A year ago an Austin-based venture capital firm offered my company $400,000 for 40 percent of its equity. Their counterpart in the Bay Area offered $2 million for 20 percent of the same company?—?just one week prior.
My belief was Austin’s fundraising problems were due to the age of the funds at Austin’s venture capital firms and the limited number of Austin investors who could invest $500,000.
It is now a year later but has anything really changed?
The decline in local investments has mirrored national activity, which decreased 23 percent from fourth quarter of 2015 to the first quarter of 2016. US funding dropped 18% from the second quarter to the third quarter of 2016 for venture-backed companies. Seed and Series A funding fell to a 5-quarter low with seed-stage deals greatly falling as a percentage of total deals (from 34% in Q3 of 2015 to 26% of Q3 of 2016). Early-stage deals represent less than 50% of all deals in the US.
My goal with this article is to continue the dialog that happened last year as things seemed to have gone a bit downhill across the country let alone in Austin. This analysis uses data from Crunchbase and CB Insights because they comprise the best data available to me. I encourage others who have better data to contribute it to the dialog.
Austin’s aging funds
Venture capital firms in Austin still publicly state they invest in early-stage companies, but do they still really do much early-stage investments?
From what I have been told by countless people in recent months, Austin firms are looking for proven winners before they will invest. This often includes requiring $100K in monthly recurring revenue and the nebulous concept of “lots of customers” to prove traction.
Silverton Partners
According to Crunchbase, Silverton Partners invested in 12 deals in 2015. We see a sharp decrease in the total number of deals when we compare this to the 5 deals they invested in for 2016. The numbers also look quite reduced for the smaller seed-stage deals when we compare 2015 to 2016.
Data Interpretation?—?Aceable re-upped from seed to Series A with them, as did Convey. Alert Media pulled in their second Series A from Silverton. Outbound Engine pulled in a Series C from their previous investment in the company’s Series B. OJO Labs in Austin was their only new investment (and it was a venture round).
Update: Morgan Flager from Silverton Partners wrote they made 11 investments in 2016, consisting of 4 new investments, and a "couple of smaller seed investments (less than $500k)." The stage of the investments were not offered by Morgan except for the seed investments -- but we can infer that he is referring to the ones in the chart above. He also wrote that Silverton's target is 4-6 new investments per year.
LiveOak Venture Partners
Venu from Live Oak was a bit critical of the first Dark Ages of Austin Startup Capital?—?even penning his own response to it. Let’s see how he and his team did. According to Crunchbase, Live Oak invested in 5 deals in 2015 and 5 deals in 2016.
Interpretation?—?Ranzure Networks in Richardson, Texas, Brett Hurt’s data.world, and OJO Labs were new investments for them. CS Disco and NSS Labs were re-ups from Series B to Series C. 60% of their investments were new companies. 40% of their investments were new companies in Austin, accounting for only 2 investments.
Austin Ventures
While I reported that Austin Ventures had left the market, they were really closing out their last fund. Crunchbase indicates they made 4 investments in 2015 and 7 in 2016.
Data Interpretation?—?They are closing out their fund and maintaining pro-rata rights with no seed stage or Series A investing.
Austin’s funds have less money
Out of the three firms we list above, none of them have raised a new fund in the last 3 years with Silverton having raised 4 years ago and Austin Ventures 9 years ago. They will have less money since they are putting money into later-stage deals which tend to eat up more of their fund to maintain pro-rata percentages.
Simply look at the chart below from CB insights showing the number of deals funded (in orange) compared with the amount invested (in blue) and we can see a steep increase in the size of the deals indicating more late-stage investing.
Chart © CB Insights
Austin has had very few big exits
Austin continues to have exits. Most companies are taken out by M&A events with just 2 companies going through an IPO in 2016. A chart from CB Insights shows Austin exits by quarter for the past 2 years.
Chart © CB Insights
Other sources of investment
There are other sources of capital coming to Austin besides the companies listed. Arena Growth Partners, Next Coast Ventures, True Wealth Ventures, and 1839 Ventures are all bringing more competition to the city’s incumbents. These are adding to the slowly-growing list that includes ATX Seed Ventures, S3 Ventures and the ones listed in the article save Austin Ventures. We may never have our own Sand Hill Road to walk and shop in close quarters, but things will improve as these new firms take hold and challenge the stronghold of the few.
In the end
As an entrepreneur I am constantly being told that things are good, money is available, and Austin funds are investing. However the data still shows the opposite. When I couple in the countless conversations I have had with entrepreneurs since the original Dark Ages of Austin Startup Capital came out, I see a landscape still built out of hype more than investment.
This is a guest post by Richard Bagdonas, an Austin entrepreneur who's latest company MI7 solves the problem of electronic healthcare record integration and interoperability. This is a follow up to his 2016 article on Austin startup funding, which you can view here.
