[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
     FIELD HEARING IN ARIZONA: SMALL BUSINESS ACCESS TO CAPITAL IN 
                          SCOTTSDALE, ARIZONA

=======================================================================



                                HEARING

                               before the

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS

                             UNITED STATES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                           SEPTEMBER 23, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] 
                               

            Small Business Committee Document Number 113-037

              Available via the GPO Website: www.fdsys.gov



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. David Schweikert............................................     1

                               WITNESSES

Mr. Jim Goulka, Managing Director, Arizona Technology Investors 
  Forum, Mesa, AZ................................................     3
Mr. Nima Jacob Nojoumi, Co-founder & CEO, itsWorth, LLC, Tempe, 
  AZ.............................................................     4
Mr. Thomas H. Curzon, Senior Partner, Osborn Maledon, Phoneix, AZ     6

                                APPENDIX

Prepared Statements:
    Mr. Jim Goulka, Managing Director, Arizona Technology 
      Investors Forum, Mesa, AZ..................................    23
    Mr. Nima Jacob Nojoumi, Co-founder & CEO, itsWorth, LLC, 
      Tempe, AZ..................................................    28
    Mr. Thomas H. Curzon, Senior Partner, Osborn Maledon, 
      Phoenix, AZ................................................    30
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.


        SMALL BUSINESS ACCESS TO CAPITAL IN SCOTTSDALE, ARIZONA

                              ----------                              


                       MONDAY, SEPTEMBER 23, 2013

                  House of Representatives,
               Committee on Small Business,
     Subcommittee on Investigations, Oversight and 
                                       Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 1:00 p.m., in 
Enterprise Room, Skysong Innovation Center, Arizona State 
University, 1475 North Scottsdale Road, Scottsdale, Arizona, 
Hon. David Schweikert [chairman of the Subcommittee] presiding.
    Present: Representative Schweikert.
    Also Present: Representative Gosar.
    Chairman Schweikert. Before we actually start getting on 
some of the traditional opening script, I want to share with 
you. The Committee and Subcommittee staff have actually been 
very kind to those of us who are members as we are also trying 
to build a record, as we often refer to it, from hearings all 
over the country of what is actually going on, what is 
happening in different regions, what is working, what isn't 
working, because we often find different parts of the country 
have very different views.
    So with that, thank you for all being here. I would like to 
first start today's hearing by thanking our witnesses for being 
here.
    I would also like to thank the staff of Skysong. Is the 
actual title really ``Skysong Innovation Center''? Okay. And is 
Kubion around? He didn't come? You know he is my cousin. Yes, I 
just thought I would share that.
    Thank you to Arizona State University for assisting my 
office and arranging the room and this hearing.
    In Washington, part of my role as a Subcommittee Chair on 
the House Small Business Committee is to hold Congressional 
hearings on topics that are important to small business. There 
is a two-part mission to these hearings. First, the testimony 
that we receive helps educate members of Congress on relevant 
issues that help us better represent the needs of small 
businesses throughout the country.
    So far this year, as Chairman I have held hearings on the 
Securities and Exchange Commission and their accountability for 
missing deadlines and the great frustration we have on the JOBS 
Act in regards to what the Securities and Exchange Commission 
has just blown through all their deadlines, which is one of the 
few bipartisan pieces of legislation we have had through 
Congress in the last couple of years, and we can't get the 
regulatory bodies to finish their work sets.
    We have also held hearings on the Regulatory Flexibility 
Act and its goal of reducing overall burdens of Federal 
regulations on small business.
    Congressional hearings can also serve as educational tools 
for the community, also for small business and those who are 
trying to understand that relationship.
    As chairmen, we receive testimony on innovative ways small 
businesses are raising capital by hearing from crowd-funding 
websites. We had a great hearing earlier this year with 
Indiegogo, Fundrise, Rock the Post, as well as, believe it or 
not, Samuel Adams brewery, whose leadership have set up--it is 
not technically a micro-funding platform, but they are putting 
money into small, growing businesses around the country. A very 
innovative thing for a company to do is to take part of its 
capital and engage in such lending.
    Today we want to bring that same opportunity to Scottsdale 
to examine the current environment for small business trying to 
raise capital. Our goal is to talk about the resources 
available here that small business can access to grow their 
business and create jobs.
    To that end, we will hear from our witnesses who are either 
investing in, creating, or advising local small businesses, to 
see what is available in this marketplace.
    Again, I thank you all for being here.
    And with that, let me also just explain--do we have the 
lighting system? The running joke is everyone gets 5 minutes. 
When you are down to 4, the yellow light goes on. Yellow means 
talk faster. And at red, we are supposed to be done with the 
time. I am not going to be particularly persnickety because we 
are all not running off to floor votes, but trying to keep it 
fairly crisp gives the opportunity to have some dialogue back 
and forth because, I promise you, somewhere you are going to 
say something that sets off questions from both Congressman 
Gosar and myself, and staff, and maybe each other.
    With that, I was actually going to let Congressman Gosar do 
an opening statement, and then I was going to come and give one 
last bit.
    Mr. Gosar. I am going to keep mine short.
    Chairman Schweikert. What happen when--Congressmen not 
getting their microphones on--Our first witness today is Jim 
Goulka. Did I get it right?
    Mr. Goulka. Good enough. Thank you.
    Chairman Schweikert. What would be perfect?
    Mr. Goulka. Goulka.
    Chairman Schweikert. Isn't that what I said?
    Mr. Goulka. I thought you said Goulka.
    Chairman Schweikert. All right. Managing Director of the 
Arizona Technology Investors Forum, a group of angel investors. 
Jim is also CEO of Jumpstart Solutions, an early-stage business 
intelligence software company, and has been involved in several 
other technology companies throughout his career. Jim, I know, 
had some interesting things to share with us.
    Jim, you have 5 minutes.

STATEMENTS OF JIM GOULKA, MANAGING DIRECTOR, ARIZONA TECHNOLOGY 
INVESTORS FORUM, MESA, ARIZONA; NIMA JACOB NOJOUMI, CO-FOUNDER 
   AND CEO, ITSWORTH, LLC, TEMPE, ARIZONA; THOMAS H. CURZON, 
        SENIOR PARTNER, OSBORN MALEDON, PHOENIX, ARIZONA

                    STATEMENT OF JIM GOULKA

    Mr. Goulka. Thank you, Chairman Schweikert. Thank you. 
Thank you, Congressman Gosar, for inviting me. I will try to be 
as brief and as concise as I can.
    Starting a business, which is really the part of small 
businesses that I am particularly interested in, is a life-
changing event for entrepreneurs. So you think about how they 
start their businesses. A few people have some ideas. There is 
nothing there. It is an idea. And then they have to turn that 
idea into a real, actual business.
    So they need some money for that. So they put some of their 
own money into the business. Then they go to their friends and 
family, and sooner or later they are going to run out of that 
kind of money.
    So where do they go after that? There are, obviously, grant 
programs around from the Federal Government and from the state. 
But even those are difficult to come by, and so they start to 
think about other people with cash, cash to invest.
    The first thought, of course, is to go to a bank. But if 
you are a young person in particular, if you have an idea and 
no assets and you are using your savings to go into the 
business, you are essentially unbankable, and most of the banks 
know that, and most people understand that.
    So young entrepreneurs or old entrepreneurs have to find 
other sources of capital, people who are able to understand 
that a new business is a risky business. The new risky business 
might be changing the world. It might be changing behavior. It 
may work or it may not. So who do they go to to find this kind 
of money?
    Well, there are angels and there are venture capitalists, 
the usual two crowds of people. Venture capitalists generally 
understand the important characteristic for real small 
businesses is that they are not interested in doing 
transactions of less than $2 million. So if you are a small 
business and you are looking for a half-a-million dollars or a 
million dollars, there aren't very many VCs that will do that 
kind of funding, and there are certainly no VCs in Arizona 
doing that kind of funding.
    So that naturally drives entrepreneurs to angels. And who 
are angels? We are, according to the SEC, accredited investors. 
We meet their test to do that. We are individuals who are 
willing to risk our own money on an uncertain venture in the 
hopes of achieving a superior economic return.
    What does that mean? It means that we are prepared to take 
a loss of 100 percent of our money. It means we understand 
that. It means that we have the ability to absorb that kind of 
a risk, that kind of a loss, and we think that we can deal with 
that by being very careful about what we do, collaborating with 
other people of like mind, maybe not the same attitude but like 
mind to evaluate opportunities and select those that we think 
are really good investments.
    That is pretty sophisticated stuff. We learn to do this by 
doing it. We do transactions. We learn from each other. Arizona 
Technology Investor Forum is a group of people that does this 
together, and part of the benefit of it is that we learn from 
each other. And as a result, we can do better transactions.
    But here we are in Arizona. There are 170 or so angels in 
the organized angel groups of ATF and Desert Angels. We know 
that there are many more people here who could invest in these 
kinds of transactions. Part of our responsibility is to become 
acquainted with those people and show them how to do it, show 
them the kinds of risks, show them how we mitigate risk, show 
them how they can make a judgment on their own to participate 
in a transaction, and then give them the opportunity to do 
that.
    So we are interested in finding and building the angel 
population in Arizona. Angels here are investing in early-stage 
or start-up businesses that are not investing specifically in 
real estate but in these other things where you can lose all of 
your money. So now we look at how can we do that better.
    Part of what we do at our angel group is to have education 
programs. We have our Sidecar Fund is what we call it. It is a 
fund to enable people to learn how to do what we do, and most 
importantly, we have the 71 individuals who are mentors to each 
other, showing each other what is going on. Unfortunately, the 
new changes that the SEC is proposing in 506(c) start to 
curtail the ability for current angels to continue to do our 
angel investing and make it much more difficult for new angels 
to enter the fray because they have to disclose information 
that they have never, ever had to disclose before, which means 
they are not going to do a deal. And more than anything else, 
this is an impediment to doing more transactions here.
    Thank you.
    Chairman Schweikert. Thank you, Jim. Actually, I would love 
to talk to you some more about the accredited investor rules 
that may be coming out of the SEC.
    Our second witness is Jacob Nojoumi.
    Mr. Nojoumi. Nojoumi.
    Chairman Schweikert. Close enough. Co-Founder of 
itsWorth.com, a website that is looking to be the resource for 
finding the value of everything in the world, which is actually 
a concept I have a fascination on because one of the things our 
office has worked on for years is shouldn't everything of value 
have a platform it could be traded on.
    Prior to starting itsWorth.com, Jacob worked in various 
roles for the local company named GoDaddy.
    Jacob, 5 minutes. Share with us.

                STATEMENT OF NIMA JACOB NOJOUMI

    Mr. Nojoumi. Congressman Gosar and Chairman Schweikert, I 
appreciate the opportunity to speak today. My name is Nima 
Jacob Nojoumi and I come from a long lineage of entrepreneurs. 
I am the Co-Founder and CEO of itsWorth.com. I recall when Shad 
Nojoumi initially approached me with the concept for our big 
data startup. He said, ``Nima, I want to valuate the world.'' 
That statement put a huge smile on my face. After doing 
thorough research, I came to the realization that with today's 
technologies, there is no reason why we couldn't create the 
world's first valuation engine. The concept is both simple and 
powerful, an engine that provides users with up-to-date, real-
world financial values.
    itsWorth.com is the Google of values. We are on a mission 
to provide an unbiased valuation of the world people can 
contribute to and feel empowered by to make informed buying and 
selling decisions.
    My three best friends and I, who at one point were 
colleagues at GoDaddy, decided to pool our life savings 
together and take a chance, to live the American Dream. Today, 
we have 8.4 million products in our database and are six weeks 
from releasing our Software-as-a-Service platform. We are 
extremely grateful for local experts like Tyler Rives of 
Silicon Valley Bank in Tempe and Evan Gilbert of Polsinelli Law 
Firm for helping position us for success.
    However, I have traveled to California 10 times this year 
alone to gain access to advisers and talent, to build 
relationships with angel investment groups and with the venture 
capital community. It has been a long and hard journey. I am 
here to say entrepreneurs in Arizona should not have to leave 
the state to gain access to human or financial capital. The 
time is right. Arizona has an emerging startup community. It 
needs to develop, it needs to mature and grow up fast. That is 
the problem and the opportunity.
    Fortunately for us, there are celebrated experts that have 
outlined the structures, systems and processes, and the social 
architecture to develop an ecosystem. I cite Dr. Barry Stein's 
1974 MIT dissertation: ``Human resources are the wealth of 
nations; each nation has the responsibility as well as the need 
to develop and conserve them. But human resources are not the 
simple equivalent of physical persons, as mere existence does 
not automatically create human beings. Rather, they develop 
through participation in social life.''
    Mr. Mark Tomizawa, a strategist and entrepreneur, invested 
the past five years of his life developing social architecture 
to deploy in real time, and I quote him: ``As for the 
ecosystem, we need freedom, support and know-how, as 
individuals at work, in school and in life, to do the right 
thing. That means more humans supporting each other, live and 
in real time. That means passing knowledge, mindfully, from 
generation to generation. That is part of how a healthy society 
is defined.''
    I am here to say that as a state, we are leaving money and 
opportunity on the table. We can and we must do better. We must 
coordinate better and connect the dots more strategically. The 
stand-alone organizations must join forces to create an 
ecosystem of opportunity, an ecosystem of human capital, and an 
ecosystem of local job creation. We can and we must become 
known as a great state where great ideas come to life.
    To cross the chasm from communities to ecosystem, we need 
to leverage existing resources, thought leaders like Dr. Stein 
and Mr. Tomizawa, and bridges that work on an integrative 
level. Tyler Rives, Evan Gilbert and I are examples of bridges. 
We naturally connect people to resources and initiatives.
    I believe conversations like these are essential and will 
serve as a catalyst for change and growth. I am not here to ask 
the Small Business Committee for solutions. I am asking that 
you leverage and organize existing capital, whether it is human 
or financial, to provide entrepreneurs with the opportunities 
they need to meet today's evolving market conditions and to 
remain loyal residents of the great State of Arizona.
    Chairman Schweikert. Thank you, Jacob.
    I would like now to introduce our next witness, Tom Curzon, 
Senior Partner for the law firm of Osborn Maledon, where he 
represents emerging growth-oriented companies. Thomas has also 
been involved in Invest Southwest, a local fundraising event 
which helps small business access more than $250 million since 
1992.
    Thomas, 5 minutes. Share with us.

                 STATEMENT OF THOMAS H. CURZON

    Mr. Curzon. Thank you, Mr. Chairman and Mr. Gosar. As the 
note said, I have been practicing law here for over 33 years, 
more than 30 of that representing startups or investors in 
startups. I have been involved in all kinds of organizations in 
our ecosystem, one of which is Invest Southwest that you 
referred to, which is basically the venture capital conference 
that has been in Arizona since 1992.
    It has evolved with the markets and through three 
recessions, and it basically serves as an annual--you can think 
about it as a forum where we invite investors, both venture and 
angel investors, all accredited historically, to attend the 
several-day event, and then we invite companies seeking growth 
capital, not small doughnut shops and pizza parlors but 
companies that aspire to be the next big company.
    They apply. We will typically get 50 to 100 applicant 
companies. They go through a rigorous selection process, and 
then we pick 10 to 12 of those companies who will do a pitch, a 
10-minute pitch to the audience, and then by that we hopefully 
will expose them to potential investors so that they can then 
begin a journey that we hope will lead to them being funded by 
somebody at the conference or perhaps in the chain of 
networking events that we all know happens. They will end up 
getting funded because they surfaced.
    The event has been the premiere capital conference in 
Arizona for a very long time. We are continuing to offer it, 
and in light of the changing capital circumstances, we are 
restructuring it again, and we will hopefully be serving it up 
next March.
    It is an important part of our ecosystem here, and one of 
the things I want to accomplish is answering questions that you 
may have about it so that you better understand how events like 
it work.
    One of the things that we are struggling with right now in 
the leadership--and I am on the board of directors of it and am 
helping in that planning--is what do we do in light of the new 
rules that become effective today, and in light of the proposed 
rules, the comment period that ended today under Regulation D.
    Our dilemma is that we would like to have it be as all-
inclusive as possible. It has typically been accredited-only 
invitees. We can keep it that way, but because of the new 
general solicitation and advertising rules, there is now a 
question whether a demo day type of event or an event like what 
we are doing will be now deemed to be general solicitation, 
when before we didn't think it was.
    It has never been bright-line clear, but the way the 
ecosystem has worked here and in Silicon Valley and Boston and 
everywhere else is that that kind of event, you are not 
committing a sin if you hold the event and you have companies 
pitch and so forth, and if they happen to do deals, it worked 
out.
    Now we don't know, and we can't get advice out of the SEC. 
We know it is not in Congress' hands. It is in the SEC's hands. 
But it is a dilemma. If you see Tech Crunch, if you see any of 
the publications right now, it is a question that everybody is 
asking in our ecosystem, how can we keep doing these events 
that are immensely important.
    The thing I want to pass along for the Committee's 
understanding to help understand, in the world of the 
principally high-tech capital raising, capital formation, the 
angel venture world, what has happened over the last several 
decades is the evolution of an ecosystem where people have 
figured out how to do the deals relatively efficiently without 
driving up a lot of legal cost. The paperwork the deals are 
done on is pretty standardized now, not because of any rules 
but because of the efficient marketplace, and because it has 
been in the context of this accredited-only regulatory regime.
    That is part of the secret sauce, is being able to keep the 
cost down, keep as much of the legal work out as you can, and 
have the market function smoothly, and it has worked pretty 
well.
    The observation I would make about the recent crowd-funding 
changes on the public side, as well as in the accredited-only 
side, is it is injecting a whole new level of cost, and by that 
I mean principally legal fees. I think that jeopardizes the 
public side of it, the public crowd funding, because of the 
needs of those small businesses now to spend money on lawyers 
to do the paperwork the SEC wants, or seems to want, and it is 
going to be a challenge because of that to it actually working, 
and that is the point I think I want to emphasize, the 
practical side of what they are doing.
    With that, I would be happy to, at the right time, take 
questions.
    Chairman Schweikert. Thank you.
    I may actually go because you actually started with a 
couple of lines that I would love to dig into.
    First off, with the reinterpretation, the lifting of the 
ban to general solicitation, how is that helping, how is that 
hurting? And you see that now also in conflict with some of the 
mechanics and the definition of qualified investor?
    Mr. Curzon. Well, the way we work the conference is we want 
to have as big an attendance as we can for the event to expose 
potential investors to these companies, right? Now, typically 
what we have done is we have required accredited-only investors 
to register, and they have self-certified. So they show up----
    Chairman Schweikert. But now you can broadcast the message 
to a much larger audience, but your concern now is the 
certification?
    Mr. Curzon. Well, we have to be--we are put to a choice. If 
we do it the same way we have done it before, we would limit 
the conference attendees to accredited investors and ask them 
to self-certify, and we would be telling the companies who are 
attending that we are relying on the old rules, right? And it 
would be that audience.
    If we don't do that and we broadcast more broadly, then the 
risk is it would be deemed to be a general solicitation, and 
under the rules that apply to that, the way the SEC is talking 
under the proposed rules about the Form D filings, you could 
have a footfall. They could violate those inadvertently, or 
they could put themselves, by participating, into the now 
506(c). Get it?
    Chairman Schweikert. Okay, I am tracking with you. But that 
still isn't completely called out in the rule sets yet, is it?
    Mr. Curzon. No, it is not. So now it is a big, fat 
question. Our event is in March.
    Chairman Schweikert. You hit one of my fixations on the 
cost of future equity crowd-funding, if we ever finally get the 
full sets of rules there.
    Mr. Curzon. Right.
    Chairman Schweikert. How about something like the 
conference you do, actually controlling creating a crowd-
funding platform? So you would become not only--trying to 
create the love connections at that type of conference, but 
also maybe even some of your smaller players to actually be a 
crowd-funding hub.
    Mr. Curzon. This is my personal opinion. This is not 
something that we talked about. My guess is we would say that 
is somebody else's expertise. There are a bunch of companies 
out there exploring the ins and outs of becoming platforms.
    Chairman Schweikert. I just have a great concern that we 
find a way to template much of the mechanics of it, therefore 
to drive down the cost.
    Mr. Curzon. Right.
    Chairman Schweikert. Obviously, the first handful of 
players carry much of the regulatory presentation, graphing, 
cost burden.
    Mr. Curzon. Right, right. The other thing to know--I mean, 
my take on it is that the kinds of companies that will use the 
public crowd-funding mechanisms that are being discussed are 
not likely to be appealing to the growth investors, the angels 
and the venture capitalists who are seeking big company plays 
because of the dollar limits, the algorithm of the dollar 
limits and the number of investors that would be required, and 
the amount of money that would be required to build those 
companies.
    Chairman Schweikert. This is probably a different 
conversation. I have always thought it would be a great test, 
testing the waters, for proof of concept of an idea.
    Mr. Curzon. Maybe, maybe.
    Chairman Schweikert. But, we will see.
    Jacob, on your current venture, I have a dozen questions 
for you, and probably some of them are more appropriate 
offline. What talent sets have you had the greatest difficulty 
finding here in Arizona?
    Mr. Nojoumi. Without a doubt, engineering.
    Chairman Schweikert. Okay. Now, is that engineering to give 
you a value on things you are trying to--I mean, is it the 
platform underneath? What type of engineering?
    Mr. Nojoumi. We are working with financial quants that help 
us with the algorithms for the depreciation. But the 
engineering we are looking for is PHP/MySQL engineers, how to 
work with hadoop and large database systems. That has been a 
real challenge for us here locally. I had to source talent from 
California, from Florida, all around the nation, but nothing 
locally. I visited with local groups like Gang Plank and was 
unsuccessful.
    Chairman Schweikert. Okay. So this is your system. You are 
building an SQL----
    Mr. Nojoumi. PHP/MySQL.
    Chairman Schweikert. Okay. All right. I keep forgetting I 
am a decade out of date from everyone.
    Mr. Nojoumi. No worries.
    Chairman Schweikert. From when I used to write script.
    Second, the model of your business--and this is just sort 
of an aside--are you going to be using transactional data, 
something like the second markets of the world that are trying 
to find a way to take sort of everything that is out there in 
life and put it in some way where you can create a 
transactional connection? I mean, how do you do your valuation?
    Mr. Nojoumi. Valuation consists of actual historical sales 
data, and we have recruited engineers who had a work history at 
Google to help us write SPDRs and APHRs and crawlers to crawl 
the Web, very much like Google does, extract data on 
valuations, and also a consumer contribution is another factor, 
and then financial quants are coming in to help us with the 
rates of depreciation for sectors and individual products. So, 
the combination.
    Chairman Schweikert. Have you ever met the folks at Second 
Market?
    Mr. Nojoumi. I have not.
    Chairman Schweikert. Let me get an introduction there, 
because they are working very hard in trying to actually create 
a platform to actually do transactions on things you typically 
would not think are tradable.
    Mr. Nojoumi. That is interesting.
    Chairman Schweikert. Next question. You are telling me you 
have had great difficulty in finding the engineering talent to 
build your database. How about the talent, like the gentleman 
sitting to your right, on being able to finance and potentially 
take your organization and set it up to go public one day, or 
however you choose to finance it?
    Mr. Nojoumi. Well, I have traveled to California for that 
very purpose, to build relationships with these venture 
capitalists and with angel investors.
    Chairman Schweikert. You didn't find any of those types of 
venture capitalists here in Arizona?
    Mr. Nojoumi. Unfortunately not, no. What I am aware of is 
there is a limited number of these. I have done some research 
on a few of them and, unfortunately, one of them had a 
competing interest where Google Ventures was an investor, 
basically like online consignment, which isn't a direct threat 
to us but it is in competition, so we chose not to go with 
them. That is why I have been to California and back so many 
times, is to build those relationships, and it is unfortunate 
that California is known as that hub and that ecosystem, and 
that Arizona is not.
    Chairman Schweikert. Have there been any particular 
regulatory hubs either from our state or Federal that have also 
caused you angst?
    Mr. Nojoumi. Haven't really worked on any Federal level as 
of yet, no. We bootstrap the company ourselves, the founders, 
and actually generate revenue before we get capital.
    Chairman Schweikert. Right.
    Tom, tell Jacob why he is wrong and why he could have found 
the VC here.
    Mr. Goulka. I am Jim.
    Chairman Schweikert. I am so sorry.
    Mr. Goulka. I don't know the answer, because we haven't 
talked. One of the characteristics in any market like this is 
that--in our example, because it is a good one, we look at 125 
to 150 companies a year, and we will fund five of them, which 
is typical of angel groups around the country, which is typical 
of VC groups. So that means that if there are 150 companies and 
we fund five, there are 145 disappointed companies which, by 
definition, can't find capital here. So there is always going 
to be a degree of discontent because it is a competitive 
environment and there are winners and losers, and there are a 
lot more losers than winners even within the context of capital 
that is available.
    The bigger issue, the more systemic issue that we have is 
that we are only 71 people. We have only been around for five 
years, six years in Phoenix, and our counterparts in Tucson are 
a little larger and a little older. But we are a very small 
subset of the total potential angel population in the state.
    Chairman Schweikert. Jim, and we sort of started to touch 
on this even before the hearing. Mechanically, you are mostly 
in the angel space, whether it be VC or private equity. How 
much talent do you find even beyond the money, accounting 
talent, legal talent, compliance talent? I mean, do we have a 
robust enough infrastructure underneath the money?
    Mr. Goulka. In all those areas of expertise, we have a 
plethora of competence. In marketing, in sales, in go-to-market 
strategizing, in accounting, in legal, in IP, all of those 
activities we have lots and lots of very fine, very competent, 
highly qualified people to do that work. So we are not short of 
that.
    What we are missing is there is an issue about engineers in 
Arizona, and the issue ultimately is an engineer may work for a 
company for a year, working in a startup. You don't know 
whether the company is going to be around for three or four 
years or five years or longer. So if you are a young engineer 
and you are looking at taking a job in a company that may only 
be there for 18 months, you have to look at where am I going to 
go from that job to the next one. You may have a hard time 
discerning the opportunities, the plethora of opportunities 
here for re-employment, and that becomes the beacon that 
Silicon Valley shines out into the world. They say you have 
lots of opportunities here. If the first one doesn't work, we 
have the second and the third and the fourth.
    So the development of entrepreneurial businesses like his 
is an issue. We have to find ways of incentivising young people 
to stay here, and the way you do that is really the second 
part, which is that they are not very well connected to each 
other.
    I have lived in 10 states, and this is the most 
disconnected community I have ever lived in. I could get 
anything done in New York in three phone calls, or in 
Washington, or in Chicago, or in Dallas, or in Minneapolis. I 
can't do that here because I don't know who to call, and I have 
been here for a few years.
    Chairman Schweikert. All right. Before I hand it to 
Congressman Gosar, I have to follow up.
    Tom, do you agree?
    Mr. Curzon. Yes. I would add the note that the engineering 
problem is actually a national problem. It is hard to find 
engineers everywhere, and their cost has gone through the roof.
    But, yes, we have a very fragmented in the sense of 
dispersed kind of ecosystem, lots of individuals in the 
rowboats rowing in circles.
    Chairman Schweikert. Okay. When we do our second round, I 
am going to come back to all of you and just say give me an 
idea, because I know we have a dozen different Chamber groups, 
industry groups, congressional offices that have been trying to 
find some way to create that sort of portal where we drive our 
people and our information through. Why are we failing?
    Congressman Gosar?
    Mr. Gosar. Thank you.
    Jim, I want to come back to do you see only engineers as 
being the focal point of being what is inadequate about our 
system here in Arizona?
    I mean Tom. Sorry.
    Mr. Curzon. Yes. I wouldn't even point to the lack of 
engineers. I think that is just a supply issue. A lot of my 
clients are solving the problem using virtual teams from all 
over the country and just using it over the Internet.
    I just spent an hour-and-a-half this morning brainstorming 
this issue with somebody, and our takeaway in part is that 
there is a lack of momentum of successes. Part of the getting 
people together and one success leads to another success, the 
kind of serial entrepreneur. A company has a big success, and 
then 10 people from that company go out and become angels and 
they invest in the next company, and then you just have this 
big ripple effect.
    We haven't had a ripple effect since the late `90s, except 
occasionally, and as soon as we get one of those, I think we 
will see some really great things happen. One of the things in 
my notes you will see, or in my testimony that bears on this is 
the Arizona Commerce Authority's Arizona Innovation Challenge 
Business Plan Competition is a big deal. In my opinion, it is a 
really big deal. And the reason it is a big deal, it is a semi-
annual business plan competition, $1.5 million each time to 
typically six companies. It is not the winners that are the 
most important thing. It is that we have had 810 applications 
in the last three years, which brings visibility to companies, 
most of those we never heard of. And now they are exposed to 
our mentoring systems and to investors to see and that kind of 
stuff.
    That is, I think--I think we are going to look back and it 
is going to be one of the most important things that will have 
happened, and it is a momentum issue, right? It is getting the 
light of day on these so the investors will take their dough 
and put it out, and the winners.
    Mr. Gosar. Part of that also comes back to big government 
dictating winners and losers. I mean, government is supposed to 
be fostering an environment to allow that to sort out. I mean, 
you made the comment that you have sorted out the streamlined 
process. It is not what government has been doing. It is what 
you have been doing on a solid business scale, and we have 
tipped that scale. Would you agree?
    Mr. Curzon. If government gets into the business of making 
those kinds of decisions, yes, that is not optimal. I think 
when you have--the way Invest Southwest works, the way actually 
the Arizona Innovation Challenge works, with a judging panel of 
investors where they are picking those--it is not a government 
picking them--I think it works best.
    Mr. Gosar. Jim, do you like that?
    Mr. Goulka. I do, actually. I have been part of the 
Innovation Challenge. I see how it works. The opportunity to 
get many companies that come out of--it seems like they come 
out of the woodwork. I mean, I have spent a large amount of my 
day, every day, seeking out companies as candidates for 
investment because our doors are open. We are looking for 
places to put our dollars. And the Innovation Challenge found 
many, many, many companies I had never heard of before, some of 
which have subsequently gotten funding from us.
    So it does work. That is an instance of utility here, 
because it was the big government enabling a bunch of investors 
to make the choices for the state capital to be deployed. So 
there was some risk involved there.
    To my mind, the issues really are staying out of the way, 
first and foremost. We don't need a lot of rules to do what we 
do. To find opportunities for companies to grow, and 
particularly to attract other investors, the way that there can 
be good incentives coming from government are through capital 
gains tax credits of one sort or another. They do exist at the 
Federal level and do exist with the Arizona Angel Tax Credit in 
the state because those add an element of potential return to 
investors for taking the risks that they are taking. It doesn't 
obviate the risk, but it says if the risk is successful, that 
there is a gain. So in that weighing of opportunity, of gain or 
risk, it tilts it properly and enables the person to take a 
better risk, and that will be attractive to people who have 
never done this sort of thing before.
    Mr. Gosar. Is our economy and the composition of our 
business in the State of Arizona compared to others, does it 
preclude certain industries over other industries?
    Mr. Goulka. Well, we were talking a little earlier about 
the importance that serving the needs of the population that 
has moved into the state over the years--a nicer way to say it 
than just real estate. But, in fact, we have seen enormous 
population growth for the last 60 years. It doesn't take a 
genius to figure out that you can make money serving all those 
needs, whether you are building houses, building roads, 
building schools, becoming a teacher in a school, working in a 
restaurant or any of those things, serving the ordinary needs 
of a massive influx of human beings.
    What that has done is it has made it so easy to make money 
in that fashion over most of the years that the more risky 
kinds of things such as startups, where you are creating 
something altogether new, like his business--it is altogether 
new; before he thought of it, there wasn't that--that is a 
riskier thing. So that says to a person of means, I can take a 
high risk, and I can take a lower risk. Which should I do? Then 
it is about the kinds of returns for those risks.
    So, yes, I think we have had a skewed economy, but that 
doesn't mean that it has been so completely skewed that nothing 
else exists. We have successes in technology. We have life 
science companies that are successful. We have software 
companies that are successful. We have GoDaddy, one of the most 
extraordinary stories around, that is right here, and it stays 
here.
    So we are not devoid of it. We haven't developed it as well 
as we could. I call us adolescents in that. We have to work at 
developing them into a full-fledged ecosystem, and that is 
dealing with what I call the disconnectedness.
    Mr. Gosar. By utilizing some of the spinoffs that we have 
seen out of TGen and ASU, do you think there is a better 
relationship that we should have with our major university 
partners in regards to looking at investment into spinoffs and 
new technology?
    Mr. Goulka. I think the universities are working very hard 
at becoming good at a very difficult thing. Tech transfer is 
very difficult to do, even under the best of circumstances. If 
you look at Stanford and Cal Tech and MIT, and even Columbia, 
it is still a difficult thing to accomplish. How do you bring 
scientists and engineers and business people together? And in a 
university setting, particularly one that wants to find 
alternative sources of income, this looks like a good one. But 
the hurdles that we have in this are serious.
    The first is if I as a licensor require from you, a 
licensee, a large amount of money for a license on the front 
end, only the wealthy can afford that. If, on the other hand, 
that cost is lower, it makes it easier for small businesses to 
do this, and I can speak to this from personal experience. My 
software company is the result of two people, my partner and I, 
acquiring a license from NASA Ames of some software they built 
over a five-year period, and it was very easy to work with 
NASA, much easier to work with NASA than it is to work with ASU 
or the University of Arizona. So there is learning to be done 
in that tech transfer activity.
    The second part is the connections between scientists, 
engineers, and business people. Many people choose to be 
researchers in the university setting because they are not 
interested in business. So working on methodologies 
intramurally about this is a good thing to take your idea and 
commercialize it, it is not just about greed and all that, it 
is about taking your ideas and bringing it to a larger 
population and serving them, that needs to be done, and we are 
not very far along in that.
    Chairman Schweikert. Well, thank you. And I need to follow 
up on that one. It is because of the residual model, or is it 
the up-front cash----
    Mr. Goulka. It is absolutely the up-front cash. That is the 
issue.
    Chairman Schweikert. Okay. So, let's hunker down. So when 
you are going to do that licensing transfer, it is just the 
amount of capital up-front, and when you did your agreement 
with the NASA-developed software, that model was different?
    Mr. Goulka. It was a very small up-front fee.
    Chairman Schweikert. And did they take a residual?
    Mr. Goulka. Absolutely. We pay them every year for it, and 
that is fine because it is based on our revenues. So the more 
we grow, the better off they are, and that is the way 
successful licenses work. If we would have had to pay a quarter 
of a million dollars to acquire our license, we would not have 
acquired it. That meant the technology would be sitting on a 
shelf today, and there are businesses that have generated 
billions of dollars for their institutions, and it wasn't from 
a billion-dollar up-front fee. It was from the success of the 
business made by entrepreneurs with some scientific new idea.
    Chairman Schweikert. It is interesting. I think REA and I, 
we had some meetings with ASU and U-of-A on this very similar 
subject. So it is going to be real high on the checklist.
    From your view of the world, and you touched on this in 
your opening statement, but I want to sort of bounce through 
them, 506(c) and some of the improvements, changes, the 
solicitation rules--and you know I am not happy with what they 
have been doing on the credit investor mechanics and possibly 
now having to have a third party certification--where are you 
hitting your greatest concern, and would you believe for our 
angel investor community here in Arizona, where do you see your 
greatest legal liability right now when you are trying to put 
something together?
    Mr. Goulka. The issue ultimately is how hard is it to do a 
transaction. And as Tom mentioned earlier, there are now 
additional costs. Some of those will be dollar costs, but some 
of it is simply the new disclosures of information that has 
never been disclosed before to third parties, whether it is an 
intermediary or an entrepreneur.
    So we have done transactions, private transactions. Self-
declaration works. And when you think about this, when we do a 
transaction, first off, to become a member of our group, you 
have to self-declare as an accredited investor. Secondly, all 
the documents that I have ever seen for the closing of a 
private securities transaction require you to re-declare that 
you are an accredited investor, and there are legends in the 
documents that say you understand this is a high-risk 
investment and all that. That is easy.
    The problem is with the general side, you have to do more 
than that. The simple language for it is, well, if you want to 
do that, you have to provide your tax return or some simulacrum 
to somebody else. Initially, it is the entrepreneur.
    So I would just put it this way: Would you want to give 
your tax return to me, somebody you met an hour ago, and you 
kind of like my idea?
    Chairman Schweikert. You have seen some of the articles I 
have written. I am enraged about what the SEC is doing in 
regards to this whole category. How would you fix it?
    Mr. Goulka. I would say that it turns on two pieces. Piece 
one is, is an accredited investor simply somebody who has to 
provide a financial statement to somebody else, or is an 
accredited investor really a sophisticated investor? And you 
can define that differently.
    Chairman Schweikert. And that, I know, is sort of the fight 
that is going on, let's call it discussion. The discussion that 
is going on out there is are you an accredited investor because 
you have this much cash in the bank or this much net worth, or 
are you an accredited investor because you have this much 
expertise in what you intend to invest in? Just because you may 
have had a great real estate deal doesn't make you a brilliant 
engineer. You may be a brilliant engineer, but you don't have 
$1.2 million in the bank. And we go around and around on this 
one now for almost two-and-a-half years.
    Mr. Goulka. The second part of it is, when we make our 
investments, we are writing a check, cash, for 100 percent of 
the asset that we are buying. We are not financing this. This 
isn't like getting a mortgage for a building. This is buying a 
pen. I may be paying $25,000 for this pen, but I am writing 
this check now. So who is at risk?
    Chairman Schweikert. Okay. Forgive me for going off on a 
lark. What I have learned is, in D.C. particularly, there is a 
cultural split on the value of risk-taking. Much of what has 
made this country amazingly successful is a culture of risk-
taking and the benefits that come from that. There is a 
fixation by many in Congress and in the bureaucracy that we 
need to create a risk-free society, and you see that if you 
have ever had to sit through a Financial Services Committee. 
Paul knows, because we talk about this all the time.
    If you create a big enough bureaucracy, you make it risk-
free because there will be no transactions. You just stop them. 
Of course, there will also be no rate of return, no multiplier 
in the economy, and we flat-line. But there really is this sort 
of terrible fear of you take a risk, what if he loses money? 
And the same arrogance sort of works its way down into the 
accredited investor rules.
    A simple example I have is I have a very good friend, a 
brilliant engineer. He has a couple of friends who started a 
business that he actually sort of helped give them the idea. He 
is not allowed to invest in it because he is not accredited. 
They have already filled up the other. But he could walk in, 
and if they were listed as a mutual fund or other type of 
investment, or a certain private equity fund, he could invest. 
We have an absurd system right now.
    Paul, do you have any other questions? Because then I have 
some other more technical things.
    Mr. Gosar. I have one more thing for Tom. It seems like 
what we see is a Federal Government ratcheting down the 
biosphere in which you function. Would you agree with that? And 
if you were to make a pitch to the Federal Government in 
regards to rules, regulations, what would you do in regards to 
that to make this a better application so that instead of an 
equal outcome, we just had equal opportunity?
    Mr. Curzon. Personally, I think one of the reasons that 
immediately preceding accredited-only mechanisms work so well, 
setting aside the definition of who is accredited--that is its 
own fight--is that if, in fact, you had only accredited 
investors, it cured almost all sins. So you could put together 
that deal and you were pretty sure it was going to be fine 
because you had accredited investors.
    Now, an example of where we are now making it more 
difficult is under the new 506(c), even if you had sold only to 
accredited investors, if it turns out the government says, the 
SEC says that you didn't conduct a reasonable diligence into 
those, you have violated the statute and you have a year ban on 
being able to fix it. That is just dumb.
    Chairman Schweikert. Paul, can I leap in on you just to 
that point?
    Mr. Gosar. Sure, go ahead.
    Chairman Schweikert. So it is that liability tree that 
exists there. And as our official lawyer on the panel----
    Mr. Curzon. It is not the liability that is bothersome. It 
is the uncertainty that causes people like Jim and me not to 
invest. What will happen is there will be more companies that 
won't get investors because there are questions about that.
    Chairman Schweikert. If I can get that rule locked down and 
a crisp definition there, does that make a difference?
    Mr. Curzon. Make a huge difference. If entrepreneurs and 
those wanting to invest in those companies can have 
predictability about whether those target companies are clean 
or not, then you have eliminated an obstacle. Today, because of 
these changes, there are new questions about that company. So 
we are going to say, eh, I am going to pass on that one because 
I am not sure. They may have generally solicited and advertised 
in a way that there could be a problem, and we are not signing 
up for that.
    Chairman Schweikert. Okay. Paul, thank you for letting me 
step on you. But this is something we have been hearing. We 
have done some of these in other places, and this has become a 
focus we hear over and over and over.
    Mr. Curzon. That predictability is really big.
    Mr. Gosar. When you hear these two gentlemen speak, coming 
from your perspective of looking towards the capital formation 
to start up a new idea, do you have any new thoughts listening 
to them?
    Mr. Nojoumi. I believe it boils down to conversations and 
communication, talking about what is so important, and it is 
not just from a financial perspective or an engineering 
perspective. It is education, education from an institutional 
standpoint like ASU or high schools, but also grassroots, from 
the bottom up. So in corporations like GoDaddy that are 
established, I spent six years there, and Bob Parsons really 
grew this amazing company, a workforce that looked up to him 
and aspired to the American Dream of entrepreneurship.
    I know 2,000 people there right now who are dying to get 
into entrepreneurship. They just don't know--they don't have a 
road map. They don't know what steps to take. They don't know 
what resources are available.
    Mr. Gosar. You saw what Tom was talking about in which they 
have that kind of expo. Shouldn't that be something that is 
highlighted amongst the entrepreneurial community?
    Mr. Nojoumi. Absolutely it should be, and I think we need 
to take it one step further. I am not sure how often that expo 
takes place, but it would be good to have weekly workshops 
where entrepreneurs--industry calls them wonktrepreneurs. I am 
not a fan of that. But they can actually go to these, attend, 
and get a seminar or some sort of introduction to growth 
hacking or recruiting, which is huge for startups. It is a 
massive challenge. Or advice on institutional investors and how 
to raise capital, and how to form your company, the structure.
    Mr. Gosar. Do you reach out? I mean, you are a pretty smart 
guy. Have you reached out to either of these two gentlemen?
    Mr. Nojoumi. Unfortunately, I haven't. I wasn't aware and 
hadn't had the pleasure of meeting either one of them. In terms 
of raising capital, fundamentally what we believe is our 
problems are our problems, right? So if we can't solve our 
problems with the money that we bootstrapped with, I am not 
going to raise money to figure out how to go and solve my 
problems. So step one is to figure out my problems, find 
solutions, raise capital from an individual or entity that has 
expertise. And the deal flow is so limited here in Arizona, 
they don't have the same expertise, unfortunately.
    Mr. Gosar. But it seems like communication here is what is 
lacking.
    Mr. Nojoumi. Yes.
    Mr. Gosar. But it is a two-way street. It is not just from 
the top down. It is from the bottom up.
    Mr. Nojoumi. That is correct.
    Mr. Gosar. What kind of investigation did you do into those 
groups?
    Mr. Nojoumi. I looked into--I did some Google searches. I 
reached out to some contacts of mine. I found 1,200 capital 
firms in Arizona. The largest one I believe was Great Hawk. I 
looked at their investments and their portfolio, and really 
what we are looking for is specific expertise along with the 
capital, and we couldn't find that in Arizona.
    Mr. Gosar. Did you approach them into an opportunity, or 
did you just review them on the Web?
    Mr. Nojoumi. I reviewed them on the Web, I researched them 
online.
    Mr. Gosar. Why wouldn't you directly try to contact them to 
have some type of conversation? I mean, I understand 
diversified portfolios. So just because somebody does something 
over and over again doesn't mean they are not receptive to new 
ideas.
    Mr. Nojoumi. Right, that is very true. I didn't reach out 
to them because we just weren't actually ready to raise capital 
yet, and I thought if I was going to raise capital, I should 
probably target someone more informed in that sector.
    Mr. Gosar. Jim, one last question. Tom made an aspect in 
regards to where we can go with this, between the state trying 
to grow this. Do you have any other ideas in regards to that?
    Mr. Goulka. Specific to Arizona?
    Mr. Gosar. I mean, somehow we are lacking here, and it 
sounds to me from your initial statements that we have this 
fixed group, and it doesn't seem like it is growing very much. 
Am I quantifying that quite right?
    Mr. Goulka. Yes. We have as a challenge to reach out to 
other like-minded people that we are not in contact with 
already. That is one of our jobs. And I would not say that 
government is supposed to do my job for me.
    On the other hand, in New Mexico, part of the deals that 
went back to the vetting of the contracts for Sandia and Los 
Alamos required some effort on the part of the contractors to 
participate in early-stage technology development. I think TVC 
is the consequence of that. Years ago I met with people from 
there who had University of New Mexico people, Sandia people, 
Los Alamos people, and the venture community all participating 
together to try to identify the needs of the local 
entrepreneurial community, recognizing that most of the 
entrepreneurial activity was going to come from Sandia, Los 
Alamos, the University of New Mexico, and New Mexico State.
    So it was, if you will, government focused, because that is 
the nature of the state, but there is a page out of that book 
that we can take. We have major contractors here, and one of 
the characteristics of our community is that the major 
contractors in technology have a very, very limited interaction 
with the early-stage community here. You don't find, like you 
do in California, in both Southern California and in Northern 
California, the big company, the big oak tree with all these 
acorns sprouting into new oak trees all around them, and a 
little incentive for that is part of the contract. To let them 
work out with the eagles I think would be a very valuable 
thing. It wouldn't cost anybody any money.
    Mr. Gosar. Would that be--in biotechnology, I see ESU over 
there, and I am just kind of interested along these lines 
because it seems like with biotechnology, being a dentist for 
25 years, and the only difference between me and young folks is 
the price of my toys. But the whole future of medicine I think 
goes a lot through Arizona. Does that mean that there has got 
to be a better communication or a structure that is established 
with institutions like ASU?
    Mr. Goulka. There is work going on in that that is pretty 
serious, Biodesign being the best example of that. BioInspire 
is here, BioExcel. We have a variety of entities that are 
participating in figuring out how to do that at the earliest 
stages, and it is now starting to work.
    The illustration I will give to you is that BioExcel funded 
six companies to a modest degree. Two of those companies made 
it through our screening process. Two of them presented to our 
membership for the next round of funding on the 12th of 
September, and both of those are in due diligence right now, 
one with a very large number of people. You are particularly 
interested in this, Congressman Gosar, given your background. 
And the other a smaller number.
    But we have serious interests now, and that was 
technologies that were--one technology actually came from 
another university. The other was originated at the University 
of Arizona. People are here being incubated in an incubator, 
advised by BioExcel, and now we are looking at it. So the steps 
are working right, but it is still very new.
    Mr. Gosar. And the last question. You just brought up these 
incubators. NAU has got one, Flagstaff has got one, ASU has got 
one. Are those the kind of a bridge that you are looking at as 
being fundamentally the thing that you are looking at for the 
future?
    Mr. Goulka. There is a degree of fashion in that right now. 
There are lots of them growing up, and we will see the 
marketplace will prevail, and some will succeed and some won't. 
But those that are doing a good job do a very good job. We see 
a regular flow of opportunity from them. We actually get 
members from our group as a consequence of NASA. So they can be 
very helpful. They are the kinds of places where entrepreneurs 
can go for a lot of the training.
    The third company that presented out of the three that we 
had on the 12th was at an incubator here. So all three of our 
companies that were selected to present to our membership out 
of the 25 were incubated.
    Mr. Gosar. Thank you.
    Chairman Schweikert. Thank you, Paul.
    Something miraculous, we are actually exactly on time.
    The fact of the matter is, we are sitting in Skysong right 
now. I mean, this was the community and ASU's venture to try to 
actually create a physical structure for what we are almost 
talking about.
    My last question is the one that always gets me in trouble. 
Tom, I am going to start with you. Well, you know, he is always 
picking the lawyer.
    From our offices, new members of Congress. From the 
institution that ASU is and being a very innovative--I mean, it 
is my alma mater. I believe in maroon and gold. So also what we 
have in the community.
    What do we do? What do we do to make it better? Is it 
something as simplistic as dramatically expanding the events 
where we bring people into the same room? Is it a much better 
registry of information? Is it just understanding it is going 
to work on many levels? If you were a policymaker, how do you 
make the access to capital for growth in this community work?
    And can I beg of you to pull the mic slightly closer to 
you?
    Mr. Curzon. Personally, I don't think there is any silver 
bullet. I think a rising economy will make a world of 
difference. I think when people feel like they have money that 
they can invest and don't have to be putting it away in a 
scared mode, they will be more inclined to invest. I think that 
is a piece of the puzzle.
    I think we should recognize that Phoenix and Arizona has 
made, in my opinion, enormous strides over the last three 
decades. The amount of infrastructure here, the amount of 
activity--we now have more than two dozen incubators. We have 
universities working very hard at this stuff. It is really hard 
stuff to do, and as you guys know, entrepreneurialism is all 
about failure. It is the pioneers with the arrows in their 
asses, not the settlers who came after. So that is the part 
that we are talking about.
    But if you have the rising tide, I think that provides the 
context for the successes that lead to the serial 
entrepreneurs. I think making it easier, not harder, to invest 
the capital--it is around the rules that we talked about 
earlier in the discussion. If we can make the rules clearer, 
and less paternalistic would be a nice thing, but at least 
clear to be able to work around, I would do that.
    Chairman Schweikert. Okay.
    Jacob, almost the same question. From your experience of 
being one of those entrepreneurs, what would you change? What 
would you hope to see? What do you need, do you think, for us 
to grow in this marketplace?
    Mr. Nojoumi. Let's say, first and foremost, you identify 
and organize thought leaders that have followings, easier to 
reach. Instead of reaching 6 million people individually, you 
have six individuals who have a million persons following, 
right? A rough example. But you identify those leaders in the 
community first on a government basis level, and also in 
educational systems like ASU, and also in the entrepreneurial 
and private sector, and you align their focus, an initiative 
for an ecosystem for Arizona. So it starts with a conversation, 
align the vision.
    Secondly, we learn from other ecosystems that have proven 
to work--Boston, even Santa Monica right now. They are calling 
it Silicon Beach. Boston and Texas. So we learn what 
initiatives we have there, what support groups.
    I am working with a team called the House of Genius. They 
have 14 locations across the world, and I was on their panel in 
Santa Monica and I thought what a great opportunity for 
Arizona. It is a safe environment for entrepreneurs to come 
pitch, and it is to an esteemed panel without the pressure of a 
make-or-break scenario.
    Working with them to bring them to Arizona, that is one 
example. I think it is a multi-faceted approach, and I don't 
think it is the government's responsibility to do it. I think 
it is their responsibility to organize and leverage the 
resources.
    Chairman Schweikert. Jim, sort of that same question. I 
know we have some great talent here, but I always have this 
fear that somehow we are all not ending up in the same room. 
What would you change?
    Mr. Goulka. When people talk about Silicon Valley, they 
say, well, you get lots done there, everything happens there, 
and there is this vision of all you need to do is go to Sand 
Hill Road and say you are looking for money, and the VCs come 
out of their offices with their bags, ``How much do you need?'' 
And, in fact, VCs in Silicon Valley and the angel groups in 
Silicon Valley are just like we are. It is 5 percent get 
funded.
    There, they understand competition. Here, we have still an 
attitude of, well, I am doing this, so you should be giving me 
things. I hear that a lot.
    So what we need to have is an attitude like we are going to 
get in the big leagues, which means it is competition. There 
are winners and there are losers, and if you are a loser, as 
Tom said, failure is an important part of being an 
entrepreneur. You learn from being a failure. You don't learn 
from your successes.
    So it is okay to fail, and it is even better to win, and we 
should extoll our big-time winners, which we don't. So I am 
saying, at the same time, raise our standards. The last thing 
you want to be is the batting champion in Triple-A, not make it 
to the bigs. They don't extoll themselves. Nobody is going to 
walk around saying, ``Look what I did last year, I was the best 
minor leaguer around.'' We want to be in the bigs, so we have 
to focus on helping the best get noticed and celebrated as our 
lions and say, yes, we compete, and we are going to compete 
with the best.
    Chairman Schweikert. Paul had one other thing.
    Mr. Gosar. I only have one more question.
    Mr. Curzon. I think we have--of the competing companies?
    Mr. Gosar. Mmm-hmm.
    Mr. Curzon. Sure. We ask them about their experience and 
their comments and suggestions.
    Mr. Gosar. I am just real interested because a lot of times 
what you do to expand your universe other than raising the bar 
is by finding out from the applicant pool how did you find out 
about us, how did you find the process, what would you add 
additionally. It helps to attend where like minds gather.
    Mr. Curzon. A lot of times, if you are asking the 10 who 
presented, we try and follow up with them and see about their 
experience. If they were able to raise capital afterwards, they 
are happy. If they weren't able to raise capital, you know, 
they are not happy.
    Probably the criticism we have had, in fairness, 
particularly in more recent years, is that our audience has not 
had enough investors in it, that we haven't been able to 
attract the investors, and there are a couple of reasons for 
that, one of which is the number of investors nationally who 
are interested in early-stage investing, which is what we have 
mainly is early-stage stuff, has gone away. There are very few 
professional funds that actually invest in early-stage anymore 
because they either went up-market or disappeared.
    So, I mean, Congressman, we are actually in the middle of a 
pivot with the conference right now to try and address that 
very issue. We are working on it to make it more interesting 
and broader and bigger to bring in more companies, to have the 
benefit of the exposure and hopefully more investors because of 
responding to the kinds of inputs and our own observations, 
frankly, sitting at the conference, is trying to do something 
new and different.
    Chairman Schweikert. Thank you, Paul. That is actually 
where we need to go.
    We are going to wrap up the formal portion of this, and 
then I am going to ask if you would be willing to engage in 
something a little quirky.
    I also need to thank Skysong. Thank you for letting us 
invade your space. It is appreciated.
    I also need to thank our witnesses.
    On a personal level, I have a personal fixation on--I mean, 
in our office, we have actually been trying to create lists of 
people that do compliance accounting. We have had some great 
success with drawing some big REITs here, some more folks who 
are managing private equity out of this community. Now I need 
this community to start knowing each other and see if there is 
a level of--what is the term?--cross-pollination there, 
building, as you used the term, ecosystems.
    One of my other frustrations is we had a great success with 
the JOBS Act. We proved we can do bipartisan legislation all 
the way through the process. And then I have my brothers and 
sisters on both sides of the aisle absolutely flabbergasted we 
are heading to two years of rule sets coming from the very 
bureaucracy that talks about helping us, and we are supposed to 
be creating job growth. Who would have ever thought we would 
lose the momentum in the bureaucracy? And that is why many of 
us have played with the idea of what do you have to draft in a 
JOBS Act 2.0--I was told I would get in trouble for using that 
title--to either clean up the definitions, fix the tree of 
liability and things like crowd funding, and also take away the 
SEC's ability to take two years to do something that should be 
simple in rule sets.
    Maybe we have to be much more definitive in saying it will 
be in this fashion. I think that is actually the future of 
where the legislation is going to go as we sit and work on the 
details of that.
    And with that, I ask unanimous consent--and considering it 
is only you and I, you had better not argue with me--that any 
submitted or supporting materials be made a part of the record.
    Without objection?
    One day he is going to go, ``No.''
    Also, to our witnesses, be prepared over the next couple of 
weeks, there is a very good chance we may send you a couple of 
other questions to sort of fill in where either the question 
didn't get us where we needed, some bits of information, or 
something else has come up.
    And with that, the hearing is closed.
    [Whereupon, at 2:14 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X


                               Testimony


                                   Of


                              James Goulka


                           Managing Director


                   Arizona Technology Investor Forum


                                 To the


       Subcommittee on Investigations, Oversight and Regulations


                      Committee on Small Business


                     U.S. House of Representatives


                          Scottsdale, Arizona


                           September 23, 2013


    Chairman Schweikert, Members of the Subcommittee on 
Investigations, Oversight and Regulations, staff, ladies and 
gentlemen, my name is James Goulka. I reside at 2525 W. Lompoc 
Avenue in Mesa, Arizona. I am the Managing Director of the 
Arizona Technology Investor Forum, a 501(c)6 entity comprised 
of 71 accredited investors who collaborate on finding, 
evaluating, and investing in early stage technology companies. 
In the 6 years of its existence, we have invested over $7.25 
million of our own money in 29 companies, 24 of which are based 
in Arizona. Together with our counterpart, Desert Angels in 
Tucson, we are by far the most active investors in early stage 
companies in the state. It is an honor to be here to offer my 
testimony to the Subcommittee. I will be brief.

    Most people acknowledge that small businesses drive 
American job creation and innovation. Whether providing a new 
cancer diagnostic or a mobile phone app, opening a taqueria or 
doing contract manufacturing, small businesses hire people, 
lease space, buy services, and pay taxes.

    I want to focus my comments today on a subset of American 
small business: startups. These are the creation of one, two, 
or three individuals, who take the exceptional risk of taking 
something that doesn't exist--an idea--and making it into a 
reality that solves a problem in a new way, causes new ways of 
behaving, or, simply, makes life better.

    These businesses start out by the investment of time and 
energy from the founders--so called ``sweat equity''--and the 
capital they can contribute to their new enterprises. Few 
founders are wealthy: most are middle class; many are young. 
They use hard-earned savings to start their businesses and live 
frugally. As they need capital to buy equipment, lease space, 
pay other people providing them services, they tap their 
friends and family members who may not know their business 
idea, but they do know the founders.

    Occasionally, a startup can grow sufficiently to generate 
sales and profits with no additional capital. Such businesses 
usually serve a gaping need of a customer group for a pre-
existing service. These quick successes strengthen our economy 
and are the bedrock of our local communities.

    Others, though, are more uncertain: they may disrupt 
current practices, they may propose solutions that have never 
existed before, or they may be creating new market niches. 
These are the engines of innovation. Think Facebook, Amgen, or, 
more locally, GoDaddy, Infusionsoft, or Medicis.

    These startups, with high potential but equally high risk, 
soon run out of capital from their friends and families and 
have to turn to outside investors. In some situations grants, 
such as SBIR funding from federal agencies or Innovation 
Challenge Grants from the Arizona Commerce Authority provide 
important early capital to these businesses.

    For capital beyond these sources, founders and other 
entrepreneurs turn to outside investors, people and 
institutions with capital resources they intend to invest to 
achieve economic returns.

    The most obvious sources of funding for businesses are 
banks. But, for more than simple transactional offerings like 
checking accounts, startups are not attractive to banks because 
they do not meet the banks' fundamental credit criteria. 
Startups, by definition, have no history, and are completely 
unpredictable. Most have no profits or collateral. Most 
entrepreneurs have little personal history with a bank, many 
have no previous experience as founders, and few are willing or 
able to provide personal guaranties on loans to their 
companies. Startups are, in reality, unbankable. And American 
taxpayers, having experienced the financial meltdown of the 
past several years, are not enthusiastic about banks taking on 
this kind of risky business.

    We do have investors who are interested in providing 
capital to this segment: individuals, generally referred to as 
angels, and institutions, generally called venture capital 
firms. These are sophisticated individuals and firms who are 
have the capability to assess the risks of new enterprises, 
make judgments about them, and accept what they hope are 
reasonable risks in return for acceptable returns. Importantly, 
they understand and accept that the risk of total loss of an 
investment in any private startup is high.

    In late 2013 venture capital firms tend to manage funds 
sufficiently large that they rarely invest in funding rounds of 
less than $2 million. Angels, whether investing by themselves 
or in groups, are the principal source of funding for 
entrepreneurs seeking their first rounds of outside capital in 
lesser amounts. The Center for Venture Research estimated that 
angels invested $19 billion in 35,000 US companies in 2008. And 
that was the year when the financial crisis hit.

    A major intent of the JOBS Act of 2012 was to increase the 
opportunity of American startups to raise capital by enabling 
more people to invest in them. This meant addressing two 
issues: (a) redefining who could invest in the securities 
issued by startups; in other words, redefining an angel 
investor; and (b) changing the rules on how startups--the 
potential issuers of private securities--communicate with those 
potential investors.

    Solicitations--Private and General

    Rule 506 of Regulation D that governs the issuance of 
private securities had come to be seen by some as a constraint 
on the ability of issuers to reach potential accredited 
investors whom they do not know in advance. To address this, 
the SEC recently subdivided Rule 506 into two sections: 506(b) 
deals with purely private transactions, and the new Rule 
506(c), which relaxes the constraint and enables issuers to 
publicly advertise their issues--do a general solicitation--in 
the hope of attracting those unknown investors. In exchange for 
the freedom to advertise, the issuer must now meet an array of 
requirements and take the ``reasonable steps'' to assure itself 
that the investors are accredited.

    Definition of Accredited Investor

    Regarding the definition of angel, most angels fit the SEC 
definition of ``accredited investor,'' which means meeting a 
net worth test (of $1 million not including a residence) or an 
income test (of $200,000 in each of the previous two years for 
a single person. That number increases to $300,000 for married 
persons). The intent of the Securities Act of 1933, was to 
protect the general public from unscrupulous promoters who 
might cajol unsophisticated individuals into making investments 
in spurious companies. The concomitant though was that a 
sophisticated investor could fend for himself, which he or she 
would do by careful evaluation of opportunities, collaborating 
with likeminded investors, and understanding the risks 
involved. He also has the ability to absorb loss.

    Over the past 80 years, the practice arose among angel 
investors of self-declaration of accredited investor status. 
This usually takes the form of a document wherein an investor 
identifies how he/she qualifies as accredited. I have attached 
the form that the Arizona Technology Investor Forum requires of 
all members. Most organized angel groups such as ours use a 
form substantially identical to this. Furthermore, the 
documents relating to every privately issued security that I 
have seen includes a substantially similar statement by each 
investor. This means that at every investment action, each 
investor restates his/her status as an accredited investor. And 
further yet, the securities documents of a private issue 
contain legends clearly stating the riskiness of an investment 
in those securities. Combined, these make compelling arguments 
that angels, especially within organized angel groups, but also 
experienced independent investors, know what they are doing, 
understand the risks, and meet the intent of the words 
``accredited investor.''

    One would think, then, that the sheer scale of tens of 
billions of dollars invested by angels each year and current 
accredited investor practices prove that the system works and 
would form the baseline for any expansion of the definition of 
an investor who could invest in privately issued securities. 
Presumably, that is the case for purely private solicitations 
under Rule 506(b).

    However, the effect of the new rules issued by the SEC in 
Section 506(c) of Regulation D that go into effect today create 
serious impediments for the same angels to invest in new issues 
by private companies if the means of communicating the 
opportunity is different, i.e. by general solicitation:

          (a) If accredited investors consider investing in a 
        private security which meet the test of a general 
        solicitation, they may be required to provide to the 
        issuer of, potentially, a third party private, highly 
        confidential information in order to buy something for 
        which they are paying 100% cash at the time of 
        purchase.

          This contains the absurd notion of an investor 
        disclosing his/her tax return to a relatively unknown 
        person in advance of a transaction that may or may not 
        close. Alternatively, if an intermediary is used, new 
        costs are added to a transaction. These could be 
        substantial, especially given the uncertain requirement 
        for periodic updates. And that does not obviate the 
        potential lost privacy or harmful subsequent 
        disclosure. Many angels polled on the subject state 
        that they will refuse to provide the kind of 
        information required. Thus the rules needlessly shrink 
        the pool of existing investors.

          (b) The onus on collecting that information is placed 
        on the issuer of the securities, with serious sanctions 
        on the issuer if it does not fully comply with these 
        requirements. This includes the potential prevention of 
        fundraising for a year, which would effectively destroy 
        the issuer.

    When considering a general solicitation, an issuer now has 
to weigh the potential benefits of attracting new investors 
against the costs, most importantly the improbability of 
reasonably satisfying itself and the SEC that every one of its 
investors is accredited. In my view, if investors are required 
to provide the personal information, they will not invest in a 
deal that is generally solicited. The purpose of relaxing the 
prohibition on general solicitation will have been defeated.

    Fortunately, the SEC included in its rule-making the 
provision for verification through a ``Principles-Based 
Approach'' which contextualizes the investors by their 
experience, previous knowledge of the person(s), the minimum 
scale of an investment, and other elements. Ambiguous now, I 
recommend that this section be more thoroughly defined. There 
is, in my view, an opportunity to define accredited investor by 
the traditional self-declared method, supplemented by 
observations of actual experience, such as previous investing 
in private transactions and by education in high risk 
investing. For both of these, organized angel groups such as 
the Arizona Technology Investor Forum, provide structured and 
thorough opportunities and programs. Illustrative of this are 
our multi-step screening process in which nine experienced 
investors vet all candidates to select the few that members are 
shown; our Sidecar Funds, which enable new investors to learn 
by following others, and by our education programs, such as the 
Valuation Workshop created by the Marion W. Kauffmann 
Foundation which we are bringing to the membership in October. 
The Angel Capital Association has provided input to the SEC on 
how organized angel groups such as the Arizona Technology 
Investor Forum work and suggest formalizing membership in an 
organized angel group as sufficient verification of accredited 
investor status.

    Until the rules clear further, the Arizona Technology 
Investor Forum will limit consideration to private 
solicitations only, thus ensuring that our members do not find 
themselves accidentially in situations where they do not wish 
to be.

    These issues are particularly important for Arizona. In our 
state, we have few venture capital resources, so angels, 
especially organized angel groups such as Arizona Technology 
Investor Forum and Desert Angels, are a critical part of the 
state's technology ecosystem. Together, we are about 170 
investors. Arizona needs, if anything, more angels investing 
here, so the rules should help attract new investors, not 
dissuade them from participating.

    Thank you for your time and willingness to listen to my 
testimony.
             Building an Ecosystem; Access to Human Capital


    Good afternoon Congressman Schweikert, Chairman Graves, and 
the esteemed members of the Small Business Committee. My name 
is Nima Jacob Nojoumi and I come from a long lineage of 
entrepreneurs. I am the Co-Founder and CEO of itsWorth.com. I 
recall when Shad Nojoumi initially approached me with the 
concept for our big data startup: He said, ``Nima, I want to 
valuate the world.'' That statement put a smile on my face. 
After doing thorough research I came to the realization that 
there is no reason why, with the technologies available today, 
we couldn't create the world's first valuation engine. The 
concept both simple and powerful: An engine that provides users 
with up to date, real world, financial values of virtually 
anything and everything. itsWorth.com is the ``Goggle'' of 
values. We're on a mission to provide an unbiased valuation of 
the world where people can contribute and feel empowered to 
make informed buying and selling decisions.

    My three best friends and I, who at one point were all 
colleagues at GoDaddy, decided to pool our life savings and 
take the chance--to live the American Dream. Today we have 8.4 
million products in our database and are six weeks from 
releasing our Software-as-a-Service platform. We are grateful 
for generous local experts like Tyler Rives from Silicon Valley 
Bank in Tempe and Evan Gilbert at Polsinelli Law Firm in 
Phoenix that have positioned us for success. I have traveled to 
California ten times this year to gain access to advisers and 
talent, and to build relationships with angel investment groups 
and with the venture capital community. It has been a long and 
hard journey. I am here to say entrepreneurs in Arizona should 
not have to leave the state to gain access to human capital. 
The time is right. Arizona has an emerging startup community. 
It needs to develop, mature, and grow up fast. That is the 
problem and the opportunity.

    Fortunately for us there are celebrated experts that have 
outlined structures, systems, processes and the social 
architecture to build an ecosystem. I cite Dr. Barry Stein's 
1974 MIT dissertation: ``Human resources are the wealth of 
nations; each nation has the responsibility as well as the need 
to develop and conserve them. But human resources are not the 
simple equivalent of physical persons, as mere existence does 
not automatically create human beings. Rather they develop 
through participation in social life.''

    Mr. Mark Tomizawa, a strategist and entrepreneur has 
invested the past 5 years developing social architecture to 
deploy in real time. And I quote him, ``As for the ecosystem, 
we need freedom, support and know-how as individuals at work, 
in school and in life to do the right thing. That means more 
humans supporting each other, live and in real time. That means 
passing knowledge, mindfully, from generation to generation. 
That is part of how a healthy society is defined.''

    I am here to say that as a state we are leaving money and 
opportunity on the table. We can and we must do better. We must 
coordinate better and connect the dots more strategically. The 
standalone organizations must join forces to create an 
ecosystem of opportunity, an ecosystem of human and financial 
capital, an ecosystem of local job creation. We can and must 
become know as a great state where great ideas come to life. To 
cross the chasm from communities to ecosystem we need to 
leverage existing resources, like thought leaders such as Dr. 
Stein & Mr. Tomizawa and bridges to work on an integrative 
level. Tyler Rives, Evan Gilbert and I are examples of bridges. 
We naturally connect people to resources and initiatives. I 
believe conversations like these are essential and will serve 
as a catalyst for change and growth. I am not asking the Small 
Business Committee to create solutions; I am asking that you 
leverage and organize existing capital, whether it is human or 
financial, to give entrepreneurs the opportunities they need to 
meet today's evolving market conditions and to remain loyal 
residents of the great state of Arizona.

    Thank you to the esteemed members of the U.S. House of 
Representatives Small Business Committee, Congressman 
Schweikert and Chairman Graves for the honor to speak today.
    Testimony of Thomas H. Curzon
    Before the House Committee on Small Business
    September 23, 2013
    SkySong Innovation Center
    Scottsdale, Arizona

    Thank you, Mr. Chairman and Members of the Committee.

    I am pleased to appear before the Committee today on behalf 
of Invest Southwest to tell you about The Invest Southwest 
Capital Conference (Invest Southwest) and its place and role in 
the Arizona entrepreneurial ecosystem. By way of background, I 
am a senior partner with Osborn Maledon, a 50-lawyer Phoenix 
law firm dedicated exclusively to the Arizona marketplace. Our 
corporate practice focuses on representing entrepreneurs and 
growth companies, anywhere from zero revenues to over $200 
million in annual revenues, and anywhere in their life cycles, 
and we have special expertise with start-ups. So we've assisted 
companies in angel financings, venture financings, buying and 
selling companies, IPOs and exit transactions and everything in 
between. And as part of our commitment to Arizona, we have been 
deeply involved in the Arizona entrepreneurial ecosystem, and I 
personally have been for about 33 years.

    To that end, our firm was one of the founding firms of 
Invest Southwest in 1992, which was then known as the Arizona 
Venture Capital Conference, and I have personally been involved 
in it since the mid-1990's, including serving as Chairman of 
the Conference for 2006-07, and currently I am on its Board of 
Directors. The Conference itself is a nonprofit corporation, 
and is the principal early stage investor conference in 
Arizona. It is organized and run by volunteer service providers 
and entrepreneurs who are keenly interested in having a 
flourishing entrepreneurial ecosystem.

    The Conference was originally founded in 1992 as a 
conference focused exclusively on attracting venture 
capitalists to Arizona to potentially invest in our start-ups. 
Historically, the typical structure of the Conference has 
included using a selection committee made up predominately by 
venture capital investors to select from a pool of applicant 
start-ups ten to 12 companies who then were groomed to present 
10 minute pitches to the investor audience at the Conference. 
In 2004, after the Dot Com Bust, and the resulting dramatic 
fall off in venture capital investing throughout the US, we 
restructured the Conference for 3 years to focus on presenting 
to angel investors rather than venture capitalists, and then 
when the venture capital industry began reviving, in 2006 and 
07 we restructured again into what is now known as Invest 
Southwest and began focusing on connecting the region's most 
promising startups and emerging growth companies with an 
audience of angel investors, venture investors, entrepreneurs 
and service professionals. In other words, we were focused on 
the stage of company development of most of the companies then 
prevalent in Arizona (being relatively early stages) and the 
investors who were interested in that company stage, which was 
a mix of angels and venture investors. To date, we believe 
presenting companies of Invest Southwest have received more 
than a quarter billion in investment dollars since the 
inception in 1992.

    The Great Recession has, of course, dramatically affected 
the entrepreneurial ecosystem in Arizona and, just as following 
the Dot Com Bust, early stage venture capital has become much 
more scarce. Happily, this time around, though, the angel 
investment community has been actively filling the gap, 
particularly under the leadership of two leading angel groups, 
Arizona Technology Investors Forum (ATIF) in Phoenix and Desert 
Angels in Tucson. In addition, in the most exciting development 
in a number of years in our space, Arizona is now the home of 
the largest (by aggregate grant award amount) business plan 
competition in the United States. This program, known as the 
Arizona Innovation Challenge, is put forward by the Arizona 
Commerce Authority (ACA), and takes the form of two 
competitions annually, each awarding up to $1.5 million in 
total grants (typically in the form of 6 grants of $250,000 
each). Prior to the current cohort, there have been more than 
800 applications to participate in the competitions. The 
judging process is accomplished by a pool of more than 50 
volunteer entrepreneurs, investors, executives and other 
experts from our ecosystem who are giving back to foster 
capital formation and employment growth in Arizona. The fifth 
cohort of the Challenge is now in process.

    In my opinion, the importance of the AIC competition cannot 
be underemphasized. Certainly the cash awards are significant 
to the winners. But it is equally significant that the 
competition is bringing public attention to hundreds of new 
companies and helping to connect them with resources available 
in the ecosystem, including programs such as ACA's Venture 
Ready, which are designed to help groom promising companies in 
the competition for future successes of all kinds.

    Because of this significant flow of companies, Invest 
Southwest and the ACA are partnering together for the upcoming 
Invest Southwest conference and will be launching an innovative 
new event format designed to help Arizona better address 
current market conditions and continue the growth of its 
ecosystem. We have noted the recent Kaufman Foundation report 
showing that in 1990, Phoenix did not show up in the top 20 
metropolitan areas for high tech start-up density and by 2010 
we have found our way to 13th largest on that list. We at 
Invest Southwest believe that through the continued efforts of 
the Conference, ACA, the Arizona Technology Council, the 
numerous incubators and accelerators we now have, as well as 
the contributions of ASU, UofA and Thunderbird, and others, 
Arizona will continue to make important gains as a place where 
businesses will continue to be created and thrive at an 
increasing pace.

    I will be pleased to answer questions and discuss the above 
matters with you, or relating more generally to start-up 
activity and financing in Arizona.

                                 
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