A recent piece for The New York Times indicates that while Phoenix may not surpass San Francisco in terms of the number of venture capitalists or unicorn companies, it is snagging some tech jobs from the Bay Area, due to the fact that it has become a popular place for tech companies like Uber and Yelp to set up “outpost” offices.
Using data from Moody’s, the Times found that the number of tech jobs in Phoenix–known by some as the “Silicon Desert”–grew by 8 percent from 2014 to 2015, while the number of tech jobs in the Bay Area grew by 7 percent in the same time period. Phoenix still, however, has only about one-fifth as many tech jobs as the Bay Area does.
Owners of some of the Phoenix-based businesses on the Inc. 5000–an annual list of the fastest-growing private companies–say that they have noticed the number of tech jobs in the area increasing over the last three to four years. And they say that for the most part, it’s been positive growth that has helped raise the profile of the Phoenix business community.
“I would say now that nearly half–or at least a good percentage–of the résumés we receive come from outside of Phoenix,” says Frank Begalke, the COO and co-founder of B2Gnow (No. 2039 on the list), a company that provides diversity management software for government agencies.
Begalke and his co-founder, CEO Justin Talbot-Stern, founded the company in San Diego in 1999 but moved it to Phoenix in 2002 after the area proved to be a much more affordable place to do business.
Relumination, a company that implements energy-efficient lighting for commercial and industrial clients and No. 345 on Inc.‘s list, is based in Phoenix but also experimented with opening another office in Southern California in 2012. The experiment lasted less than a year.
“It became pretty obvious, pretty fast, to be honest, that it just wasn’t a good idea,” says CEO and co-founder Daniel Henderson.
According to think tank the Tax Foundation, the 2016 corporate tax rate in California is 8.84 percent, significantly higher than Arizona’s rate of 5.50 percent. Additionally, California’s maximum individual income tax rate is a whopping 13.3 percent (the highest in the nation), meaning that both entrepreneurs and their employees don’t get as much to take home. (In Arizona, the maximum individual income tax rate is only 4.53 percent.)
In addition to the low cost of living, some of the most frequent reasons that the Inc. 5000 entrepreneurs gave as to why Phoenix was a great place for startups included proximity to the Bay Area and the Western United States (it’s a 90-minute flight from San Francisco), the supportive environment of the entrepreneurial community, and the work-life balance.
For Phoenix, the influx of tech jobs provided a much-needed resurgence to a city that was known as the “poster child” for the 2008 housing crash. At its height, lenders were foreclosing on 5,000 Phoenix-area homeowners per month, according to the Arizona Republic.
Jim Prendergast, CEO of Healthiest You (No. 397), is a serial entrepreneur who has lived in Phoenix for 21 years and saw the effects of the housing crash firsthand on the Phoenix startup community. He says that while before the crash there was “no shortage of capital, and people in the real estate business were making ridiculous amounts of money,” he thinks that the level of entrepreneurial activity in Phoenix has now surpassed pre-crash levels. He recently had a successful comeback of his own, after he sold Healthiest You–which lets customers speak with doctors, search for providers, and compare prescription drug prices all on one platform–in June to Texas-based telemedicine company Teladoc for a mix of cash and stock, currently worth more than $155 million.
“Before the collapse, the entrepreneurial community was much more service related, much more real estate related. Now we’re having a lot of tech companies come into town from the Valley,” says Prendergast.
However, it will take some time before the city of Phoenix starts to see the ripple effects of all of these tech companies moving in. The city still has a healthy entrepreneurial community–the Phoenix metro area came in at No. 14 last year on Kauffman’s list of metro areas with the highest rates of startup activity–but it has a long way to go before it catches up to Silicon Valley, or even other well-known startup hubs like Austin or New York City.
Instead, what may be more interesting to watch is what venture capitalist Fred Wilson deems the “spillover effect.” He writes in a blog post that he thinks the entrepreneurial community is “just seeing the start of” the trend of big billion-dollar tech companies opening outposts in big cities like Phoenix and others that have a lower cost of living.
“We will see that story play out across many cities in the U.S. (and outside of the U.S.) in the next five to 10 years,” Wilson writes. “That’s a very healthy and positive dynamic for everyone, including the big tech centers that are increasingly getting too expensive to live in for many tech employees.”
Prendergast says that for now, there’s really only one problem that business owners say has arisen with all of these tech companies moving in: there’s more competition for talent.