Entrepreneurship in Austin is reinvigorated after a funding slowdown the past couple of years, members of the city’s startup community said as South by Southwest Conferences & Festivals’ Interactive portion ended March 16.
In 2014, Austin startups hauled in more than $1 billion in venture capital investment, according to data from local economics firm AngelouEconomics. Mayor Steve Adler has touted the city’s top state ranking in launching startups and raising venture capital. Austin venture capital investment made up 45.57 percent of the state’s overall capital investment over the past decade, according to AngelouEconomics data.
But Austin has been in a two-year decline, according to the data. Venture capital fell 23.62 percent, from $1.09 billion in 2014 to $834 million in 2016. Venture capital is the funding mechanism that supports the growth of startups, especially those in the tech industry.
Venture capitalist and entrepreneur Chris Shonk said he was “in complete follow-up mode” March 16 at the conclusion of the SXSW Interactive.
“Pretty much everyone has a partnership they are trying to ink, a potential investment, an acquisition conversation or are hiring a key executive,” said Shonk, general partner in ATX Seed Ventures. “Those people are all going to have their heads down the next few weeks just taking that potential energy and turning it into kinetic energy.”
Austin startups raised$7.5 billion from 2006-16.
Over that same time span, $16.46 billion was raised in Texas as a whole.[/caption]
Road to recovery
The technology startup scene and the venture capital investment system that supports it are among the city’s economic pillars, said Angelos Angelou, principal executive officer and chief strategist at AngelouEconomics.
“From the construction worker to the restaurants and entertainment to the hotel industry, I don’t think there is any part of the economy that is not really being touched by these [venture capital] investments,” Angelou said.
Austin Ventures had been the largest provider of capital funds in the city until a few years ago when the firm stopped making new investments. Angelou called the ongoing dissolution of Austin Ventures a “shame” and said the firm’s influence helped shape the city into a major technology hub.
Several new venture funds have emerged locally that are on the smaller side—$25 million to $100 million—many of which are Austin Ventures spinoffs, said David Altounian, a long-time entrepreneur who now teaches entrepreneurship classes at St. Edward’s University. As the new firms build their funds and develop partnerships with other firms around the country, Austin will remain in a bit of a transition phase, he said.
“I’m actually very positive for the future,” Altounian said. “I just think we’re in this bit of a trough right now leftover from Austin Ventures.”
Definition and process
Venture capital is someone else's, be it a corporate entity or one’s family member, investment in an entrepreneur's business. The money can come from many sources—especially during the early stages of fundraising, Angelou said, including an entrepreneur's own credit cards.
Among the initial steps toward making a project viable is securing the company’s first large pot of money from an angel investor, or someone who is using their own money to fund a venture. Joshua Baer, founder of Austin’s Capital Factory, which coaches entrepreneurs through the early stages of their projects, said angel investors usually attach themselves to a company for personal reasons because they are interested in seeing the project succeed.
Once an angel investment is secured, a business then begins preparing for the series funding stage, when it will seek even larger pots of money from people—typically venture capitalists—who invest in startups professionally.
Although Austin is the venture capital hub in Texas, the city’s firms are usually not large enough to provide funding beyond the early stages. To raise capital for the growth stages of their ventures, entrepreneurs are likely to travel to secure deals with larger firms.
Although most of the companies that join the Capital Factory raise some funding, Baer said, it is rarer to make it to the end of the funding cycle.
“The way this industry works, only a small number get venture capitalist funding, and even fewer make it all the way to the exit,” he said. “That's the nature of startups! You have to believe you're the exception, or you might as well go get a job somewhere.”
[g-slider gid="231149" width="100%" height="55%" autoplay="0"]
Bootstrap culture
Despite the lack of growth-stage funding, the city’s network of angel investors is one of the country's strongest, Shonk said. He said local entrepreneurs’ bootstrap resourcefulness and ingenuity is what draws outside capital to the area. Shonk met with several venture capitalists during SXSW.
“The coastal, larger firms know things are happening here," he said. "We can get things going here with a lot less money. … Everyone sees Austin as the shining city on the hill when it comes to early-stage funding.”
Former Austin Ventures capitalist Stephen Straus said local companies raising capital today, such as Data.world and web hosting service WP Engine, could be tomorrow’s Dell Technologies and HomeAway Inc., which today employ more than 6,000 and more than 1,000 local employees respectively.
The venture capital ecosystem not only supports technology-related entrepreneurship but also non-tech, venture capital-backed companies, such as Alamo Drafthouse Cinema and Whole Foods Market.
“They’re big deals around the country—in some cases around the world,” Straus said. “It’s definitely not just tech. It’s entrepreneurship; it’s something Austin is really good at.”
