Fund­ing drop wor­ries en­trepreneurs

The slow­down is es­pe­cially hit­ting com­pa­nies that have reached the ex­pan­sion stage.

Austin American-Statesman Sunday - - FRONT PAGE - By Lori Hawkins

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.”

PHUN­WARE

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

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.”

JES­SALYN TAMEZ / AMER­I­CAN-STATES­MAN

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.

CON­TRIB­UTED

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.”

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