Is Austin Headed for a Seed Round Draught?
Austin has built a name for itself within the startup scene, ranking among the top cities in the U.S. for funding amounts. For the Central and Southern regions of the United States, the city is the crowned jewel of startup communities. In 2017, Austin was the topped-ranked city by funding amount outside of the Western, Northeast and Chicago regions. Last year, nearly $1.2 billion in funding poured into Austin deals. But while there’s an increase in dollars, a simultaneous decline in the number of deals has occurred. That could set the stage for a concerning seed round trend.
A tendency towards more money but less deals could be debilitating for early-stage companies. Larger investments favor larger funding rounds, and larger funding rounds are usually secured by growth-phase companies. The tens-of-millions-of-dollars rounds aren’t going to the early-stage startups. So while the number of dollars pouring into Austin may be increasing, that metric is only favorable to businesses that warrant those sized-rounds.
In 2017, the top 13 funding rounds in Austin were in excess of $20 million each, with a top round of $40 million (The Zebra). Of these rounds, nearly every one was classified as a Series B or later-stage round, with the exception of a few debt and equity financing rounds.
What does this information mean? A trend towards larger, later-stage companies typically means investors are looking to take on less risk and invest in more established companies. A Series B or C can be more attractive than a seed round for a few reasons. First, there is less risk involved because the company typically has a track record. And second, a more mature company is better positioned for an acquisition or an IPO, giving the investors an “end in sight.”
For startups seeking early-stage rounds, this could be grounds for a more challenging fundraising environment. In 2017, Austin ranked 9th in the top metro areas that received VC, but represented just one-fifth of the funds given to the fifth-ranked metro area, L.A. The discrepancy grows larger when compared to the top-ranked city, San Francisco. The funding in Austin equals less than 1/20th of the amount of funding poured into the Bay Area. Funding remains centralized in key metro areas, and it is Austin’s smallest companies that may feel this the most.
While this data might be alarming for early-stage founders, but it should certainly not dissuade entrepreneurs from launching a venture and seeking funds in the city. Austin is ripe with opportunities, but outreach should be adjusted to fit the landscape. With a smaller landscape compared to other metro areas, Austin’s funding sources include family offices, traditional PE firms and pledge funds. These less-traditional VC routes means local startups must adjust their pitches accordingly.
On the other side, investors should not avoid early-stage companies. Success stories must start somewhere, and it is in an investor’s best interest to back a winning company in its early days. Investing terms are better, you have more influence and the pay-out is ultimately larger. Quake, the venture capital firm I co-founded, is expanding to Austin and will be launching its first cohort in the city this month. We believe in the promise of early-stage rounds in the city, and we encourage other investors across the country to do the same.
Adam Cragg is a founding partner at Quake Capital, a unique accelerator focused on making seed level investments in new and early stage ventures across a wide range of industries.
