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Regional Report: Investment Perspectives

A GPEC Virtual Series

The Greater Phoenix Economic Council (GPEC) hosted the latest installment of its virtual series, ‘Regional Report,’ and assembled an esteemed panel of leading investors to provide perspective about how the pandemic has impacted their investment decisions. The hour-long discussion was moderated by Eric Sperling, managing director of The Social Television Network, and speakers included:

Greater Phoenix is home to a vibrant startup community that is agile and determined to build the economy and unify the community. Whether it’s a serial entrepreneur taking on their next challenge or a new disrupter to hit the scene, Greater Phoenix is innovating like never before. Investors are taking notice.

A recent Crunchbase News article highlighted Greater Phoenix’s venture capital ascent and in the past two years local companies are raising dollars at a record clip. According to Crunchbase data, $1.5 billion in venture capital across 247 deals went to Greater Phoenix startups in 2018 and 2019. In 2020, regional startups have raised $84 million thus far, highlighted by Paradox’s recent $40 million Series B round.

“We’ve made 18 investments in Arizona with value exits of just over $690 million dollars and we’ve invested over $56 million dollars into Arizona companies,” said Leib Bolel, venture partner at Grayhawk Capital based in Scottsdale, Ariz.

But how has COVID-19 impacted investment strategy in the past 60-days? Bolel opened the discussion with perspective from Grayhawk’s point of view.

“I think the timelines of investment of companies that are engaging now maybe push back a little bit, but from a Grayhawk perspective, we’re business as usual. We definitely took a couple of weeks off to really get grips on the complexities of the investment sphere,” he says. “Even if a fund is taking a little bit of a pause, but that fund is well-networked, has co-invested with other funds, leveraging their networks could be a huge opportunity for companies that are looking for funding.”

Bolel had encouraging words for companies looking for funding.

“Don’t worry about reaching out. We still want to hear from companies. Even if an investment isn’t relevant right now, it could be relevant in six-month’s time,” he says.

Ulya Khan, operating partner at Virgo Investment Group, also hit the pause button 10 weeks ago, noting investors like to wait and see when there’s uncertainty in the market. Protecting current portfolio clients became the number one priority.

“Protect your existing investments. A big focus on hanging onto the investment dollars is to see which companies in our current portfolio on the Virgo side need further investments,” she says.

Expanding, Khan said it’s black and white when it comes to the clear winners and losers in a post-COVID-19 world.

“Companies that were being told there’s a glut in the marketplace of tele-health and tele-medicine solutions suddenly saw in two weeks they did their entire year’s sales quote and they are seeing unprecedented growth with investors chasing them with their checkbooks,” she says. “I don’t believe there’s any going back there.”

On the angel front – follow-up investment checks are routine, protecting capital is still the number one priority, and starting this week, Virgo is revisiting their investment thesis to factor in the post-COVID-19 effect, which includes Greater Phoenix companies.

“On the Phoenix side, what we are actually seeing is really, really high-quality entrepreneurs and high-quality companies coming up. So much so that we work very closely with the Silicon Valley chapter of [Golden Seeds], and most high potential companies these days are coming from Phoenix,” she says. “Right now, we are the ones supplying them [Silicon Valley] with companies, and three of our Phoenix companies are right now in the due diligence and deep dive for investments purposes.”

Brian Yee, a partner at ACME, a venture capital firm based in San Francisco, provided historical perspective relative to the market cycle during crises and a silver lining as investors and early-stage startups navigate COVID-19.

“The advantages that come out of these big disruptive events, whether it’s ‘08-‘09 or the tech bubble in the early 2000s, the vintages afterwards are sometimes actually more frequently the best performing,” he says. “It’s important to keep that contrarian mind and understanding that by the time these companies’ sort of come to fruition because we’re investing at such an early stage, they are actually on the upswing with respect to how the economy and market is fairing.”

Yee says ACME’s portfolio has been “overweight” in industries like consumer, E-commerce and digital health, which has resulted in their portfolio remaining resilient even through these uncertain times, and they are still looking to invest.

“We’re definitely open for business, no venture capital firms going to tell you that they’re not open for business,” he says. “The reality is we’ve seen deal flow decrease, 60,70, 80 percent. A lot of these venture firms are internally focused on trying to make sure that the portfolio companies that they have are well capitalized and are managing through this dynamic.”

As Yee highlighted, COVID-19 has forced investors to take a step back to assess the situation and be even more emphatic regarding a thesis driven approach as the industry tries to figure out the ‘new normal’ and who is going to benefit from it.

Sydnie Keddington, VC associate at Kickstart, a seed stage venture capital firm based in Salt Lake City, is optimistic and looking to see who will rise to the occasion.

“The types of companies and entrepreneurs that emerge during crisis and during times like these are often sort of the greatest opportunities,” she says. “I think there’s something to be said for a founder or entrepreneur who has the type of conviction that allows them to step up to the plate. Our perspective is that there are great opportunities ahead.”

Keddington also pointed to current transformations that will harden post-COVID-19, which will drive near-term innovation.

“There are a lot of societal and behavior changes taking place right now, many of which will be sticky, and I think that presents opportunities for technology and innovation,” she says.

It’s already happening.

“Coronavirus in many ways has activated and stimulated innovative capacity at the regional level within various communities as opposed to eliminating it,” she says. “It’s important to bear in mind and recognize that there are a lot of technology companies doing very well. While there are a lot of challenges ahead, I think it’s been pretty incredible to see how companies have rallied together and responded so quickly to the crisis.”

Keddington emphasized the need for companies to determine integral optimization for the business, deploy a conservative approach related to capital runway and adjust strategy to get to a strong capital position.

“Getting back to the basics is what will be most important for both businesses and investors,” she says.

Basics include investing and Keddington said they are still very much writing checks, but a higher volume of smaller sums to assure Kickstart is part of the pivots and innovation taking place during this crisis.

The crisis has also spurred productivity in addition to innovation according to Tim Kelley, chariman & founding member, Canyon Angels (Grand Canyon University).

“Utilizing tools like Zoom to be able to engage deals more effectively with our members through a remote platform,” he says.

For its June session, Canyon Angels will be focusing on artificial intelligence and they have already seen numerous applications related to the technology to combat the impact of COVID-19.

“We’re starting to see some interesting deal flow and pivots in companies that had even approached us a month, two, three, four months ago, and literally pivoted their businesses model in the last six weeks,” he says.

These companies are gaining new customers as a result of those transformations.

To an earlier point around optimization, Kelley agreed opportunity exists.

“As companies pivot to optimize costs…there are tools out there we feel Canyon Ventures, as part of our portfolio offering to our companies in which we invest, can be a way to optimize those resources, improve sales and actually pivot your enterprise,” he says. “We’re excited. Others view this as a significant opportunity.”

Each panelist was steadfast that they are still very much open for business. COVID-19 has forced dramatic pivots, new technologies and innovation, but the panel had some tips for companies looking for funding and insights into the process.

  • Leverage your network in hopes of getting a warm lead and intro to a contact at a fund
  • Have a pitch deck prepared and if you get an introductory meeting, anticipate 30-minute conversation and come prepared to sell yourself, company, product and vision
  • Utilize Zoom and other communications technology to film a short video to submit through online portals
  • Participate in innovation and tech challenges

To bring the conversation to a close, moderator Eric Sperling, asked each panelist about which technology-based solutions interest them as prospective investment opportunities post-COVID-19.

  • Leib Bolel, Grayhawk Capital:
    • AI, analytics, FinTech, digital healthcare
  • Sydnie Keddington, Kickstart:
    • Focusing on the founder
  • Tim Kelley, Canyon Angels:
    • AI, sensor technology (spurred by rollout of 5G)
  • Ulya Khan, Virgo Investment Group:
    • AI and machine learning, remote healthcare delivery models
  • Brian Yee, partner, ACME:
    • FinTech, healthcare, AI, robotics, education and online learning platforms

Part II of GPEC’s ‘Investment Perspectives’ webinar series will take place Thursday, May 28 at 10 a.m. MST.  Four Greater Phoenix-based businesses and/or nonprofits will pitch their technology and highlight how they have pivoted their operation to meet the current demands of the COVID-19 pandemic. These businesses are vying for a $50,000 grant provided by the Pakis Center for Business Philanthropy at the Arizona Community Foundation. Register HERE.