Think of Austin as an immature forest with thousands of saplings growing, a few big live oaks towering above them and not nearly enough water sources to make it the next Amazon.
That’s the reality facing Austin today. It’s gushed over in the media for its relatively low cost of living, thriving tech scene and free-living culture of the weird. Its economy is booming, incubators and accelerators abound and the city has a higher density of startups than Silicon Valley, Boston or Chicago.
But when comes to funding, Austin has some of the tiniest startup funding deals around. That’s according to a new study from the Munday School of Business at St. Edward’s University that compares Austin to other startup boomtowns and provides the most detailed look yet at the city’s venture capital and startup ecosystems.
The study’s findings may taste a bit sour, if not all too familiar. For years, tech and startup leaders, angel investors, venture capitalists and politicians have noted that Austin generates loads of seed money to fuel young businesses but lacks the Series A, Series B and late stage funding sources to really drive a company’s growth to new levels. Some blame the lack of high-quality, experienced CEOs. Others point to a dearth of big time venture capital firms.
The new study, released by the Austin Technology Council and Austin Chamber of Commerce and led by David Altounian, an assistant professor of entrepreneurship at St. Edwards University, blames that lack of funding on the city’s diminutive funding network.
Central Texas has only 144 funding sources. And, while that may sound like a lot, it’s comparatively tiny compared to Silicon Valley’s 785, New York’s 739, New England’s 475 and the Midwest’s 371. While startups in nine other metro areas enjoyed an average deal size of $10 million to $11 million, Austin’s mean is $5.4 million.
“While we have a healthy and growing capital investment network in Austin, it is not as over-developed as other metros,” Altounian said. “This, coupled with the fact that our startups are currently funded at lower levels than competition in larger markets, provides a tremendous opportunity for investors to get in early and establish a presence in Austin.”
The study provides some grim realities for Austin startups. In essence, it could be tough to get local funding that could help your company become the next Indeed, HomeAway or RetailMeNot — or even the next WP Engine, Spredfast or Bigcommerce. Austin is great at giving startups their start, but there are a lot of better places to be if you need powerful capital to outpace competitors.
But tech, startup and civic leaders see it differently. They see the study as proof that Austin is sitting on the brink of huge opportunities and that it needs to rally to change state laws that benefit new businesses and hit the road to recruit more big time capital. Sure, you could call it spin. But by calling the study evidence, the Austin Technology Council, Chamber of Commerce and others are sending signals to lawmakers who slashed funding for incentives to new businesses in recent years and signaling (even more) to big city venture capital firms that Austin has a ton of potential for investors.
Community Discussions, Legislative Lobbying and National Recruiting Planned
It’s easy to let studies quickly fade to the background. But tech and startup leaders say that won’t be the case with this one. In response to the new data, the Austin Technology Council and Austin Chamber of Commerce are starting to pool resources to attract later stage investment sources to Austin through a series of community discussions and a revamped recruiting program.
“I’m hoping this data, frankly, kind of elevates the dialog withinin the community,” Julie Huls, president and CEO of the Austin Technology Council, said. “We’ve had this black and white arguement about whether we have enough capital available. This drills down and allows us to see opportunities for strategic moves.”
Meanwhile, the Capital Factory, perhaps Austin’s most celebrated startup accelerator and center of gravity, said it will expand its offices in the Omni building to accommodate qualifying venture capital firms and other late-stage investors who come to Austin.
Austin Mayor Steve Adler, who has close ties to startup leaders, is also pushing the conversation, saying Austin has never been more hospitable for new venture capital activity and that attracting that capital is critical for the city.
And political capital also plays a major role. In conservative Texas, lawmakers have cut back on many of the incentive programs that the state has used through the years to attract high tech companies. And they had more reasoning than pure small government rhetoric. The state gave about $220 million to universities for research and poured about $205 million into 145 private companies — 16 of which have declared bankruptcy, according to the Houston Chronicle.
But that happened while the program was largely under control of the Governor’s office.
And the state’s biggest economic incentive program shrank from $120 million to $90 million. And Gov. Greg Abbott eliminated the emerging technology fund, shifting money to research at universities.
While the legislative session is still nearly two years away, business leaders say those programs should be revisited, perhaps with more robust oversight.
Michele Skelding, senior vice president of of global technology and innovation at the Austin Chamber of Commerce, said she hopes that startup founders, venture capitalists and others in the Austin business sector will tell their stories to lawmakers as they head into the 2017 legislative session. Meanwhile, Skelding said that she will be collaborating with local leaders to help recruit more venture capital to Austin, a move that takes time and patience.
“It’s like dating, you have to first get to know people,” she said. “You have to see what’s in the market and meet with investors.” Then it’s all about bringing those investors to town to see the city’s best startups, its thriving incubators and fellow investors.
And the job is never complete.
“I don’t think anyone would say we have enough,” Skelding said. “I don’t think any market will ever say it has enough capital.”
Austin startups attracted a total capital investment of $620 million in 2014, according to the National Venture Capital Association. That’s compared to $4 billion in New England, $4 billion in New York, $1.2 billion in Seattle and $2.6 billion in Southern California.
Huls and Skelding say they’re aware that the study and forthcoming community dialog come at a time when many high-level investors in Silicon Valley and out East are warning of tough times to come for startups, the death of unicorn companies valued at $1B or more and other inflated valuations. But they say Austin is different — and somewhat insulated from a correction in the marketplace.
“I think that Austin is less at risk for a tech bubble, compared to Silicon Valley,” Huls said. “It’s not to say we wouldn’t suffer if there was a crash. But our valuations have always been way more reasonable than those in Silicon Valley. I think our companies have learned a lot over the past decades and people have been very smart and very conservative.”
Those overvaluations may, in fact, play to Austin’s hand, she said.