HURD

W

hile Phoenix may not be the next financial capital of the world, the area is on track to continue its reign as the nation’s leader in job growth for the financial services industry, with thousands of new jobs added in 2014 and more expected in years to come.

Bankers, brokers, lenders and other industry leaders are supported by a growing network of IT and back office positions that are fueling this growth.

“Phoenix is likely to end up 2014 ranked again as the fastest growing large metro area for finance jobs,” says Lee McPheters, research professor of economics in the W.P. Carey School of Business at ASU. McPheters, the director of the school’s JPMorgan Chase Economic Outlook Center that specializes in economic forecasts for Arizona and the Western states, says, using data available through October from the Bureau of Labor Statistics, 2014 is shaping up to be another topranking year for Phoenix.

“So far this year, finance and insurance jobs are up 3.89 percent over the same 10 months in 2013,” McPheters says. “Jobs are up 4,680 and, for the first 10 months of the year, finance and insurance averaged 125,030 jobs in the metro Phoenix area.”

In 2013, McPheters explains, the Phoenix metro area added 8,450 new jobs in finance, which includes all forms of banking, loan companies, mortgage companies, insurance, stockbrokers, real estate and rental agencies. Phoenix ranked No. 1 on rate of growth of new finance jobs among all metro areas that have more than 1 million workers at 5.6 percent. Phoenix also ranked first for jobs in finance added in 2013.

A robust industry

Barry Broome, president and CEO of the Greater Phoenix Economic Council (GPEC) from 2005 until press time, explains what is driving this growth.

“We’ve seen a reset since the Wall Street crash. There was a new normal. There was a big correction in the head counts and the body counts. People started to revisit where they make those investments and Phoenix got rated as the No. 2 place for pulling jobs out of Wall Street. They asked themselves, ‘Why are we on Wall Street when we can be in Phoenix?’

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GPEC

Jack Barry

Barry Broome

Ryan Kosowsky

James Lundy

“The financial services sector requires a skill set that we are very strong in, “ Broome continues. “We may be attracting new advanced financial services like Northern Trust and Silicon Valley Bank, but we’ve been a strong financial services sector for a good 25 or 30 years. Now that the market is selfcorrecting, paying more attention to costs and being more careful about how it uses money and operates, our market is rising as an interesting place for them to do business.”

There’s an abundance of financial services talent in the Greater Phoenix region, anchored by the presence of American Express, Charles Schwab, Discover Card, Chase, Wells Fargo and Bank of America, for example, Broome says. He goes on to explain how GPEC is helping the finance industry grow in Arizona.

“Our major objectives industry-wide are financial services and our most prominent geographic area is the Bay Area. We hit San Francisco the hardest and we focus on financial services as a business platform and we’ve done really well with both.

“Northern Trust is going to bring 1,000 jobs to Arizona, paying an average of more than $100,000 a year. Zenefits is going to bring 2,000 jobs. Even though I wouldn’t classify State Farm as financial services, I would put insurance in the line of financial services and State Farm could go to 8,000 jobs in Tempe.”

Some financial services businesses that added to the job growth in 2014 include: • Zenefits – 800 phase one jobs • Asurion – 800 phase one jobs • Progressive Leasing – 500 jobs • Edward Jones (workforce expansion/hiring) – 500 jobs • Regional Acceptance Corp. – 300 phase one jobs • Springleaf – 200 jobs • Wells Fargo (workforce expansion/hiring) – 200 jobs • AllState Insurance – 75 jobs • CreditSafe – 69 phase one jobs • LearnVest – 30 phase one jobs In recent months, Progressive Leasing, a Utah-based financial services vendor for retailers and merchants, announced it was moving into the area, expecting to add 500 jobs by the end of 2015. Zenefits, the free, cloud-based human resources technology company based in California, continues to add jobs.

These and other new businesses add to the thriving financial industry.

James Lundy, founding president and CEO of Alliance Bank of Arizona, started with 25 employees in 2003. Today, he says Alliance Bank of Arizona, an affiliate of Western Alliance Bank, is the largest state bank headquartered in Arizona with 500 of its 1,200 employees in the state.

Charles Schwab & Co., Inc., has been in the Valley for decades. With 3,400 employees, the Phoenix area is the company’s highest density employment location in the nation, says Ryan Kosowsky, managing director of talent acquisition.

Arizona appeal

Lee McPheters

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“Phoenix has a lot to offer like many other great cities,” Kosowsky says. “You have a great, educated workforce. You’ve got a business-friendly climate. The cost of living is good. There are a lot of attractive things in the Valley that could bring business, specifically financial services here.”

Broome explains why the Valley of the Sun has an appeal that continues to attract new employers.

“We enjoy a pro-business climate being in the mountain west time zone, providing ease of access to other major cities with

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GPEC numerous non-stop flights departing regularly from Phoenix Sky Harbor International Airport, a Top 10 airport nationally.

Our infrastructure system offers a robust fiber and telecommunications backbone, along with a reliable power grid, making the Greater Phoenix market attractive for nerve centers of companies.

In addition, companies here or those looking to move their operations here to the Greater Phoenix market find a great operating cost environment for scalable headquarters and back office operations, with low corporate and payroll taxes.”

Broome also pointed to the large talent pool, courtesy of strong university programs at Arizona State University and Grand Canyon University that produce a pipeline of business school talent.

Future in finance

Lundy, who is also past chairman of the board of directors at GPEC, gave credit to the universities and community colleges for adding talent to the employee pool, but says more focus is needed on education as we move forward.

“We are developing a lot of job growth in back office support area. Those are good jobs. Those are $45,000 to $100,000 a year jobs ... When we are No. 1 for job growth, that’s a good thing, but you have to look at the quality of those jobs. That’s going to be a challenge for us as we go forward,” Lundy says.

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“Phoenix has a lot of things that attract people to this area, but if we are going to compete over the next generation we need to focus primarily on education in post secondary and K-12 because that is the fundamental building block to produce a smarter workforce and to be able to engage in higher value productivity.”

Jack Barry, president of Enterprise Bank & Trust Arizona Region, a commercially focused institution that has been growing in Arizona since 2009, recently participated in a roundtable discussion of industry leaders. There, industry leaders echoed Lundy’s comments about the need to improve Arizona’s educational system. The state’s low educational ranking on a national level, Barry says, acts as a deterrent to attracting businesses. He called on the state’s political leaders to come up with a plan to help improve that.

He also says, moving forward, that Arizona’s economy needs to diversify.

“We need to wean ourselves from the dependence on real estate,” he says.

Statistics analyzed by McPheters show that construction is actually losing jobs, which is unusual for Arizona and manufacturing will be flat for 2014, with no new jobs at all.

The two strongest growth industries in Arizona at this time are healthcare and finance.

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