Phoenix Not Copying Silicon Valley is the Winning Lesson

Ninety percent of startups fail, and the standard response from the startup industry encouragement because we “learn from failure.” The work I do in legislative affairs and ecosystem development is oriented precisely to improving that number, and a recent trip to Phoenix reminded me that the cities doing interesting things are not the ones trying to replicate the Bay Area playbook, they’re the ones that know better.

I was in Phoenix last week for a fireside conversation with Brian Ellerman at Phoenix Bioscience Core, a 30-acre life sciences innovation district in downtown Phoenix. Ellerman is Executive Director of XLR8 (pronounced “Accelerate”), a scale-ready startup program housed at PBC, the vice chair of Desert Angels (ranked number one in the Southwest and fifth nationally among angel groups), and a doctoral candidate at Arizona State University researching entrepreneurship education and entrepreneurial ecosystems. His career spans founding companies in the ’90s healthcare space, a successful exit, 15 years in pharmaceutical executive leadership (including a global role in technology scouting that put him across the table from VCs, accelerators, and startups worldwide), and now a deeply intentional effort to fix what doesn’t work in how Arizona builds companies.

If his personal mission sounds like me, I appreciate that you’ve been getting to know my motivations.

90% of startups failing isn’t a benchmark of encouragement, it’s the baseline of mediocrity. Unchanged since 1995, we must focus on what doesn’t work.

Our conversation was part of a broader circuit during Arizona Tech Week, but what made it notable was where it led; not into the usual “how do we attract more VCs” fantasy that plagues most ecosystem conversations, but into something far more diagnostic the likes of which I want to be having in every city.

Arizona Ranks Fifth in Policy. So Why Isn’t It Winning in Venture Capital?

I published The Best and Potential States for Startups: A Policy-First Look at Who’s Helping Founders not long before this event, ranking all 50 U.S. states on policy conditions for entrepreneurship using the Tax Foundation’s State Business Tax Climate Index, the ALEC-Laffer State Economic Competitiveness Index, and the Mercatus Center’s RegData. Arizona landed fifth! Not California (no surprise), not New York (which wasn’t far behind California), not even Texas (which, despite its mythology, has meaningful regulatory friction of its own). Arizona. Idaho. Tennessee. Utah. These are the states where founders face the least structural resistance from their own government.

That raises a question that should make us uncomfortable: if Arizona’s policy environment is among the best in the country for founders, why isn’t Arizona leading in venture capital? Why isn’t it leading in startup-driven job creation? Why are New York and California still dominant when their regulatory and tax environments are, by the numbers, terrible for entrepreneurs?

Brian’s answer was appropriately blunt, “We might be a city of five and a half million, give or take, in the whole area,” he said during our conversation, “Even then I don’t think there’s sufficient density to be able to put too many bets on the table.” He paused. “The key is not to try to be all things to all verticals and industries, but rather to try to figure out exactly where those strengths are and to try to devote as much of our time and attention to those as we can.”

This is an observation that cities everywhere need tattooed on their plans. Every mid-tier metro in America has declared itself a “tech ecosystem;” Austin has done it, McKinsey encourages it, Washington wants it, and the UN pushes for more. The regions that actually succeed are the ones that stop doing it and pick a lane. Phoenix’s lane, sitting inside the bioscience core surrounded by three state university programs, a genomics pioneer in TGen (Translational Genomics Research Institute), Banner Health, Phoenix Children’s Hospital, and a growing cluster of emerging life science companies, is healthcare: Health tech / Life sciences / Precision medicine. The physical presence is on the ground.

Years ago, I wrote Work, Live, and Play in a Futuristic Phoenix, back when ASU’s collaboration with the Herberger Institute was exploring how life in the Valley might look decades into the future. That vision is materializing, and it’s materializing not because anyone waved a wand but because the PBC represents what many of us keep telling cities to do: build density in a specific sector, not a generic “innovation district” that’s really just a coworking space with nicer furniture and a cafeteria.

Optionality, Which Sounds Like a Buzzword, is Better Workforce Development

One of the concepts I brought into the Phoenix conversation is something I call optionality, and I should clarify what it means because I introduced it in Startup Ecosystems, and frequently use the word, but it’s not common parlance in the economy.

Optionality is perhaps the most underappreciated factor in why Silicon Valley works and most other places don’t.

If you’re a startup founder in Silicon Valley working on consumer social media and your company fails (as 90% of them do), what happens? You go get a job at another social media company. You join another startup. You consult. You angel invest with the money you made from the last exit. The entire ecosystem is structured so that when one thing fails, there are other things to fall back on, other rungs on the ladder, other opportunities within the same sector. That’s optionality.

It’s important that you don’t think of it as a startup or Silicon Valley thing though. Consider working in Banking in New York. When laid off, do you have to hope for a sales gig in a fashion company or can you shift into the hundreds of other banks, into a parallel career in accounting, or pivot to work in a hedge fund?

Now move our founder to Tucson or Boise or Little Rock – Company fails… What do they do? Social media at corporate scale isn’t there. There are no other startups hiring in that space. A founder either leaves the city or leaves the industry. The venture capitalist looking at that deal from San Francisco sees exactly this risk and passes. Not because the founder is bad and not because the idea is bad but because if the company fails, the ecosystem has no safety net to catch the human being, which means the risk is structurally higher than it would be in a market with optionality.

You don’t work in “marketing” and I don’t work in “tech” – those are roles. The work we do is in a sector relevant our skill, experience, and personal interest.

This is what the VCs were actually saying when they told cities they “couldn’t find deal flow.” They weren’t saying the founders were incompetent; they were saying, “We can’t find sectors where, when the entrepreneurs fail, they have other opportunities. They don’t have jobs to fall back on. They can’t start another startup because they can’t afford to. They can’t find local capital in that sector.” The VCs, by and large, were saying, we invest in Commerce SaaS and aren’t paying attention to many other sectors because yes, they should come to Silicon Valley, where we have options for the entrepreneurs to take these risks.”

If you work in healthcare, you’re not going to pivot into video games because there is a job there.

Downtown Phoenix is, from my point of view, addressing that more accurately, more meaningfully, than most cities. You have three universities with health sciences programs feeding talent in and around PBC. You have hospital systems providing both employment and potential customers. You have research institutions like TGen creating IP that could (with the right commercialization pathway, which is a separate headache we’ll get to) spin into companies. You have AZBio reporting that Arizona’s bioscience industry employed over 40,000 people across more than 3,600 establishments in 2023, with average wages 53% above the private sector average, and attracted $281.8 million in venture capital. That’s an actual labor market in a specific vertical where a failed founder can find another job, start another company, or pivot without leaving town.

Brian agreed, though he framed it differently. “We are really saying the same thing,” he said, “in the sense that if something doesn’t work out, are there other things for you to go to? And in a dense sector, they are. That optionality exists.”

A Capital Gap Is a Misdiagnosis (Stop Repeating It)

Almost every city that calls me says the same thing, “We need more capital.” It took me maybe half a dozen of those conversations to realize that cities were doing what bad founders do: They weren’t listening. What they were hearing is that founders were saying they can’t raise capital. “I can’t raise capital. I’m struggling to raise capital. There’s no money here.” The city hears that and says, “Got it. That’s the problem. We’re going to focus on helping raise money, attracting investors.” And then they host a demo day, invite some VCs to sit in the audience, and nothing happens because that is not how capital works.

Josh Lerner and Ramana Nanda’s landmark study, “Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn” published in the Journal of Economic Perspectives, demonstrated what those of us on the ground already knew: venture capital concentrates in places that have already demonstrated high-quality deal flow, human capital, and infrastructure. Capital follows. It does not lead. Cities that try to attract VCs before building the underlying ecosystem are doing it backwards, like installing traffic lights and hoping cars materialize.

Brian zeroed in on a related problem: the failure to distinguish between risk capital and development capital. “We need better definitions and clarity when funding is going to something,” he said. “If it’s meant as risk capital, okay, that means it’s at risk. It could go away. Well, that tends not to be a very popular choice when it’s coming out of the tax base.” His point is critical and underappreciated in policy discussions around startup funding. Public money labeled as “startup investment” is almost never structured like actual venture investment; it comes with political constraints, committee approvals, and an expectation of safety that is antithetical to the entire premise of risk capital. The result is that public funds get deployed as development capital (money to build stuff, support programs, fund research) while being marketed as risk capital (money to bet on startups that might fail). The confusion matters because it leads cities to believe they’re funding entrepreneurship when they need to stay in their lane of infrastructure or cultural impact; those are different jobs with different return profiles and different accountability structures.

The challenge for Phoenix, or anywhere, is not a lack of capital (Scottsdale is right over there). There’s wealth in this metro area. Entrepreneurship is driven by access to opportunity, not access to money per se. The question is why the money isn’t moving into startup investment, and the answer is almost always that the ecosystem is missing something: experienced mentors who know what failure looks like, startup development organizations that serve founders instead of collecting rent, sector-specific networks that give VCs confidence in the deal flow, and optionality for the humans involved. Fix those things and the capital shows up. I’ve watched it happen in Austin, where the city has gone from basically zero venture presence when I arrived in 2008 to overtaking Boston in seed-stage capital.

Why Letting People Leave Is Not Losing

One of the more refreshing things Brian shared during the event was his “boomerang philosophy.” Most cities panic when they see talent leaving; they treat it as a crisis. They try to chain people in place with tax incentives and hip neighborhoods and promises that “the scene is growing.” Brian’s take: let them go.

“We don’t need to look for reasons to chain people to this place and say you cannot leave, you must stay here,” he said. “Let them go. That’s cool by me because actually it’s sort of like a finishing school. You can go to one of those other places, whether San Francisco, right? Their density is like a nuclear weapon. They use density as a tool to be able to impact and succeed in ways that we don’t have; that density doesn’t exist here. And I’m cool with that.”

The boomerang part is what makes this work: create an intentional landing pad so that when those people realize their Bay Area apartment costs more than a Phoenix mortgage, when they’ve built their network and sharpened their skills, they have something worth coming back to. This is, incidentally, not a new idea. Ecosystems with returning diaspora members outperform those trying to build everything from scratch.

The distinction Brian draws between Tucson and Phoenix is instructive here. “Tucson’s fantastic to start,” he said. “And then as soon as those same people who started the company come to me and say, ‘All right, we’re starting. I think we need to grow.’ I’m like, ‘Get out. You need to go to Phoenix.'” Not because Tucson is bad. Because Tucson doesn’t have the density of customers, partners, investors, and co-workers in the sectors that matter for scaling. And Phoenix, specifically the PBC corridor, is building that density in life sciences in a way that most cities only talk about.

University Tech Transfer Is Broken (And Everyone Knows It)

We got into university tech transfer during the conversation, and as I wrote in Universities Aren’t Commercializing Innovation, They’re Taxing It, this is the topic where people in the room always look at everyone else sideways like we’re saying something we’re not supposed to talk about. Everyone knows the model is busted; almost nobody says so when the university administration is within earshot.

Brian separated the problem into two pieces, which I found helpful. The first piece is tech transfer as it applies to university employees: faculty, staff, graduate students whose inventions belong to the institution. The second piece, which Arizona handles better than most states through specific legislation entitling students to their own inventions, is student entrepreneurship, which the tech transfer office cannot assist with unless the student assigns rights to the university.

On the employee side, Brian’s had a vehicle analogy. “The invention is the paper,” referring to it being merely the idea (more or less). He added, “You’ve got to construct the right vehicle to carry the right payload. Universities create such a fragile wrapper around that payload, around invention, that it breaks the moment it hits contact with market forces, with investors.” And he explained why: the incentive inside the university is to do more research, get more grants, attract more graduate students. Not to build companies, not to create jobs, and not to generate venture-scale returns; the machine optimizes for inputs (research funding) rather than outputs (commercialized innovation).

AUTM’s own data confirms this which I absolutely love because I know I pissed them off a little when said that university patent development was broken. I ran an analysis of startup economic policy and found that universities disclose tens of thousands of inventions annually, but only about 3 to 5% result in the formation of a startup; the share that become viable, venture-scale companies is necessarily much smaller.

“I would be willing to concede that university tech transfer offices are building a bunch of small businesses, not startups,” Brian said, and he drew the same distinction I’ve been pushing for years between startups and small businesses, two fundamentally different economic animals that governments and universities insist on treating as the same thing. “When I put my investor hat on and I look back at how many companies we’ve invested as a group in Arizona-based spinouts from the universities,” he continued, “it is a very small number compared to, let’s see, 65 companies that Desert Angels has invested in in the past five, six years. So, they’re not making investable companies. They’re making small businesses that maybe someday they figure out how to deliver that payload, build it with the right chassis.”

My question of whether founders should try to work around tech transfer offices or try to reform them from within got an interesting response. Brian’s advice: don’t avoid it. “I’ve watched that game play out,” he said. “And in the end, the university is still going to be able to make some claims to how that came to be. And now you’ve got this really ugly situation where you have a university wanting to claw back.” His point is that the best tech transfer offices are the ones that make themselves useful enough that founders go through the process willingly, rather than running from it. That’s a higher bar than most TTOs currently clear, but it’s the correct framing.

The deeper issue, which I raised and which I think the public should be angrier about, is that this is taxpayer money. Research funding flows up through state and federal channels, gets passed to university systems, and results in roughly 1% of the research being commercialized in some meaningful way. The economics show a net loss at most institutions. The offices fund the research, fund the professors, fund the school. And the actual job creation, company formation, and economic impact that the public was presumably paying for? Mostly missing.

Remember my frustration that 90% of startups fail? Read those percentages differently… that’s roughly 98% of funded research that fails to do anything more than sit on shelves.

Team vs. Environment: The 60/40 Split That Should Embarrass Us

Our conversation turned to consider a more provocative question given the policy research placing Arizona 5th in the country. If a great team drops into a terrible policy state and a weak team drops into Arizona, who wins?

The answer is still the team. Research on startup success factors consistently shows that cofounder characteristics (complementary skills, tenacity, adaptability, domain expertise) outweigh environmental factors. The team is the 60 to 70% of the equation.

What should make ecosystem builders furious is the fact that the team still wins in a bad environment means that most environments are still failing to add meaningful value.

If Arizona’s policy ranking is fifth in the nation and yet a great team in a policy-hostile state can still outperform an average team in Arizona, what does that tell you? It tells you that the operational layer, the accelerators, the mentorship networks, the startup development organizations, the culture, is still not pulling its weight.

That’s why 90% still failing pisses me off.

Since Brad Feld’s book catalyzed a wave of startup ecosystem building roughly 15 years ago, cities have been pouring resources into programs, spaces, and events. And what we’ve found, which I cover extensively in Startup Ecosystems, is that most cities still run these things very poorly.

• Mentorship is not discerning (we let anyone who’s ever built a website be a “tech advisor” to a startup).
• Accelerators are nothing more than coworking spaces with a curriculum stapled on.
• Angel groups operate as social clubs where a community decides to invest in something, and everybody goes along with it.

This should anger you because the answer should be that strong policy states like Tennessee, Idaho, and Arizona are leading in venture capital and startup-driven job creation. They aren’t. And the reason is that the operational infrastructure between a good policy environment and a funded, scaling company is still broken in most places.

“I want to see a culture of radical candor,” Ellerman said. “If you don’t have almost a spirit of just being honest about ‘that’s a bad idea, stop what you’re doing and go do anything different,’ then what you end up with is enablement. And two, three years go by before finally someone is honest.” He referenced his own LinkedIn profile, which reads “calling babies ugly since 1999.” The culture of niceness in startup communities, particularly in the South and Southwest, is itself a structural liability. People won’t tell founders the truth because it feels impolite. The result is that founders waste years on ideas that anyone with pattern-matching experience could have flagged in the first meeting.

Anybody who tells you what you should do is probably wrong. These are startups, if we knew what worked, I’d go be a billionaire and stop standing on stage talking to people. But we very often know what doesn’t work. We know certain marketing approaches are dead on arrival. We know certain tech stacks won’t scale for what you’re doing. We know when a business model has been tried and failed a dozen times. The people who are meaningful in your ecosystem are the ones who point that out. Stop wasting your time on X. We know X doesn’t work. That’s the value. Not “here’s the answer,” but “here’s everything that isn’t the answer, so stop burning cash on it.”

What Phoenix Gets Right (and What’s Still Missing)

Phoenix’s Phoenix Bioscience Core is doing several things that align with what the research and evidence suggest about effective startup ecosystem development. First, it’s sector-specialized. Healthcare, life sciences, precision medicine. Not “tech.” Not “innovation.” A specific sector with specific employers, specific investors, specific customer bases, and specific talent pipelines. Second, it’s physically co-located. Three state universities with relevant programs, hospital systems, research institutions, and emerging companies are sharing a 30-acre campus, density by design. Third, with Brian’s XLR8 program, it’s addressing the scale gap. He built the program after systematically checking existing programs in the state against a readiness spectrum and finding that nobody was serving companies at stage six (post-product-market-fit, pre-Series A scale). “Everybody said we don’t know of anything out there that fills that particular need,” he said. “So that’s where we targeted.”

The missing pieces, and Brian was honest about these in such a refreshing way, I didn’t want our talk to end. If you’re not honest about the challenges, you can’t work to overcome them. One here? The exit pipeline is thin. “Are we going to see a whole bunch of Phoenix-based companies IPO in the near future? I don’t think so,” Brian said. The conversion of university research into venture-scale companies is still hampered by the same tech transfer dysfunction that plagues universities nationally. And the storytelling, the narrative infrastructure that makes an ecosystem credible to outside capital, is still underdeveloped.

That last point came up right at the end; storytelling is a critical piece of the puzzle that every city, almost every founder, and most investors actually stinks at. No one cares about the press release. No one cares about the events calendar. No one cares about the founder who raised a bunch of money (raising money is not a success metric, and Brian made this point forcefully: “I was an investor in that company. I didn’t get a dime back. So as far as I’m concerned, I’ll never invest in that person again. But that’s the person that gets held up because they successfully raised. Wrong metric.”). What people care about, what resonates and gets retold, are meaningful stories. Who exited? How? What did they build that mattered? Celebrate outcomes, not activity. Curate the heroes who actually delivered returns, created jobs, solved problems, not the ones who were best at raising rounds.

The question now is operational. Can Phoenix build the mid-stage support systems (B2B customer access, fractional executives, applied R&D partnerships, capital-readiness preparation) that bridge the gap between a promising company spinning out of a lab and a company that a Series A investor will back? Can it build a culture where radical candor is the norm and not the exception? Can it attract and retain the experienced operators who serve as the mentorship backbone of every ecosystem that actually works?

• Brian’s XLR8 program is a bet that the answer is yes, specifically for scale-ready companies in the PBC’s life sciences corridor
• The policy environment is favorable
• The physical infrastructure is real and growing
• The institutional alignment between three universities and the state’s healthcare industry is structurally better than what most metros can claim

We got together to unpack Startup Ecosystems and get to know Arizona. What we walked away with was clarity about execution, not more programs, not more events, not more press releases about innovation, but the hard, unglamorous work of connecting founders to buyers, connecting research to market demand, and connecting capital to companies that have earned it.

If you’re building or advising an ecosystem and you haven’t audited your city against the considerations that actually matter for startup economic development, you’re guessing. If you’re a founder in Phoenix working in life sciences, health tech, or precision medicine and you haven’t connected with what’s happening at PBC, you’re leaving structural advantage on the table. And if you’re an investor who still thinks “deal flow” means waiting for a warm intro from your Stanford roommate, you’re missing what’s being built in places like Phoenix while your asking about valuations in San Francisco.

We walked across the street to Samsara after the event where ecosystem building discussion continued, as it tends to; if we’re being frank about it, that happening is when you know you’re with the people putting what matters to making it work for others.