Should Early Stage Startups Move to Austin because of Capital?
In September 2017, I spent 2 weeks in Austin, Texas to understand what makes this vibrant startup ecosystem tick. My visit took place courtesy of the Young Transatlantic Innovative Leaders Initiative (YTILI), a State Department program implemented by the German Marshall Fund of the United States. My primary mission was to learn from the impressive entrepreneurial ecosystem in Austin and draw lessons for developing the entrepreneurship education program for Beetroot Academy. This 4-part story, however, explores the Austin ecosystem based on the 4Cs framework — culture, capital, customers, and competencies. It follows up on my posts discussing why early stage startups should — or should not — move to Silicon Valley.
Should Early Stage Startups Move to Austin because of Capital?
“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations. You have to pay attention to money, but it shouldn’t be about the money.”
Tim O’Reilly, Founder at O’Reilly Media and promoter of open source and Web 2.0
In terms of access to capital, Austin is not Silicon Valley or New York — but it is Austin. There are a handful of factors that make capital available — and go a long way — for early stage companies in particular. And this capital comes with the know-how and contacts that are crucial when your company is still learning to walk. However, at the time of this post going press, there are also limits to the quantity and quality of money one can raise in Austin. Let’s have a look at what early stage founders can expect in terms of oxygen.
For starters, it’s worth pointing out that Texas is an oil state. Oil money is usually not what an early stage startup needs, but it does matter in other ways. Namely, windfall revenue from oil means that the Texas taxman does not collect personal or corporate income taxes (on the state level). That’s helpful in a couple of ways.
On the one hand, your runway will last that much longer. Paying 0% in state income tax in Texas versus up to ~10% in California or ~6.5% in New York helps put out some of that monthly burn. Partly as a result of the relatively low tax burden, the overall cost level is an order of magnitude lower than in the coastal tech hubs. For the time being, you’ll spend 40–50% less on renting a home or office and 20–30% less on employee salaries, while not giving up that much in terms of the startup ecosystem. However, prices are rocketing. In a nutshell — even if you’re obsessed with setting up shop in San Francisco or New York, Austin could be a great place to figuring out your business before increasing the cost base. For now.
The other effect of 0% personal income tax is improved access to investor capital. The exodus of Silicon Valley techies to Austin has largely been fuelled by a quality of life that compares to California, but comes at half the cost of living. If you’ve just exited or realised stock options from a Silicon Valley success story, moving out of state is worthwhile. And when you move to Texas, the only destination to consider is Austin. Consequently, the city has now built up a respectable pool of angel investors that have not only the cash, but also the scars, wits, and friends to lift you off.
Other than angels, there are a handful of more organised early stage funders around. Capital Factory runs not only a tightly-knit co-working space, but also an incubator-accelerator type of organization with very founder-friendly terms. Similarly, Techstars Austin is a force to be reckoned with. It’s not simply a strong program in its own right, but also serves certain HQ functions for the entire Techstars network in 150+ countries and can thus provide access to top notch advisors from around the world. As a network that is built on the value of #givefirst, Techstars also embodies the community-driven spirit of Austin.
Last but not least, the brand spanking new Dell Medical School, the graduate medical school of The University of Texas at Austin, hosts the Texas Health Catalyst that provides not only funding, office space and mentorship, but also access to medical data. This is the holy grail for companies who want to save lives through machine learning. In fact, the entire Dell Medical School, free from legacy programs, is consciously designed to foster innovation and breed leaders among physicians.
While seed and angel stage companies are well served by the Austin ecosystem, the road for more mature companies can get bumpy. On the one hand, Austin VCs prefer working with predictable B2B companies and get a little scared when they hear the word “consumer”. On the other, the average deal is twice the size on the coasts, and the sheer amount of capital dwarfs what is available in Austin. Having said that, access to finance is getting better due to the influx of techies and the local scene maturing. So the answer to the ultimate question on Life, the Universe.. khm, to whether early stage startups should move to Austin is that they should — but consider their options for the long haul.
