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Business startups face funding challenges in Nevada

When Gerald Meggett Jr. began searching for a new city to relocate his startup, Las Vegas seemed like the perfect fit.

The community’s education system presented a prime opportunity to show off the capabilities of his app, CircleIn, which connects students to peer tutoring opportunities. So in 2017, co-founder Meggett moved his company from Maryland to Las Vegas.

He soon realized one thing was missing: local funding from venture capitalists.

More than 80 percent of CircleIn’s funding had come from out of state. Meggett said Battle Born Venture, Nevada’s state venture capital program, invested $200,000 in the company in January, and UNLV’s Rebel Venture Fund finalized an investment this month.

“There definitely have been some challenges” getting capital from local investors, he said. “Right now, (Las Vegas) is not attractive for venture capital. … You have a community ranking dead last in education. That’s a very scary place to invest.”

Education Week magazine put Nevada in 51st place in its 2018 Quality Counts report, which is used as a national comparison for the quality of public education in each state and the District of Columbia.

Local experts said Nevada’s tax structure and business-friendly climate make it an appealing location to set up shop, but they said the startup scene lacks quality businesses. In turn, the investment money in Southern Nevada is funneled into larger startup scenes outside of the state, including Silicon Valley.

The money scene

The venture capitalist scene in Las Vegas has been growing in recent years, according to Nick Jones, an entrepreneur in residence at Las Vegas-based seed investment firm Varkain. He and others said it is unclear how many venture capitalists there are in Las Vegas.

“It’s a difficult number to track, especially in this town,” he said.

Some of that growth may have been from high-net-worth individuals moving into Nevada from states with high taxes, such as California. According to research co-authored by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, California lost about 138 high-income residents to other states after voters approved a tax increase in 2012 that raised the top state income tax more than 29 percent to 13.3 percent.

Zach Miles, associate vice president for economic development for UNLV, said there is venture money in Southern Nevada, “but trying to find the right groups to tap into for that money is different.”

Jones said his workplace invests most of its money in startups outside of Las Vegas, citing a lack of quality startups in the Las Vegas area: those that have a good minimum viable product, solve a problem in the market and show traction.

Lost opportunity

According to a 2017 report from the Kauffman Foundation, Las Vegas ranked No. 34 out of 40 metropolitan areas for growth entrepreneurship, a metric of how much startups grow.

Jones said Nevada’s lack of quality startup businesses and university structure are two reasons venture capital funding is leaving the state.

While Nevada is home to only a handful of colleges spread across the state, Silicon Valley has schools such as Stanford University, San Jose State University and the University of California, Berkeley, all within a 50-mile radius. That means investors can find clusters of educated, qualified entrepreneurs in one area.

Those clusters tend to attract the most money. U.S. venture capital-backed companies raised $23 billion in the second quarter of 2018, according to New York-based CB Insights, a financial research firm. The Southwest, which encompasses Nevada, Utah, Arizona, New Mexico and part of Northern California, received $386 million in funding, with about $25.2 million in Nevada. The San Francisco area alone received about $5.6 billion.

Sam Palazzolo, managing director of Las Vegas-based financial investment business Tip of the Spear Ventures LLC, said the Bay Area has more opportunities for investors and entrepreneurs alike.

“If I were in San Francisco, I could go to a pitch-fest every evening that was sponsored by a law firm,” he said. “We might hit two law firms in the same evening, and the pitches are from the smartest people on the planet.

People from Stanford, MIT, Yale, you name it.”

Leith Martin, director of UNLV’s Troesh Center for Entrepreneurship and Innovation, said that while education is a factor in developing local venture capital and startup scenes, it’s no different than any other workforce development opportunity.

“If there’s not the necessary skill set there, then there’s going to be a struggle in terms of the number of people or individuals qualified to do that,” Martin said. “There’s a lot of discussion on whether or not you can manufacture entrepreneurs. At UNLV, what we attempt to do is provide individuals the tools that help them start a company, whether it be knowledge in how financing works … (or) determining the commercial viability of an idea.”

Future of capital funding

Local funding isn’t impossible to find in the valley. Mark Brennan, founder and principal of private equity and venture capital consulting firm Brennan Capital Partners, focuses on working with local entrepreneurs. Twelve of the 15 he is working with today are based locally.

“Overall, Las Vegas is a great place to start a company,” he said. “But it’s also frustrating because while it has a host of the basic requirements to create a really robust early-stage ecosystem, it also lacks several elements,” such as qualified workers and an efficient education system.

Martin said he expects more investors will turn to Las Vegas as they start to recognize the potential in Las Vegas’ convention space and tax structure.

But the local venture capital scene — which Miles described as “disorganized,” with a lack of networks between local startups and investors — still has a ways to go before it sees major growth.

“The sooner it gets organized, the sooner we’ll have a robust venture capital scene,” Miles said. “It’s moving in the right direction.”

Contact Bailey Schulz at bschulz@reviewjournal.com or 702-383-0233. Follow @bailey_schulz on Twitter.

This story has been updated to clarify that Battle Born Venture, a venture capital program overseen by the Governor’s Office of Economic Development, invested $200,000 in CircleIn.

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