Gaining Traction: Five startup industries to watch in 2017

Each year, Northwest Arkansas gets further along in the cultivation of a growing entrepreneur ecosystem, with the addition of one company, one angel fund, one accelerator program at a time.

Many of the emerging businesses are driven by technological innovations that fall within what AOL founder Steve Case has described in multiple media accounts as the “third wave” of the digital revolution, where every area of our lives relies on the internet. Case writes about it in his book, “The Third Wave,” where he describes the movement, which he says began in 2015, as a time in which entrepreneurs will “vastly transform major real world sectors like health, education, transportation, energy and food — and in the process change the way we live our daily lives.”

Here are five key industries identified by those familiar with the Northwest Arkansas startup scene as areas of projected growth and development for the region’s entrepreneurial landscape in 2017.

• E-Commerce
A few years ago, John James built a Fayetteville-based e-commerce company based on providing products to largely untapped markets, notably raising $83 million in funding in 2013. Acumen Brands paved the way for e-commerce companies like Menguin, an online tuxedo rental company previously based in Atlanta, to set up shop in the area and find success. James not only paved the way for Menguin, he was directly involved in bringing its founders to the region.

CEO Justin Delaney said James, now an investor and startup consultant, wrote Menguin its first investment check, and although relocation to Arkansas was not part of the deal, Delaney and the business’ other co-founder, Kurt Sutton, believed they could learn a lot about the business in close proximity to the surgeon-turned-entrepreneur. They took up office in James’ Hayseed Ventures space in downtown Fayetteville, and in 2015 Menguin showed a 2,000% rise in revenue, followed by another 400% in growth for 2016, Delaney said. It has six distribution centers around the country and about 20 full-time employees.

Menguin now has a newly minted partnership with Target as the retailer’s first digital partner for its bridal registries, allowing the company to reach Target’s 500,000 to 600,000 gift registry participants with ads and special offers, Delaney said. He likes to go against the grain.

“We try to go where people aren’t,” he said.

If it’s not something he learned from James, it’s a strategy the two have in common. Delaney said James was the first to figure out how to effectively use Facebook as a marketing tool, and because of that Menguin reaped the reward of an immense amount of business during a short period.

“By the time a person has a good idea and you find it out from someone else, that idea’s probably old. You have to figure out something early on to get an edge,” Delaney said.

Carol Reeves, associate vice provost for entrepreneurship in the university’s Office of Research and Economic Development and a faculty member in the Walton College, said “Menguin tapped into an industry that was ripe for disruption.” Initially, the founders planned to start a custom suit company. However, while the two were both earning MBAs from Kelley School of Business at Indiana University, Sutton had a bad experience renting a tux, prompting them to enlist the help of faculty to research the industry. Research showed more than 80% of customers renting tuxes or suits were dissatisfied with the experience.

“That’s higher than airlines, for example,” Delaney said.

Public companies in the industry showed gross margins of 80%. Delaney and Sutton saw an opportunity and decided to pivot to tuxedo rentals. They entered a business plan competition in 2014, winning $100,000 from an angel investment round of investors that included NBC’s “Shark Tank” star and the NBA’s Dallas Mavericks owner Mark Cuban. Noted entrepreneur Scott Dorsey, another initial investor, became Delaney’s mentor, he said.

Rick Webb, founder of Grit Studios in Rogers, also pointed to Junk Brands, a custom headband and apparel company in Bentonville, as a player to watch in the e-commerce realm. Webb said e-commerce companies can do well in Northwest Arkansas for several reasons.

“A big part of it is having people who were willing mentors and subject matter experts. John James is one of those mentors that we should be proud of here,” Webb said.

Grit Studios focuses on building the entrepreneurial ecosystem by helping small businesses get to the next level.

• Medical Technology
Webb, former senior vice president of global business processes at Wal-Mart Stores, said there is a group of healthcare technology companies in Northwest Arkansas quietly gearing up to make a global impact, and he is invested in some of these companies through NewRoad Capital Partners in Rogers. One example is Now Diagnostics in Springdale. Webb said, “It will change the world,” although he admits to possible bias tied to his personal investment. The company recently raised more than $20 million. Now Diagnostics develops fast, simple diagnostics tests and — after about four years in business — now has a few products on the market for clinical use and several in various stages of development.

Commercialization in the medical device industry takes time, as the company must meet rigorous and time-consuming legal requirements. In 2016, Now Diagnostics worked toward gaining its first at-home use approval, for its hCG early-stage pregnancy blood test. It successfully completed a clinical trial and submitted to the Food & Drug Administration for a CLIA waiver — which would indicate that the test was easily administered with a low risk of errors. The company hopes to gain home-use approval for the product — now being used in clinical settings in the U.S. and Europe — in 2017.

The company has three heart attack tests and three toxicology tests on the market in Europe. The development pipeline includes more cardiac tests and tests for sexually transmitted diseases, food intolerances and common infectious diseases, according to the company. There are seven patents and two patents pending on the technology inside its tests, through the World Intellectual Property Organization.

CEO Kevin Clark said the biggest challenge for the company has been the decisions that come with a technology that is widely applicable.

“This platform works on virtually any discernible biological marker, making it a challenge to decide which test to bring to the market first,” Clark said.

Now Diagnostics has about 50 employees, about two-thirds of which are located in the company’s U.S. headquarters in Springdale, and Webb said he hopes Arkansas can keep Now Diagnostics in the state long-term.

“I think it will be an incredible success for Arkansas in the next few years,” he said.

Ascendant Dx, which leases space from Now Diagnostics but has no connection to the company, is also a medical technology startup with the potential to make strides toward commercialization in 2017. Its signature product is an early-stage breast cancer test that looks for markers in teardrops. The test is still in the clinical trial phase, and the company earned several honors last year, including making the finals for the social impact category at SXSW Eco and the U.S. Small Business Administration’s InnovateHER.

Lineus Medical, founded by a former nurse in 2015 and based in Fayetteville, is another company to watch, Webb said. Its premier product in development, SafeBreak I.V., is used to prevent dislodging of IV catheters.

• Software Engineering
If you ask Reeves, a successful company often boils down to having “amazing tech, a great management team and a great market.” RevUnit in Bentonville has all three, she said.

Michael Paladino and Joe Saumweber were co-workers at Rockfish Interactive, now Rockfish Digital, when they met and decided to start the software product development studio RevUnit near the end of 2012.

“Everyone in town was focused on digital marketing,” Saumweber said. “We loved building digital products. Products are different. They endure for much longer than a marketing campaign, they build a relationship with the user. Done right, products are shaped more by those who use them than by those who create them. This was just a different way of thinking at the time, and it meant that we had to strike out on our own to create the mindset we envisioned.”

Now, there are other operations similar to RevUnit throughout the country, Saumweber said. But they are relatively small, and the larger companies are still more focused on campaigns. In particular, RevUnit focuses on products that help companies transform its workforce, he said.

“Employees of the Fortune 500 are some of the most underserved when it comes to beautiful, usable technology,” he said. “Our mission is to increase agility in large enterprises by building tools that improve communication, productivity, engagement and learning for the workforce.”

With about 40 employees, mostly in Northwest Arkansas, RevUnit has nearly doubled in size each year, and Saumweber said the team wants to further that growth by beefing up its client roster, which now includes Wal-Mart Stores, Virgin, AutoZone, Toll Brothers and Purina.

At the beginning of February, the company will move to a new Bentonville location at the former Farmers Exchange building at 409 S.W. A St., which is four times the size of its current, 2,300-square-foot office on Main Street. Webb has invested in RevUnit through New Roads, and praised Saumweber’s and Paladino’s “thoughtful” approach and “balanced business model.”

“They started with a strong relationship with Wal-Mart but were not dependent on that relationship. Some businesses put all their eggs in one basket, and if that client decides to change its plans and part ways, the company almost has to start over,” Webb said.

• High Technology
Several high-tech companies have been formed in the past few years out of academic research at the UA, and Ozark Integrated Circuits is one now picking up momentum, said Jeff Amerine, founding principal of Startup Junkie Consulting, which mentors and works with entrepreneurs at companies of all sizes.

Founded in 2011, Ozark IC designs “rugged” electronic circuits that can withstand harsh conditions and are used in a wide variety of industries, from consumer electronics to aerospace technology. Most computer chips are made of silicon and can only work at temperatures up to 125 degrees Celsius or 257 Fahrenheit, said Matt Francis, founder and president of the company. Ozark IC specializes in silicon-carbide circuits that can operate at temperatures as high as 500 degrees Celsius, almost 1,000 degrees Fahrenheit.

In 2017, Ozark IC plans to build on ongoing research grants and commercial contracts.

“We’re pretty steadily having three to five projects ongoing at any one time,” Francis said, adding that he hopes the company will get close to $1 million in revenue in 2017.

In terms of research contracts, 2016 was a big year for the company. It won its first Phase II research contract from NASA, totaling $755,000 over two years, as well as smaller Phase I contracts from NASA and the U.S. Air Force. The push last year was to expand its work in engine markets as well as its design and testing capabilities for circuits that could withstand the atmosphere of Venus.

Ozark IC also landed commercial contracts that are now in mass production. It created an electronics design for an original equipment manufacturer and recently shipped the first 100,000 units, said Jim Holmes, chief technology officer. He did not disclose the name of the manufacturer, but said Ozark IC used its experience in low power design to make its batteries last 10 times longer than the previous model.

In 2017, pending research and commercial contracts could help the company break into new markets, including clean geothermal energy, Francis said.

While Holmes said hiring at Ozark IC has been “cautious and incremental” — there are eight employees at the company — it doubled in size from 2014 to 2015 and is on track to grow between 20% and 50% this year. Francis said staffing and cash flow have been the biggest challenges in the past few years, but the company’s restrained approach to hiring has paid off.

“The best thing we’ve been able to do is get the right folks on board at the right times,” he said.

Reeves points to several other companies that sprung from the UA’s scientific research programs and that she says are poised for success, including the early-stage businesses Little Bird Systems, which deals with the Internet of Things, WattGlass, which makes glare-free glass coatings for solar panels and lighting fixtures, and Boston Mountain Biotech, which makes technology for the pharmaceutical industry. All are neighbors of Ozark IC in the Arkansas Research and Technology Park in Fayetteville.

Reeves’ entrepreneurship program has been the birthplace for all types of businesses and entrepreneurs, and Reeves regularly works with the university’s scientific researchers to connect them with business student partners in her class — “because you need both,” she said.

• Last-Mile Solutions
Although it did not originate in Northwest Arkansas, Chef Shuttle is an influential startup in the area and represents a major nationwide trend, last-mile solutions, which refers to a wide range of technologies and processes that connect goods and services to consumers in their homes or offices.

Chef Shuttle, founded in 2014 in Little Rock, will mark its 500,000th delivered restaurant order in the coming months, said Ryan Herget, president and CEO. It now operates in 40 cities and works with more than 450 food establishments, including 50 in Northwest Arkansas, a market it entered in 2015.

“We make life easier by delivering customers’ favorite foods from their favorite restaurants when they want and where they want, from the same menus and at the same prices as dine-in customers,” Herget said.

The company now has 250 total staff and contracted drivers across its three markets — it also has operations in Memphis — with 50 of those employees based out of its Northwest Arkansas headquarters in Rogers. Herget said fast growth has led to some challenges, especially in keeping software and the front-facing customer experience up to date. However, the company plans to open in at least six new metro areas soon and will launch a new software program and website in 2017.
Reeves stressed the importance of last-mile solutions, by calling the identification of the next big innovation “the million-dollar question.” Webb said the last mile is “the Holy Grail,” in the retail world and possibly other industries. The crux of the trend is convenience, a common thread that transcends industry in consumer expectations.

Webb believes last-mile innovations will continue to gain traction, especially as transportation solutions like the ride-sharing companies Uber and Lyft broaden their business model to delivery, partnering with retailers and other companies. Last mile is something that the public — and even Webb himself admits — demands now, he said.

“Customers want personalized attention,” he said. “We’re willing to tell companies more and more about who we are and what we want and how we live. And we expect them to cater their offerings to us.”