Funding drop worries entrepreneurs
The slowdown is especially hitting companies that have reached the expansion stage.
When veteran entrepreneur Brett Hurt set out to raise millions in venture capital for his startup, data.world, he knew he would need to look outside Austin to get the deal done.
Hurt ended up closing on $19 million this month, bringing the total his data software company has raised since last sum- mer to $32.7 million. Of that, just $4 million came from Austin sources, including LiveOak Venture Partners and individuals including Whole Foods co-founder and CEO John Mackey.
“Our team is led by established entrepreneurs with strong track records, hailing from storied companies like Bazaarvoice, HomeAway, Indeed and Trilogy,” Hurt said. “That we couldn’t raise more money in Austin has left me with no doubt that there is a real funding gap in Austin, especially for super ambitious businesses like data.world.”
The flow of venture capital to Austin startups took a dive at the end of 2016. The fourth quarter was especially weak, with $111 million going to 26 deals, according to a survey by PricewaterhouseCoopers and CB Insights. That’s a 29 percent drop in dollars and a 10 percent drop in deals from the same quarter a year ago. Investment fell nationally in the fourth quarter as well — down 19 percent from a year ago to $11.7 billion in 982 deals.
Venture investment is a closely watched measure of Austin’s startup community because the money allows companies to hire more workers, invest in new equipment and accelerate product development and marketing. New companies create jobs — and, if they flourish, wealth.
Some area entrepreneurs say they worry that a lack of expansionstage capital could slow the growth of promising companies that need larger rounds of money to become breakout players.
It’s been two years since longtime VC powerhouse Austin Ventures, which fueled the region’s software startup industry in the 1990s and 2000s, pulled back from early stage funding. Several active, wellrespected firms are helping fill the gap — including ATX Seed Ventures, Floodgate, LiveOak Venture Partners, Silverton Partners and S3 Ventures.
In addition, Austin’s angel investment scene is thriving with wealthy individuals who invest their own money, as well as organized groups such as the Central Texas Angel Network and Capital Factory, which pump millions into fledgling companies.
But while those firms are putting money into Austin’s new crop of upandcomers, they typically focus on early stage deals, meaning an investment in the $2 million to $5 million range that can be used to hire a team or develop a product.
That’s great news for startup founders just getting their companies off the ground.
But companies in the expansion stage — launching products, signing customers, generating revenue — are feeling the pinch. Expansion rounds are typically in the $10 million to $15 million range.
Last year, 20 expansion stage deals closed in Austin raising a combined $255.5 million, compared with 34 deals the year before, which raised $368.8 million, according to the PricewaterhouseCoopers survey. That’s a 41 percent drop in deals and a 31 percent decline in dollars.
Besides the departure of Austin Ventures, there are a number of possible reasons for the slowdown, including a hive of activity in Silicon Valley that’s keeping investors busy there with no need to travel to find deals; and a limited number of expansionready startups, which limits the probability of VCs finding enough worthwhile opportunities to justify establishing a presence here.
“If I live in Silicon Valley, I can have five board meetings in the time it would take me to get on a plane, fly to Austin, go to a meeting and fly back,” said Erik Huddleston, CEO of TrendKite, which makes analytics soft ware that lets clients measure the impact of their print, broadcast and online media coverage. “They need enough deal flow to take the plunge in Austin, and we’ve got to get enough companies that attract them. Austin is on everybody’s radar, and that’s fantastic. But the challenge is that it’s just on the radar.”
TrendKite received seed funding from Silverton Partners, which provided the company’s management team with mentorship and guidance as it got off the ground, Huddleston said.
Silverton Partners was the lead investor in TrendKite’s seed round. In November, the company raised $16 million from investors including Adams Street Partners of Chicago, Battery Ventures of Boston and NoroMoseley Partners of Atlanta.
“The second I got to TrendKite I started cultivating relationships outside of Austin because I knew we would need to have outside money for those later rounds,” Huddleston said. “If we didn’t do that, we would end up one of those stunted trees that has to exit early (by being acquired), and not realize the full potential.”
Alan Knitowski, CEO of fastgrowing mobile software firm Phunware, says one reason Austin has struggled to attract Silicon Valley investors’ expansion dollars is that startups here don’t dream big enough. Too often, he says, the instinct is to be acquired by a bigger player rather than stay in the game and take big risks that are the norm in Silicon Valley.
Phunware, which makes locationbased mobile apps for brands like Warner Brothers, NBC Sports and NASCAR, has raised about $100 million from investors. Knitowski estimates less than 15 percent of that came from Austin backers, including the Central Texas Angel Network.
“In Silicon Valley they say ‘We’re going to create what didn’t exist, we’re going to dominate the global market and become a $100 billion company,’ ” Knitowski said. “In Austin, the focus is more on conserving cash and reaching profitability as soon as possible. Then investors push you to play it safe and sell. That’s not how you become a multibilliondollar company.”
But not everyone sees it that way. Venu Shamapant of LiveOak Venture Partners, which invested in four early stage tech companies in Austin last year, said that while it may be more challenging in Austin than in other regions, quality deals find funding.
“We’re quite enthusiastic about the level of activity we’re seeing, with a lot of companies making meaningful movements,” Shamapant said. “If you have a good company in Austin, you can raise money. Is it harder than in the Bay Area? Of course it is. It’s never been different than that, anyway.”
Venture capital firms raise money from pension funds and other big institutions and invest it in promising young companies. The goal is to get a healthy cut of the profits as those companies are sold or go public.
Investment activity in Central Texas peaked during the height of the dotcom boom in 2000. That year, 178 companies raised a whopping $2 billion. During that time, more than a dozen local and outofstate venture capital firms had offices in Austin. But most closed shop in the aftermath of the tech bust, leaving only Austin Ventures and a handful of small players.
The market slowly regained strength in the years following the dotcom crash, but it took another hit during the financial crisis in 2008.
Over the past several years, activity has steadily increased, with investors funding deals in areas where Austin has long been a player — software, chip design and medical devices — and more recently, social media, mobile web, cloud computing and data analytics.
Two years ago, in a dramatic sea change for Austin’s venture capital sector, Austin Ventures abandoned plans to raise a new fund for startup investing.
The firm, which invested $2 billion in 280 Texasbased companies, was a dominant source of money for Central Texas startups, especially those in the expansion stage. The firm backed some of Austin’s biggest successes, including Tivoli Systems, Silicon Laboratories and HomeAway.
“For Austin entrepreneurs, it wasn’t good news,” said Kirk Walden, an adjunct business professor at Texas State University. “They were a source of capital when you needed a big chunk of money. They were there, and they played.”
But some entrepreneurs and venture capitalists say the end of AV has had some benefits, opening the doors to outside investors who stayed away because of a belief that AV already had a lock on the best deals.
“There’s no longer one place where you can get that Series B or Series C round anymore, but you can also argue that just having one firm isn’t the most helpful, either,” said Jason Cohen, a repeat entrepreneur who founded WP Engine, the leading managed WordPress hosting company, and who has invested in two dozen startups. “Now a lot of former AV investors have their own funds, and they’re putting money to work. And new funds are being started.”
Venture firms that trace their roots back to AV include LiveOak Venture Partners, founded by former AV investors Shamapant, Krishna Srinivasan and Ben Scott; and AVX Partners, started by former Austin Ventures general partner Chris Pacitti. In addition, former Austin Ventures general partner Tom Ball has founded Next Coast Ventures, which is raising its first fund.
And Austin is catching attention of some Silicon Valley firms, including Fathom Capital, a new fund launched by John Komkov, a former Austin Ventures associate who was most recently an enterprise investor at Lightspeed Venture Partners, based in Menlo Park.
Komkov, who is focusing on enterprise and infrastructure information technology startups, plans to target Austin.
“There are really toptier founders in Austin and really high levels of talent there,” Komkov said. “Another thing that works in Austin’s benefit is it’s much easier to attract and retain talent than it is in Silicon Valley. I see lots of opportunities there, which is why it’s part of my investment strategy.”
Hurt of data.world says he is encouraged by the new activity, which he said is good for Austin startups of all stages.
“The good news is that we have more VCs in Austin than ever before,” Hurt said. “It’s a more diverse mix of funds in terms of theses and focus, and all are much smaller than Austin Ventures was in its heyday. I predict they will all become bigger in order to fill the gap.”
Co-founder and CEO Alan Knitowski (right) says one reason Austin has struggled to attract Silicon Valley investors’ expansion dollars is that for startups here, too often the instinct is to be acquired by a bigger player rather than stay in the game.
LIVEOAK VENTURE PARTNERS: (From left) General partners Krishna Srinivasan, Venu Shamapant and Ben Scott. “If you have a good company in Austin, you can raise money,” Shamapant says. “Is it harder than in the Bay Area? Of course it is. It’s never been different than that, anyway.”
DATA.WORLD: (From left) CPO Jon Loyens, CEO Brett Hurt and COO Matt Laessig. While Hurt has “no doubt that there is a real funding gap in Austin,” he also is encouraged by new venture capital activity, which is good for area startups.
TRENDKITE: CEO Erik Huddleston says, “Austin is on everybody’s (venture capital) radar, and that’s fantastic. But the challenge is that it’s just on the radar.”