VCs remain optimistic about Austin despite overall tech slowdown
Client: Mercury Fund
Publication: Crain's Austin
While much of the nation is seeing declines in venture capital investment, the Austin market saw a big jump in the second quarter.
Austin-area companies raised $239.3 million for the three months ended June 30, 2016 – nearly double the $123.3 million raised in the second quarter of 2015, according to a recent Dow Jones VentureSource report. Nationally, venture capital investment was down nearly 20 percent for the same three-month period to $15.7 billion.
Despite the good quarter, Austin has not been immune to the slowdown in tech investment. Venture funding in the Texas capital declined about 10 percent to $390.1 million in the first half of the year, compared to the first six months of 2015.
Spredfast Inc.’s raise of $50.1 million during the second quarter marked the period’s largest local deal. The Austin-based social marketing software platform has raised $114 million overall and plans to use part of its recent infusion on the engineering side. Lumos Pharma Inc. also raised $34 million in April,and BigCommerce Holdings Inc., collected $30 million in May.
Marc Nathan, publisher of Texas-Squared Startup Newsletter, believes the current Austin venture landscape is more of a maturation than a slowdown. “People are finding more mature companies to put more money into,” he said. “VCs are collectively looking more at revenue-generating businesses.”
Most of the seven major funds in Texas are raising capital over the next six to 18 months, he said. “Until then they’re likely not going to be making a lot big bets. I expect we’ll continue to see more follow-on investments.”
Krishna Srinivasan, co-founder and general partner of Austin-based LiveOak Venture Partners, says his firm remains “extremely optimistic” about the level of entrepreneurial activity and the amount of financing that will continue to happen in the Austin market. “There’s been lots of meaningful and robust fund formation that has happened in the last three years locally,” Srinivasan points out. “And most of those funds invest locally. Follow-on rounds have been attracting money from all over the country.”
He is also encouraged by the number of companies and people moving to the Austin area.
“Both talent and company migration from other parts of the country are very strong,” he said. “We are repeatedly seeing some really good people moving here. As such, we continue to be very enthusiastic about where Austin – and Texas in general – is with respect to its level of activity.”
It’s no secret that Austin is increasingly being viewed by startups as a viable headquarters alternative to Silicon Valley or New York. Young entrepreneurs, in particular, are drawn to the city’s active lifestyle and relaxed, hip environment. Aziz Gilani, a partner at Mercury Fund, has been investing in the Austin market for years now despite being based out of Houston. He points out that Austin has long been known for its slew of enterprise software companies with what he describes as “clear paths to revenue sustainability.”
“There’s been a very long-standing history in Austin with lots of management talent around funding these enterprise technologies,” Gilani said. “With Austin being the mecca for young talent that it is, it’s in a prime position to continue to build companies like this. It’s just so human capital intensive.”
But it’s not just software that’s hot here. Matt McDonnell, a partner at Austin-based Notley Ventures, believes the Capital City “is really having its moment as a CPG (consumer packaged goods) hub” with companies like Juiceland opening locations in other cities.
“What’s nice about these CPG companies is that they have to have $3 million to $5 million in revenue before they are appropriate for investment,” McDonnell says. “There’s just a lot less speculation in the space.”
In general, he agrees with Nathan that “what everybody is hunting for are companies that have profit.” Looking ahead, McDonnell believes that with the addition of Dell Medical School, the biotech scene here is heating up. “There’s a lot of activity and groundwork being laid to make Austin a biotech hub as well.”
ATX Seed Ventures Principal Brad Bentz concedes that Austin’s strength has traditionally been in enterprise software. Online marketplaces appear to be doing well, too. “But I think Austin has really struggled doing consumer-focused tech, including apps and software,” he said. “We would like to see some bigger wins in that space.”
Overall, Bentz doesn’t sense a pullback from investors. But he does agree they are being more discriminating.
“A year to 18 months ago, companies could perhaps attract funding just based on the promise of a PowerPoint deck and some speculation,” he says. “But people got a little burned by doing that. So I think there’s been a flight to quality.”
Vast CEO and entrepreneur John Price is less bullish on the Austin venture scene as a whole. Vast – a big data technology company that services the automotive and real estate industries – raised $14 million in January from Capital One Growth Ventures, the investing arm of Capital One Financial Corp. The company, which moved to Austin from California in 2012, has raised a total of about $50 million. Early funding came California-based investors.
Vast’s latest round was a strategic one but if it wasn’t, Price said he would not likely have tried to raise the capital in Austin.
“We didn’t even attempt to raise the money here,” he said. “Any company of a sizable stage can’t raise money here in Austin – just the early stage ones. You either have to go to the West or East coasts, or go strategic.”
To Price, the “biggest broken part of Austin” is that it has been in a venture drought since Austin Ventures folded. “As an entrepreneur and CEO, I certainly see opportunity here for more venture, especially later stage,” he said.
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