Austin Needs Bigger VC Deals and More of Them

By LAURA LOREK
Reporter with Silicon Hills News

David Altounian presenting data on funding deals in Austin.

David Altounian presenting data on funding deals in Austin.

Is a bootstrap mentality holding Austin’s entrepreneurs back from breaking through to big markets and venture capital opportunities?

That question sparked a lively discussion from seven panelists attending an event put on by the Austin Chamber of Commerce and the Austin Technology Council Thursday night at Carmelo’s Italian Restaurant.

“A lot of the companies that I see while they are serving a purpose in a market, I think sometimes what I don’t see is that they serve a really big market,” said Michael Rosenberg, partner with Redwood Capital, based in New York. He serves on ATC’s Capital Advisory Council and he frequently visits Austin. “And that might be sort of a victim of what’s happened in Austin.”

Those companies find a niche market and grow revenue to $3 million to $5 million and then they sell, he said.

“That’s probably a mentality in Austin, possibly as a result of the financial network that is here” Rosenberg said. “If you’re looking at getting investment outside of Austin, if you want to get investment anywhere, you really need to have a plan that shows there is a tremendous market opportunity….You really need to think about big market opportunities.”

Rosenberg was one seven funders and entrepreneurs on a panel discussing ways to increase venture capital and deals in Austin. About 50 people attended the event sponsored by Consero and Redwood Capital.

In Austin, it’s about bootstrapping, said Alan Knitowski, founder and Chief Executive Officer of Phunware and one of the most vocal panelists.

“It’s about very little money, don’t burn money, it’s about break even, be scrappy, win Austin, win central Texas, win the Midwest, win the United States and then think about the world,” Knitowski said.

“In Silicon Valley, you figure out a market that no one is in, go dominate the hell out of it, kill everybody that’s already in there, and when you win the world by default you get the United States, which gives you the Midwest, which gives you Texas, which gives you Central Texas and oh yeah, you get Austin,” Knitowski said.

Panelists attending a discussion on funding deals in Austin at an event hosted by the Austin Chamber of Commerce and the Austin Technology Council.

Panelists attending a discussion on funding deals in Austin at an event hosted by the Austin Chamber of Commerce and the Austin Technology Council.

Austin needs bigger and more venture-backed deals said David Altounian, assistant professor of entrepreneurship at St. Edwards University, serial entrepreneur and a partner at Capital Factory. He gave an overview of the Austin venture capital research study he recently completed.

For 2014, Silicon Valley had 1,390 deals worth about $24 billion in venture capital investment, compared to $620 million and 114 deals in Austin, Altounian said.

The top three markets are Silicon Valley, Boston and New York and Chicago is also healthy, Altounian said. The healthiest VC markets are generally where other financial markets existed, he said.

The average deal size in Austin is about $5.4 million, compared to $17 million in Silicon Valley, Altounian said. Take out the top five VC deals in Austin last year, and the average deal size is around $2.9 million, Altounian said. Austin has 144 funding sources, he said.

Altounian knows the pain entrepreneurs experience firsthand in fundraising. For his last startup, Motion Computing, he could not get funding in Austin. The company got its initial funding from an investor in China and other rounds came from California, Altounian said.

How does that put Austin at a competitive disadvantage? Altounian, citing data from CB Insights, gave the example of Austin-based Favor, which raised $17 million from seven investors. Its competitors, both based in San Francisco, Instacart raised $275 million from 17 investors and Postmates raised $138 million from 20 investors. It’s hard to grow a scalable company attacking a huge market without access to large amounts of venture capital, Altounian said.

“We don’t have a shortage of good companies worth funding, we do have a network problem we believe,” Altounian said. “We need more funding sources and more ties to later stage funders.”

Austin needs to network with funding biospheres in other cities to develop better networks and access to capital, Altounian said.

“We don’t want to recreate what they have in these other cities but we want to tie into them,” Altounian said.

The premise in Austin is if an entrepreneur builds a good company, venture capitalists will come here and invest, but Altounian said he didn’t see that in his preliminary research.

To further illustrate that point, the panel’s moderator Robert Alvarez, Chief Financial Officer and Chief Operating Officer of BigCommerce, said his company has raised more than $100 million in growth capital from firms outside of Austin.

And Panelist Steve Elliot, founder and CEO of AgileCraft.com, an enterprise software company, raised $10.5 million with $10 million in private equity coming from Houston.

Another panelist, Subbu Rama, CEO of Bitfusion raised close to $2 million and the majority of the funds were not from Austin.

Knitowski of Phunware raised $20 million in angel investment and $30 million in later stage funding. He just signed the term sheet for another $30 million to $40 million raise, he said

Out of the $62 million Phunware has raised so far, probably 10 percent came from Austin and 20 percent from Texas, Knitowski said.

“We’ve raised more money in Asia than we have here locally,” he said. “Phunware was listed as the fourth fastest growing company in North America and we had no opportunity to raise any money here.”

On the funding side, Rosa McCormick, president of Wild Basin Investments and a member of the board of directors of the Central Texas Angel Network, has seen some of the challenges companies have faced trying to find later stage funding in Austin. She also said that angel investors get tired and they need exits to continue financing more startups.

The Burn Rate

How entrepreneurs and investors think about building companies in Austin is different than the east or west coast, Knitowski said.

The burn rate, the amount of money a company spends before profitability, at some Silicon Valley tech companies is $5 million, $10 million even $20 million per month, he said.

“We burn about $1,250,000 per month, we’re looked at as the anti-Christ,” Knitowski said. “Now investment bankers in New York think we’re a responsible tech company, you only burn $1 million per month. It’s a very interesting dynamic. You don’t get to grow for free. And bootstrapping and growth are way at odds.”

Most wealthy Texas investors aren’t on board with investing in Silicon Valley Go-Go high growth companies, McCormick said. “That’s because they’ve gotten burnt before.”

Different funders have different expectations, according to the panelists. It’s important to understand the type of investor an entrepreneur is talking to and what their needs are.

Austin does have an entrepreneurial mindset but it needs entrepreneurs with really big ideas, according to the panelists. It might also have a marketing and branding problem and needs to do more to attract investors from the outside.

Austin doesn’t want to be like Silicon Valley

During the question and answer session, Bucky Couch, a successful entrepreneur in Austin and a member of the Austin Technology Council’s board of directors, said he called “bullshit” on the whole talk of Austin being like other major tech markets.

“I don’t care to be like the coast,” Couch said. “Texas was built on wildcatters and people have invested in stuff. We can do our own but there is some underlying reason why we have not.”

“At the end of the day, I don’t give a riff if we don’t have a big structure of investment capital in Central Texas,” Couch said. “I don’t want us going down the path to be like Silicon Valley or New York City.”

A few people in the room applauded his comments.

Austin doesn’t want to be Silicon Valley, it just needs to get its average deal size up to $8 million to $12 million and increase the number of deals, Altounian said. That way it can compete with other emerging tech markets like Chicago and Los Angeles, he said.

Correction: an earlier version of this story incorrectly attributed Rosenberg’s quote to a different panelist.

Comments

  1. I agree. Austin is young in this industry and still finding it’s own way. Early stage funding is available here but I do see and hear of the problems with larger funding. I am not sure, but I believe, that some of these growing pains are due to the fact that we just don’t yet have the generations of underlying “infrastructure”, cash and management experience available, that some of the larger cities have on hand and yes, networking could be key here. We do not want to copy others, or be like them, but that doesn’t mean we can’t meet up, share information and resources, for the better of all involved. Also, we do have the money here but have not tapped into it in many ways. Texans out there have plenty of money but they do not understand the ins and outs of startups and are afraid of what they don’t know. Tackling this problem is something we are focusing on in Hill Country Angel Network. So.. stay tuned….

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