Looking for Funds in All the Right Places: The Definitive Guide to Austin Capital
By David Altounian and Stephen Straus
OVERVIEW
- For entrepreneurs: We’ve compiled a definitive list of sources of capital in Austin to help focus your fundraising efforts.
- For investors outside of Austin and LPs: Austin is a a vibrant startup market and this list of capital sources can help you identify firms to co-invest with and funds to invest in.
We’ve compiled a definitive list of sources of startup capital in Austin. To ensure its accuracy, we engaged with each funding source directly and filled in any gaps with publicly available information to ensure that we represented each as accurately as possible.
Austin-Based Venture Capital Firms
There are a eleven venture capital firms based in Austin that are actively investing today, six of which are first funds. Collectively they have $850M in capital in their most recent funds:
Both Silverton Partners and LiveOak Venture Partners have filed regulatory documents associated with new fundraising efforts in 2017 so we should all look forward to announcements from them on successfully raising new funds.
Venture Capital Firms with Austin-based Investment Professionals
These are also venture capital firms that are not based in Austin but have an investing partner that lives here:
Pledge Funds
Some investment funds in Austin are structured as ‘pledge funds’ in which a group of investors associated with the firm have the opportunity to chose to invest in the investments on a deal by deal basis:
Family Offices
Austin has several Family Offices that are active local investors:
Angel Groups
While we’ve intentionally not tried to identify individual angel investors due to the difficulty of tracking their activity, Austin is home to multiple angel groups:
Private Equity Firms
For more established companies looking to raise money for growth strategies and acquisitions, there are a number of private equity firms that are based in Austin:
Venture Debt Firms
For companies that have working capital needs or are generating profitable growth and looking for venture debt, there are a number of firms that provide debt to entrepreneurial ventures:
Miscellaneous
There are also some investor groups that do not fit easily into any of the above categories:
Actively Fundraising for First Fund
A number of new venture capital firms based in Austin are in the process of raising their first fund:
It typically takes 18 to 24 months to raise a venture capital fund so it could be a while before we can help these new firms celebrate their success in raising their first funds.
VC Firms Actively investing in Austin Companies
Finally, there are a group of venture capital firms that are not based in Austin that are active investors here. This list is venture funds that have invested in two or more Austin-based companies over the past two years. A strategy for meeting these investors in Austin is to figure out the board schedule of their portfolio companies, as they they will likely travel here for those meeting.
Click here to download a PDF with all of the tables above.
There are also investment firms that are not making new investments out of their existing fund but that, according to Crunchbase, have made new investments within the past year and which tell us that they have plans to raise a new fund. Corsa Ventures fits this criteria.
One of the noteworthy findings of our survey work is that there are also a number of firms in Austin with updated websites and fund managers that are actively engaged in the entrepreneurial community but that haven’t made a new investment in some time, are not able to make new investments because their current fund is fully deployed and haven’t raised a new fund. If you’re talking to a funding source not listed in this article, it’s important to ask them whether they are writing checks for new investments. And, an important nuance is that some may still be writing checks, but they might only be for follow-on investments in companies they are already investors in.
Don’t see a firm in this article that should be? Click here if you think we missed any capital sources or some of the data is incorrect. Please consider this article an ongoing reference for capital sources in Austin as we intend to keep it updated as we learn new relevant information.
The authors encourage quoting from this article or using the data in articles and presentations but request that the title of this article and the names of the authors be cited for attribution.
A HISTORICAL PERSPECTIVE
For a historical perspective on the capital sources in Austin today, the story really starts with Austin Ventures. According to Fortune magazine, “For decades, Austin Ventures was more than just the largest and most powerful venture capital firm in Texas. It was one of the largest and most powerful venture capital firms in the world.” When Austin Ventures got its start in 1979, the venture capital industry was nascent nationally and almost non-existent in Texas. Sevin Rosen in Dallas launched the next year and throughout the 1980s and 1990s the two firms vied for their place in the Texas market.
In the run up to the Dot Com bubble in the mid-to-late 1990s, several handfuls of small venture capital funds were raised throughout the state and it looked as if Texas, and Austin in particular, was on the path to a vibrant and robust venture capital market. But the timing of the launch of these new funds almost assured their failure regardless of their investing acumen. Valuations in startups increased dramatically during the Dot Com boom and then both valuations and the availability of investment capital nationally collapsed in 2001 with the Dot Com bust and 9/11. Innumerable startups went out of business and most of the firms in Texas were unable to raise additional funds because they couldn’t show enough of a track record of success. All of the venture capital firms in Austin that launched in the 1990s eventually closed.
The angel investment scene in Austin was quite limited in the 1980s and most of the 1990s but it picked up in the late 1990s. The angels that were investing in Austin during this time period also got caught in the Dot Com boom and bust cycle. With the sting of losses so fresh, much of the angel activity dried up in the early 2000s, but it restarted with the launch of Central Texas Angel Network in 2006 and Capital Factory opening its doors in 2009.
Austin Ventures remained the dominant firm in Austin — and Texas — from the launch of its predecessor fund, Rust Ventures, in 1979 through 2015. Looking more closely at the pacing of the funds Austin Ventures raised in the table below, it also got caught up in the Dot Com frenzy, raising new, much larger funds almost every year from 1997–2001.
But by 2015, it had become clear that Austin Ventures was unable to raise its eleventh fund and Fortune signaled its demise with an article entitled The Death of Austin Ventures. A vacuum was created in the market and today that vacuum is now being filled by angels, firms based in Austin and investors from elsewhere coming to Austin. Interestingly, there are now seven funds in Austin that were started by veterans of Austin Ventures: Silverton Partners, Sante Health Ventures, LiveOak Partners, Next Coast Ventures, Blue Sage Capital, Tritium Partners, and Escalate Capital.
IS THERE ROOM FOR MORE LOCAL CAPITAL IN AUSTIN?
Much has been written about Austin being a top high-tech hub both in the press, with the city ranking among the top of many lists including CNBC’s “Metro Top 20: Best Places to Start a Business”, US News and World Report’s ‘Best Cities to Live,” NerdWallet’s “Best Cities for Job Seekers”, and within academia and research circles such as the Kauffman Foundation’s ”Index of Startup Activities”, which ranked Austin as the top metro for startup activity in 2015 and 2016 and the second spot in their ‘Top Metros for Startup Growth” survey.
While it’s clear that Austin is seen as a great place to start a new company, there have been a number of well-covered debates about the access to capital needed to sustain and grow startups here. Many of the articles and reports that highlight Austin’s startup ecosystem raise the question of how much local investment capital is available and how much is an appropriate amount. The Atlantic Council’s report titled ‘Keeping America’s Innovative Edge’ outlined the challenges for what they termed ‘inland tech hubs’ in gaining access to capital compared to the coastal tech hub areas.
The debate has been going on for some time now about the threat and opportunities for Austin entrepreneurs based on the size of our local startup capital supply. As Austin continues to attract national attention for our startup culture, this debate is also beginning to get national visibility and has become even more prominent recently with the news that Austin saw a 55% drop in venture investment in the first quarter of 2017.
In 2015, a research study was released looking at the effect of funding networks on the amount of venture capital invested in local metro areas across the United States. This study compared the funding networks of nine metro areas in 2014 and examined the effect of the size of the networks on the amount of venture capital in those markets. What the research showed was that the size of a network had an exponential effect on the amount of venture capital in those markets rather than a linear effect. This exponential effect is known as ‘Metcalfe’s Law’, named after a prominent Austin resident, which says that the value of a network is proportional to the square of the number of nodes in the network. Austin had one of the smaller networks of the nine metros examined and had a proportional share of venture funding as predicted by Metcalfe’s Law.
Access to capital is important for scaling companies and competing in active markets. Local capital provides the initial funding and local engagement in ways that attract investors from other parts of the state and country. Many investments in startups start with local venture firms in the early stages and then attract non-local venture firms for later stage and larger deal size opportunities.
There is a significant difference in the amount of venture funding within and among the regions of the country. Population, local funding sources, startup density are some factors that may contribute to the amount of funding in a region. Entrepreneurs with early stage companies typically look for local funding before going out of region to pursue other funding sources. Non-local funding sources are more common in later stage investing and frequently look for local funding participation before investing in an out-of-market firm. Local funding networks have a direct impact on the amount of total funding that goes into a region.
While the table from the Q1’2017 PwC MoneyTree Regional Report above covers Texas, Austin accounted for approximately 63%, or approximately $830M, of the venture capital invested in the Lone Star State.
OUR VIEWS
The authors believe that Austin is clearly the top of the second tier of markets for startups activity in the country. There is a vibrant entrepreneurial ecosystem that has all the ingredients to continue to grow and produce extremely successful companies over the long term.
With that said, we believe that the entrepreneurial ecosystem in Austin could greatly benefit from increased amounts of locally based capital sources, both in terms of the number of firms and the size of their funds. There are more than enough high quality startups based here that have to raise their early stage money outside of the region that could be funded here if there were more firms on the ground.
We would also welcome seeing more high risk, high reward investing by the firms in Austin. There are many investors in Silicon Valley that are looking to invest not just in great companies but those that are thinking really big and looking to create and define new categories.
Austin would also benefit from substantial increases in diversity and inclusion among the ranks of investment professionals, and especially senior partners, of the firms here. We note that if one were to count up the total number of Austin-based fund managers who are women, minorities, or identify as LGBTQ you could count them on less than two hands. Diversity and inclusion matter for a number of reasons, beyond the fact that it is better for business and increases investment returns. Our city, even more so than the country as a whole, struggles with racial and economic segregation and disparity. A focus on improving the diversity and inclusion among the ranks of investment professionals, as well as the companies they fund, is certainly an area of opportunity for Austin-based funds.
What does it take to achieve growth in available capital in Austin? There are many contributors to local funding source growth; the number of startups with ideas worth funding, successful exits (either through IPOs or M&A events), locally based, growing public companies, the availability of capital for other type of investments, and the availability of experienced management. Those help build local capital availability. As the local capital base grows the opportunity to attract non-local funding sources increases. These connections are likely best when firms are networked with other sources of capital vertically (angel groups, venture debt, private equity and investment bank relationships) and horizontally (in-market and out-of-market venture capital firms). Austin’s entrepreneurial ecosystem is benefiting from a strong virtuous cycle and there are great opportunities for startup investing.
[Note, co-author Stephen Straus has been working with others in Austin and around the country to help encourage LPs to consider investing in Austin-based venture capital firms and is open to connecting with LPs interested in investing in funds here. He has also been working on launching a startup diversity and inclusion pledge and welcomes help from anyone interested.]
SUMMARY
When we started this project a few months ago it was clear that, while there has been many articles and some research on Austin’s entrepreneurial landscape, there wasn’t a definitive listing of active capital funding sources available. It is our hope that the lists we’ve compiled will serve as a guide to those in the startup community, including entrepreneurs looking for funding, investors looking for opportunities to invest, and non-local investors including individual investors, venture capital firms and LPs.
It’s also clear from our work that there is some confusion in the entrepreneurial community about the different forms of startup funding available. We hope that the work in this effort to segregate funding sources by their type and structure will help in clarifying the landscape for entrepreneurs.
This time in Austin presents a unique opportunity for investors. With the exit of Austin Ventures as the top venture firm in Austin, new venture capital firms have stepped up to play a significant role in the Austin entrepreneurial ecosystem while a number of new firms are in active fundraising mode. These new firms— and the new funds that the existing firms raise — all represent opportunities for LPs to participate in creating new pools of capital and getting access to quality startup opportunities in one of the most vibrant and least competitive markets in the country.
Finally, there is a qualitative discussion needed about the types of capital needed — and the diversity of the investing partners at the funds in Austin — to support startup development growth in addition to the ongoing debate about the amount of local capital needed. While there is a tacit understanding that late stage local funding sources are currently limited, it should be obvious to non-local investors and venture firms that this provides real opportunities for returns. The amount of startup activity in Austin creates value and opportunity for both local and non-local investors.
We believe that there has never been a more exciting time in Austin for startup activity and investing and are hopeful our work on this project will contribute, in a small way, to our great city’s continued success.
ABOUT THE AUTHORS
David Altounian is an Assistant Professor of Entrepreneurship in the Bill Munday School of Business at St. Edward’s University. He is the founder and former Co-Chairman and CEO of Motion Computing. Dr. Altounian has over 30 years of experience in the technology sector with roles at Dell, Motorola, Compaq and Ashton-Tate.
Dr. Altounian earned his Ph.D. at Oklahoma State University and his MBA at Kellogg School of Management at Northwestern University. He is a partner at Capital Factory and a board member of the Austin Technology Council.
Stephen Straus is a serial entrepreneur and former venture capitalist who is currently launching an AI consulting firm called Kung Fu. In his career, Stephen has started, operated, and successfully sold two companies and also spent nine years at Austin Ventures, where he was a General Partner.
Stephen is a graduate of Colgate University and received his MBA from Harvard Business School. Upon graduation with his MBA, Stephen was a Kauffman Fellow, a national Fellowship awarded to a select group of venture capitalists each year. He is a Partner and Mentor at Capital Factory, serves on the Engineering Advisory Board of the Cockrell College of Engineering at the University of Texas and is a former member of the Board of Directors of Sustainable Food Center and Austin Film Society.
