Tag: venture capital

Capstar Ventures Raises $41.3 Million Inaugural Fund to Invest in Innovative Consumer Companies

Capstar Ventures L.P., an early-stage venture capital firm, announced last week that it has closed on its $41.3 million inaugural fund.

The Austin-based VC firm founded by Kathryn Cavanaugh in 2019, invests nationwide in innovative consumer companies.

Capstar raised the fund from individuals, family offices, and institutions including Capital Creek Partners, Tiger Partners L.P., and J.P. Morgan.

Capstar Ventures is the first fund to close as part of J.P. Morgan Asset Management’s Project Spark, focused on supporting emerging alternative fund managers, including minority-led and women-led venture capital funds.

“Kathryn embodies the type of fund manager we set out to back through the launch of our Project Spark initiative and we are thrilled to partner with Capstar Ventures on its inaugural fund,” Jamie Kramer, Head of Alternative Solutions at J.P. Morgan Asset Management and Investment Committee Chair for Project Spark, said in a news release. “Kathryn brings a unique perspective, deep expertise and a differentiated vision for investing in the next generation of consumer companies, and we’re pleased to be participating in the fund.”

Capstar Ventures invests in seed and Series A rounds for digitally native brands, consumer goods and services, and technologies that power these startups. Its focus is on Millennial and Gen Z consumer products and services and platforms.

“We seek to invest in founders who are solving their own pain points and who directly relate to and resemble their customers because we have seen how that authentic connection translates into high growth companies,” Cavanaugh, Founder and Managing Partner of Capstar Ventures, said in a news release. “And how Millennial and Gen Z consumers resonate with that authenticity as they align their purchasing power with their values.”

Cavanaugh has been investing in and advising early-stage companies across consumer, healthcare, and technology for the past 15 years. While working at Grace Beauty Capital, Mainsail Partners, and De Novo Ventures, she deployed and actively supported over $350 million of equity investments, including early-stage disruptive consumer brands such as Rothy’sSupergoop!, ParachutePrimary, and M.M.LaFleur.

In 2019, she moved to Austin to launch Capstar Ventures with anchor capital from successful Texas entrepreneurs Steve Hicks, Kendra Scott, and Robert Gauntt.

“Steve, Robert, and I are thrilled for the opportunity to partner with Kathryn to launch Capstar Ventures because we share a commitment to supporting the innovation and passion that entrepreneurs contribute to our world, and believe it is critical to building a brighter future,” Scott, Founder of Kendra Scott LLC, said in a news release. “We feel fortunate for the opportunity to support those in the earlier stages of building their business and to work alongside phenomenal partners to provide more diverse founders a seat at the table.”

Capstar Ventures has invested in ten portfolio companies to date, including Culina, a leading plant-based food company; Stylust, a commerce technology platform; The Class, a health and wellness platform; Sarah Flint, a women’s luxury shoe brand; Packed Party, a celebration lifestyle brand; St. Frank, a luxury home décor brand; Museum of Ice Cream, an experience-first development company; Bravo Sierra, the first military-native wellness company; Eterneva, a grief wellness company; and Intraloop, a community insights technology platform.

From a Cold Email to an IPO: DISCO, a Story of Domain Strength, Grit, Collaboration, and Serendipity

DISCO became a publicly-traded company on the New York Stock Exchange on July 21, 2021

By Krishna Srinivasan, Chairman of the Board, DISCO and co-Founding Partner, LiveOak Venture Partners

In October 2013, we received a cold email – it had all the elements on first glance that begged to be ignored.  The email came from a person named “CeCe” who talked about a founder called “Kiwi” and a company called “DISCO” in the legal tech space, which was also a category that did not have a history of great companies or large outcomes. But, boy, am I glad that we did not ignore that email! 

LiveOak’s entrepreneur-first philosophy meant a commitment to look at all deals, even cold, inbound ones, and we quickly discovered that this showed a lot of promise. Kiwi was the youngest ever graduate from Harvard Law (graduated at 19), was the managing partner of his law firm, and, while practicing law, had hacked together a product that was generating early revenue. When we first met him, we were blown away by his domain knowledge and passion for transforming the future of law. Additional deeper diligence through some friendly litigators in our network indicated that this was an industry that was sorely in need of better products. During deeper discussions with Kiwi, we uncovered a fierce entrepreneurial spirt and a desire to learn and evolve into a world-class tech leader. Armed with the conviction around a domain-rich entrepreneur and large market opportunity, we decided to proceed forward as a founding investor. Ultimately, the company was formed (spun out of his law firm) at the same time as our initial investment.

            Wow, aren’t we delighted that we embarked on this journey. Since being founded in December 2013, the company has grown from minimal revenue to now a successful IPO (NYSE: LAW) with a first trade market capitalization above $2.5B As stupendous this trajectory has been, it neither has been a straight line nor influenced by a single factor. I would attribute the success to a combination of domain strength, grit, collaboration, and good ol’ serendipity.

Domain Strength

Yes, Kiwi’s rich domain expertise was what attracted us to DISCO (N.B. the LiveOak playbook entails backing domain-rich, often first-time entrepreneurs and helping them grow into world-class tech entrepreneurs by helping with all aspects of company building). Kiwi’s obsession with using technology to help lawyers practice law has permeated into a company-wide focus on infusing deep legal knowledge into every piece of code shipped out. Every product was conceived after thinking about the problem from the shoes of a lawyer. As a result, DISCO has fused seemingly orthogonal disciplines of deep understanding of law with world-class engineering to create powerful user experiences that lawyers and other legal professionals love. Lots of entrepreneurs have deep knowledge of their respective fields but Kiwi and team exemplified the desire and capability to create magical products – an incredible distinguishing feature of the company. In an industry not known for user delight, the product has an impressive NPS of 63. 

Like any other ambitious entrepreneur, Kiwi, even from the first pitch, articulated a multi-stage product roadmap for grabbing a market that was tens of billions of dollars. While that looked like a pipe dream then, today, the company is well on its way to grabbing that exact market he had outlined. 

DISCO is very much a story of Kiwi parlaying his rich knowledge of law and thinking many moves ahead for their customers and creating products, services, and experiences to meet current and future needs. That domain-rich inventor’s spirit is what positions this company to define and lead legal tech!

Grit

Kiwi and the company have gotten here in no small measure due to their grit. As with most startups innovating in markets not yet proven, there was some doubt from prospective investors, employees, and so on.  They questioned how difficult it may be to attract future investments in legal tech, to show strong traction in the market, whether the business model was right and the impact of competition, even with the strength of DISCO’s product. Now seeing how far DISCO has come, their uncertainties have not come to fruition. These folks simply underestimated Kiwi and the team’s grit to bludgeon their way through these issues. 

The financings of the company certainly involved significant effort. However, through them all, Kiwi never had a moment of self-doubt or reduced conviction on the scale of company that he could build here. So, for all the entrepreneurs out there, don’t be disheartened if there are challenges in getting the financing dollars and terms you want as there is not often a ton of term-sheet-love spewing out there.

There were challenges in hiring the optimal leaders for every function, given the preferences around possessing both legal domain knowledge and world-class enterprise software sensibilities. This unique combination is not often available due to the lack of standout winners in legal tech. In absence of optimal leaders, Kiwi has operated as a functional head for practically every department at some point of time. Waiting for the right leaders and gritting it out until the right one was available became the mantra. Today, more than half the executive team are lawyers and several others have deep backgrounds in the legal industry as well as experience at hyper-growth software companies.

Collaboration

            The DISCO success story has also been a textbook example of collaboration between a venture capitalist and an entrepreneur, one that began the day we signed the term sheet. We had finally agreed on all the terms, but that was only after a relatively intense set of discussions where I felt that Kiwi came across as a nitpicky litigator who was focused on corner case scenarios rather than a typical pragmatic tech entrepreneur. I told him, to go forward, we needed to be convinced that our relationship could be more collaborative rather than one that felt like a legal scrimmage. Kiwi countered that he would drive over to the office to “make his case”.  Now that was a rare icy November day and he was in Houston, 200 miles away!  But that would not deter him from driving to Austin! His action to make this future relationship successful was itself enough of a powerful signal that we signed the deal the moment he strode into our office – that cast the die for a trusting, collaborative style throughout our relationship.

            Indeed, we have had many spirited debates – should we stay as a pure-play software business or be full-stack with an AI-based review platform, what is the optimal organizational design to sustain our stunning land and expand model, should we stay mostly channel vs. make a big push on the direct business, how should we position ourselves (as a vertical software player or as a horizontal software for legal category), are we ready to go public – the list goes on and on and on. Every one of these questions had enormous underlying ambiguity and given the magnitude of the consequences, of course, had some fierce opinions on both our sides. Unequivocally, in all these situations, the process was intensely collaborative, intellectually honest, and with the sole emphasis on what was best for DISCO.

            It was hard to predict it that icy night in November, I simply could not have hoped for a more collaborative partner than Kiwi in this incredible journey.  

Serendipity

The origins of our first investment in the company was itself serendipitous. We at LiveOak were fortunate that we could spot this “diamond” in the volume of cold emails we received. 

Many of the unicorn-esque hires on the leadership team required deep legal and enterprise tech expertise and happened as a result of happenstance. We were so fortunate to find Michael Lafair (a lawyer-turned CFO). We were also lucky to find Andrew Shimek, a rare lawyer-turned Head of Sales who embodied both legal and enterprise sales traits, and Keith Zoellner, our Head of Engineering with expertise building world-class products and legal domain. Many other people and key board members such as Jim Offerdahl, Colette Pierce Burnette, and Scott Hill were connections that were made at the right place, right time. 

Finally, it was of course serendipitous that Kiwi and my favorite soul food cuisine was Sichuan food! Ma-Po Tofu from Mala’s Bistro in Houston or A+A Sichuan in Austin was added motivation to meet, eat and strategize often!

After all, good fortune favors the brave and those with grit!

In closing…

The future is even brighter, and the opportunity is seemingly unbounded, and we believe that the company is indeed poised to be one of the largest and innovative software leaders for decades to come. This is the first software IPO out of Austin in a while, and it’s extra special given it was birthed in Texas and seed invested at inception by a Texas VC firm. 

The success of DISCO and its IPO will be even more impactful for Austin and Texas at large as outsized successes are bound to beget many, many more in the future. Also, with Kiwi and a management team that is committed to building a long-term standalone company, DISCO is bound to have a powerful accelerating effect on the Texas ecosystem. DISCO Cares is a company initiative that is helping drive programs that support vulnerable populations across Texas. There are a number of DISCO-alum startups already sprouting, in Austin and Houston. 

Having started this journey as the only other board member besides Kiwi at the time of inception, I am honored to now serve as Chairman of the Board as a part of this milestone IPO event. I look forward to helping Kiwi drive and shape DISCO’s next phase of growth for years to come and to contributing to DISCO’s legacy-shaping initiatives, from their community impact to the spawning of more promising entrepreneurs in the decades to come. In particular, we look forward to partnering with many more entrepreneurs who might learn from and imbibe many of this successful young lawyer’s characteristics around domain strength, grit, and collaboration while building their respective successful ventures!

LiveOak Venture Partners’ journey with DISCO began with a cold e-mail from Kiwi Camara which led to its initial investment and today reaches a milestone IPO with a first trade market cap of $2.5B. LiveOak Venture Partners’ Founding Partner and DISCO Chairman, Krishna Srinivasan, shares an intimate look at this remarkable success story.

Editor’s note: This post originally appeared on LinkedIn and has been reprinted here with permission.

Austin-based Telestax Lands $4.7 Million in VC Funding

Telestax announced this week it has raised $4.7 million in funding.

Austin-based LiveOak Venture Partners led the funding round. The company plans to use the money on product development, customer support and marketing.

“We are thrilled to bring Telestax into our portfolio of promising companies. The exceptional team, high-value technology and resulting customer adoption of Telestax’s offerings made this a compelling investment for us,” Krishna Srinivasan, General Partner at LiveOak Venture Partners, said in a news release. “We look forward to helping Telestax with their market and product expansion.”

The Austin-based company makes a communications platform called RestcommOne, which blends telecommunications applications with enterprise applications to “deliver real-time communications business solutions that scale,” according to a news release.

Telestax, which launched its RestcommOne platform in 2011, has more than 170 commercial customers including Avaya, MetTel, Ping An Bank, T-Mobile, Unifonic and NTT-AT. The platform supports 900 million calls daily and 200 million messages.

“The last 12 months have been remarkable for Telestax,” Ivelin Ivanov, Telestax CEO and co-founder, said in a news release. “We launched RestcommONE, our CPaaS enablement platform, and our RestcommONE Marketplace; and today we have added another business partner with strong proven expertise in telecom and infrastructure software”.

Telestax, founded in 2011, has raised $5.9 million in two rounds to date, according to its Crunchbase profile.

YouEarnedIt Gets $1.5 Million in Seed Stage Funding

imgres-5YouEarnedIt, a startup focused on helping companies reward employees, has received $1.5 million in seed stage funding, according to the Wall Street Journal.
The company received the funding from Capital Factory, an Austin-based incubator and accelerator of tech companies led by Joshua Baer and advertising giant WPP PLC, according to the article.
The Greater Austin Chamber of Commerce also recently names YouEarnedIt as one of its A-List Austin startup to watch for 2014. The company’s customers include Gatti’s Pizza, Conde Nast, Y&R, RetailMeNot and Spredfast.
Kenny Tomlin founded the company in 2011. He was replaced as CEO last year by “Steve Semelsberger, a former senior vice president and general manager of California-based Demand Media Inc.’s (NYSE: DMD) social products group,” according to the Austin Business Journal. The Wall Street Journal story listed YouEarnedIt’s CEO as “Autumn Manning, who previously worked as a partner at training and coaching services firm SVI World.”

Compare Metrics Snags $3.8 Million in Follow-On Venture Capital

comparemetricslogoAustin-based Compare Metrics, which makes analytics software aimed at retailers, announced that is has received $3.8 million in follow-on venture capital.
Austin Ventures led the investment with additional funding by existing investors Julie Allegro of Allegro Venture Partners, Bob Greene of Contour Ventures, Capital Factory, Mike Maples Jr. of Floodgate, Brett Hurt of Hurt Family Investments and independent investors Dean Drako, Ralph Mack and Adam Ross.
This brings the company’s total amount of funding to $8 million. Compare Metrics received $4.2 million in first-round financing in May of 2013.
Compare Metrics recently made the Greater Austin Chamber of Commerce’s A-List of Startups to watch in Austin in the emerging growth category.
The company plans to use the money to support its continued growth. It now has 32 employees and several customers including Fresh Pair, Lenovo, Rebecca Minkoff and The Wasserstrom Co.
Garrett Eastham, Mikael Solomon and Stephen Goodwin co-founded Compare Metrics in 2012 based on Eastham’s cognitive science research at Stanford University.
“It has been exciting to watch the journey of the Compare Metrics team from a three-person start-up to the high-growth and maturing company that it is today. This follow-on investment is indicative of the company’s progress in proving out their market value,” Chris Pacitti, general partner with Austin Ventures, said in a news release. “Retail client results have again validated our original confidence in the company’s potential, and I look forward to watching their continued success going forward.”

StepOne Closes on $ 4 Million in Venture Capital

Alex Mitchell,  President and co-founder of StepOne, photo courtesy of StepOne

Alex Mitchell, President and co-founder of StepOne, photo courtesy of StepOne

StepOne, an Austin-based startup that makes customer support software, announced that it secured $4 million in venture capital.

LiveOak Venture Partners led the round with participation from Silverton Partners. The company plans to use the money to add employees and to expand sales and marketing efforts.

StepOne has already landed Telstra, Australia’s largest telecomm company, as a customers as well as a major U.S. cable company.

StepOne’s flagship product, Contextual Care, focuses on helping large companies with complex products deliver excellent customer support.

Although lots of products currently exist to help companies deliver self-service customer support, StepOne has a different approach. It “predicts a customer’s question by measuring hundreds of customer attributes like what services they’ve purchased, the state of their billing cycle and the technical performance of the product, and then matches the customer to the optimal content for their predicted question,” according to a news release. “The adaptive software continuously learns which specific pieces of support content best serve various customers, improving its accuracy over time.”

“From product onboarding to in-life support, self-service for customers is broken,” Alex Mitchell, CEO and co-founder of StepOne, said in a news release. “Even though most customers prefer to solve problems themselves, they give in and finally pick up the phone. There is too much content presented to solve the problem and too many irrelevant results in search queries. Our goal is to make self-service become a driver of customer loyalty and cost savings. When you can answer the customer’s question before they’ve even asked it, they’ll stick with you.”

Last year, LiveOak Ventures invested an undisclosed amount of seed stage funding into StepOne.

“Since our seed investment, the StepOne team has achieved significant customer traction, so we are delighted to continue to support the StepOne team as they scale their operations,” Krishna Srinivasan, co-founder and general partner at LiveOak Venture Partners, said in a news release.

Funded in Austin…or Not at SXSW

By SUSAN LAHEY
Reporter with Silicon Hills News

Josh Kerr of Written, Cotter Cunningham of RetailMeNot and Utz Baldwin of Plum, photo by Susan Lahey

Josh Kerr of Written, Cotter Cunningham of RetailMeNot and Utz Baldwin of Plum, photo by Susan Lahey

In many ways, Written’s Josh Kerr was the poster child for how one gets funding in Austin at the Funded in Austin panel at SXSW Tuesday afternoon.

Kerr spoke glowingly of the help, support and advice he got from Capital Factory. He talked about building relationships with various angel investors over coffee, lunch or drinks until he gave them the ask. And he gave interesting tips: For example he suggested telling angels he’d love to have them invest even a small amount just to get them involved, and usually they upped the number because the investment he suggested seemed too small.

And the company wound up with $1 million seed round.

By contrast Utz Baldwin of Plum (formerly Ube) said finding funding for hardware like his lighting system that can be operated by your smart phone has found few Austin funders. It did, however, raise nearly $1 million on Fundable.

Finally, Cotter Cunningham of RetailMeNot explained that funding had been a little bit different for his company because his business model entailed buying existing businesses, which is an easier sell in some ways than getting funding for an idea alone. He got a $30 million round.

The panel, moderated by Shari Wynn Ressler, founder and CEO of Incubation Station, explored the process and hurdles of getting funding in Austin. All the panelists agreed that raising money is pretty much the CEO’s full time job, which can be a challenge.

For one thing, as Baldwin said, there were parts of developing the user experience he really wanted to get more involved with because it’s part of the business he enjoys. But he didn’t have time because he was busy raising money. Kerr said his team initially resented the fact that while they were doing the work of creating the company, he was wining and dining investors. Once he got the money though, they forgave him.

Beware the Soft Yes

“It was a little tricky with our model,” Cunningham said, “because it’s difficult to raise money and do an acquisition at the same time.” On the one hand were the funders doing their due diligence and collecting data and on the other were the selling businesses asking “Are we going to do this or aren’t we?”

Kerr said he kept the amount Written was asking for small, so that it looked like they were close to success. Then as more money came in, he upped the raise amount.

Cunningham and Kerr worked on building their networks, asking “Who do you know?” Baldwin wound up raising money from people he knew might be interested in the idea. After a ten minute phone call to a retired Cisco executive, for example, the exec gave him $150,000.

People who initially say no might change their minds if you make tweaks to the product that they suggest or if someone else takes the lead investment position, panelists said. Cunningham said “You have to be persistent. “Some of the people who gave us money told us ‘Until you called four times we weren’t paying attention.’”

But when making the ask, you have to know exactly how much money you want and exactly what you’re going to do with it. You also need to have practiced your pitch “a million times.” Cunningham said. And it’s best not to shoot for your most likely big funder on the early pitches. Practice on less likely candidates so you have it down when you’re shooting your big gun. That was a mistake Kerr made, going to Austin Ventures with his first pitch.

“In a matter of seconds I became uninvestible when they asked what we were doing with the money,” he said.

All the panelists experienced “the soft yes” which is not a definitive no but a “let’s keep talking” that never results in anything. Entrepreneurs need to guard against the emotional roller coaster of thinking a soft yes is the same as a yes.
Baldwin said that after his company won a People’s Choice award at DEMO, Sandhill Road (investor central in Silicon Valley) opened its doors to them. But one investor would say “You don’t want to be a hardware company, you want to be a software company” and another offered suggestions about the company’s business model. Baldwin was changing up the pitch deck after every meeting and he wound up with a garbled story.

“You have to nail that pitch. Exude absolute confidence in what you’re doing, demonstrate absolute domain knowledge and ask at every meeting if there are any red flags. ‘What do you see in this that would keep you from investing in my company?’”

Know Your Investor

While a hardware product like Plum’s, has trouble finding funding in Austin, the others talked about the difficulty of getting funding from outside Austin because investors often want to be able to keep a close eye on the companies they’ve invested in. But Cunningham said he’s had success pitching the benefits of Austin, such as a much lower attrition rate than that of Silicon Valley.

“In Palo Alto, most of the companies have a 20-to-25 percent turnover rate. Someone will be sitting in the office saying ‘I just got a call from Twitter and they’re willing to offer me 50 percent more than you’re paying me. In Austin that doesn’t happen. Our voluntary attrition is under five percent.”

Any form of investment takes a lot of investigation, panelists said. Friends and family may cough up the money but they’ll call every week and ask how their money is doing or require reports you wouldn’t normally have to generate, which is a time suck. There are numerous angels in Austin who go to all the meetings but invest very little. And there are some investors who are more trouble than they’re worth. It’s important to call their references and find out if they’re the kind who like to call you up at midnight with a question.

Entrepreneurs structure deals differently as well. Baldwin said his Fundable investors were happy with uncapped convertible notes and responded to discounts for early investors. Kerr, though, said all his early investors expected caps.
All the panelists said it was crucial to hire the best attorney available, not to scrimp or hire a relative. Kerr suggested finding an attorney who would work for equity.

At the end of the session, one audience participant asked where a new Austin startup could go to find more information about funding and Kerr recommended Capital Factory, which he had mentioned several times through the session. Claire England of Tech Ranch stood and asked a question, prefaced by the comment: “There are a lot of resources out there besides Capital Factory” to which Kerr responded that he wasn’t trying to be an advertisement for the incubator/accelerator.
Baldwin leaned over, looked at Kerr’s Capital Factory t-shirt and said “Nice shirt.”

SpareFoot Raises $10 Million More in Funding

imgresThe fun loving startup, SpareFoot that has created the nation’s largest online storage marketplace, has just raised $10 million in venture capital from Insight Venture Partners.
Austin-based SpareFoot has raised $26 million since its founding in 2008. New York-based Insight Venture Partners provided $22 million of those funds. Its other major investors include Capital Factory, Floodgate and Silverton Partners.
“SpareFoot will use this latest investment to double down on engineering and product development,” Chuck Gordon, co-founder and CEO, said in a news release. “We believe there is a big opportunity to expand our offerings in the market, and that’s what we’re going to do. Our goal is to make renting a storage unit easier than booking a hotel room, and this new investment will help us make that happen.”
SpareFoot has 120 employees at its downtown headquarters and plans to add more than 40 this year in the customer service, engineering and product development areas, according to the news release.
“SpareFoot has done a great job of bringing together a highly fragmented market of small self-storage operators and is doing an even better job helping them compete with the large players,” Richard Wells, managing director of Insight Venture Partners said in a news release.
SpareFoot operates a free marketplace that lets customers find and reserve storage units online. It has the largest inventory of storage units in the U.S. with more than 7,000 facilities in its network.

Tips for Startups on Raising Old Money and Crowdfunding

Photo of Stephanie Chandler, partner of Jackson-Walker, courtesy of the law firm.

Photo of Stephanie Chandler, partner of Jackson-Walker, courtesy of the law firm.

Old real estate and oil money in town invested in San Antonio’s Rackspace early on, said Stephanie Chandler, partner with Jackson-Walker.

It was one of the first cases of old San Antonio money backing a startup technology venture here, she said.

Now with Geekdom, a technology incubator and accelerator in downtown San Antonio, the goal is to get even more local investment into startups, Chandler said.

“Over the last ten years there’s a much more significant uptick in what families are doing,” in investing in startup deals, she said. “Five years ago, we didn’t have the Rackspace founders looking at deals.”

Five years ago, the Center for Innovation and Technology Entrepreneurship at the University of Texas at San Antonio didn’t have its bootcamps in which it introduced mentors to support young startups, she said.

Historically, a lot of the family offices in San Antonio didn’t want to look at startup investments, Chandler said. But that’s changed.

“There is a lot of buzz going on at the San Antonio country club about what’s going on in town and trends,” she said.

Chandler spoke last week at Jackson Walker’s law offices in downtown San Antonio on “Raising Capital from New Money and Old Money: Crowdfunding and Family Offices in 2014.”

Mike Laussade of Jackson-Walker also gave a presentation to about 50 entrepreneurs in attendance.

“Most startups don’t attract money from lenders,” she said.

Angel investors generally put anywhere from $25,000 to $250,000 into a deal, Chandler said.

“Clearly they are motivated by getting a return, but they are also looking for something else,” she said.

For example, a lot of the successful entrepreneurs and executives with Rackspace are now investing in early-stage tech startups to give back to the community, Chandler said.

When startups raise money, it’s important that they adhere to federal regulations.

“Every single stock offering is required to be registered with the SEC,” she said.
That requires startups to provide audited financial statements and other expenses. But if you’re not doing a public offerings, there are exemptions to these rules.

“If a deal is truly private, you don’t have to register it,” she said.

The Securities and Exchange Commission’s Rule 506 provides an exemption to companies that allows them to raise an unlimited amount of money from accredited investors, Chandler said.

An accredited investor is someone who has net assets of more than $1 million not counting their house and income of $200,000 per year, Laussade said.

The Jobs Act allows for crowdfunding that allows companies to raise small amounts of money from large numbers of non-accredited investors, but it is not yet effective, Laussade said. The rules are still being worked out and might be adopted later this year, he said.

As of Sept. 23, the SEC adopted a New Rule 506( c ) that permits companies to solicit or advertise offerings as long as all the purchasers of the securities are accredited investors.

When dealing with old money, especially from the oil industry, in San Antonio some investors will not do a deal if it involves a 506-c solicitation which requires disclosure of investors, Chandler said.

“They are choices all along the path,” she said.

Once you go 506 ( c ), you can’t turn back, Laussade said.

Equity-based crowdfunding can only be done on a registered crowdfunding portal. And companies can only raise up to $1 million a year, Laussade said.

Securities law does not apply to Kickstarter and IndieGoGo because they are perk-based crowdfunding. The people donating money on those sites to projects are not investing in the company or getting any equity in exchange for their pledges.

To do equity-based crowdfunding from non-accredited investors, companies have to file a form C and provide audited financial statements. Those can cost $50,000, Chandler said. Companies also have to provide full disclosures on what they are doing.

“If you want to go stealth on your product, how are you going to do that?” Chandler said.

Annual reports are required. These are all things that are not required with a private offering, Laussade said.

“It’s going to be an onerous process,” he said. “And the rules aren’t yet final.”
The summer would be the absolute earliest the new equity-based crowdfunding rules will be effective, Laussade said.

LiveOak Venture Partners Sees Lots of Quality Startup Deals in Austin and Texas

By LAURA LOREK
Founder of Silicon Hills News

IMG_2433Right now is the best time to be in the venture capital business in Austin.

In 2000, during the Dot Com boom, an enormous amount of money flowed into companies even though they did not have viable ideas and were also not disciplined with spending money, said Krishna Srinivasan, partner at LiveOak Venture Partners.

“Companies were burning money on products that costs tens of millions of dollars to build and to get any real traction,” he said during a recent interview at the firm’s headquarters in west Austin.

Austin Dot Com darlings included Living.com, a furniture store, Garden.com, garden supplies, and DrKoop.com, a website for medical advice. All of them went belly up.

Fast forward to today’s crop of startups in Austin. They include recently public companies like HomeAway.com, BazaarVoice and RetailMeNot. And dozens of promising startups in the software and technology industry as well as life sciences, energy, e-commerce and consumer goods.

“Maybe it’s the recent lack of capital that has forced entrepreneurs to be extra creative to make progress, or maybe it’s the natural maturation of the local ecosystem, this is clearly the highest quality of entrepreneurial activity we’ve seen in this market since 2000,” Srinivasan said. “We feel the momentum and see the quality. This place absolutely deserves a bunch of capital firms.”

And that’s why Srinivasan, who has worked at Motorola, Sematech and Austin Ventures, teamed up with two former Austin Ventures colleagues, Ben Scott and Venu Shamapant, to form a VC firm targeted at early stage investing into companies in Texas.

LiveOak Venture Partners Raises $100 million fund

LiveOak Venture Partners closed on a $100 million fund this year. However, it wasn’t easy to raise that much money. The partners spent two years on the fundraising trail. Like any other entrepreneur, they watched their expenses as they made progress on raising the fund. As a result, they have much greater empathy for entrepreneurs looking to raise money to fund their companies, Shamapant said.

The secret to their perseverance was having three members in the partnership, someone always had a more positive perspective which kept the others energized and moving forward, he said.

“We looked around at the Texas market and said how can you not have multiple funds to capitalize on this market,” Shamapant said. “That conviction really kept us going. We really believed that with our history of success combined with this market opportunity, we surely would emerge successful.”

“Capital Starved Startup Market”

Austin and Texas, in general, needed more venture capital funds to finance all of the activity going on here, Srinivasan said.

“The Texas market is the most opportunity rich capital starved startup market in the country,” he said.

While Austin Ventures does early stage investing and so do some other firms, a large untapped market opportunity still existed, Shamapant said.

“For example, if you looked at Silicon Valley, the market opportunity there allows several successful firms to exist,” he said. “Similarly, there are going to be multiple successful franchises here and we thought we could clearly build one of those ourselves.”

And the best time to enter a business is when an entrepreneur sees a compelling unmet opportunity, Scott said.

“If you are ever going to get great returns, it’s not when there’s an over-saturation of funds, it’s when there’s a shortage,” Scott said. “And so we felt like we were clearly in that situation. We felt like we were the team to take advantage of it. But we also surely picked one of the worst times in the last two decades to raise a fund.”

Ultimately with strong perseverance, a good story and a great track record, LiveOak Venture Partners did it, he said.

“And I think when you can raise money in tough times that’s an advantage,” he said.

Competition to Invest in Startups

Since LiveOak Venture Partners hung out its shingle last year, it has seen incredible deal flow, Scott said.

IMG_2431Last year, they looked at a few hundred companies and invested in five deals including Veros Systems, Written.com, StepOne Inc., NSS Labs, all in Austin, and CS Disco in Houston. Over the course of this fund, they expect to invest in 15 to 17 companies in Austin, Texas and the greater Southwest.

But they also have strong competition for deals.

Last year, Silverton Partners, an early-stage venture capital firm focused on Austin-based companies, announced the formation of a $75 million early stage follow-on fund. Silverton also struck a partnership with Mike Maples Jr.’s Floodgate to finance startups at Capital Factory. Austin Ventures, the big daddy in VC money in Austin, also invests in early stage deals.

“We’re absolutely in competition for deals,” Shamapant said. “That’s good for the entrepreneur.”

But there are a lot of high quality companies in this market to keep multiple venture firms busy, he said.

The myth still prevails that most companies are built by 20-year-old kids who drop out of college to create the next Facebook. But in reality a large majority of the startups in the Austin and Texas market getting funded are founded by experienced executives and entrepreneurs who have worked in those industries before, Srinivasan said.

But don’t discount the energy and creativity that young entrepreneurs bring to the market, Scott said. They have a “lack of baggage” and can view problems in a new light, he said.

“At the end of the day, what is crucial for success is to satisfy your customers and also figure out a scalable go to market strategy for it,” he said.

And that’s where a firm like LiveOak Venture Partners sees its sweet spot in helping entrepreneurs.

“We are very active with respect to collaborating with our entrepreneurs to help make their companies successful,” Scott said.

LiveOak Partners provides a lot of support in building a startups’ teams, he said. They also help them with strategic decisions, introduce them to key customers, partnerships and other potential investors and in the end help them with exit strategies, he said.

“Our access to talent, our access to strong executives with experience and our own long experience in investing are big assets to companies,” he said.

LiveOak understands the plight of the entrepreneur, said Kiwi Camara, CEO of CS Disco, which closed on $2 million in Series A funds from the firm in January.

The Houston-based startup makes software for lawyers to use to research cases.

“They’ve been great to work with,” Camara said.

Josh Kerr, co-founder of Austin-based Written.com, met Srinivasan at a 3-Day Startup event and then eventually met with the other partners. He and his cofounders were close to doing a deal with another firm, but decided to go with LiveOak Partners instead.

“They went from being a firm we weren’t considering to our top choice,” he said. “They seemed to really have done their homework on us.”

Last November, Written.com received $1 million in seed stage funding from LiveOak, Floodgate in California and several angel investors. The startup connects bloggers with brands interested in licensing their content.

Kerr had never created a company with VC money and he and his partners wanted to develop a good relationship with a VC firm that would also work with them and help them grow from a startup to a big company, he said.

“They’ve been great to work with,” Kerr said. “They are bringing us a ton of value.”

LiveOak finds startups through introductions and online.

“We are eager to meet entrepreneurs,” Shamapant said. “We’re as eager as the entrepreneurs are to meet us.”

It looks to invest in entrepreneurs who have a real problem that they’ve actually experienced themselves and they are trying to solve.

“A lot of people think they’ve got to have a whole business plan. It’s really not that. The first meeting all we’re trying to understand is do you have a problem to solve? Do you have a unique way to solve it that allows you to build a business on it.”

LiveOak Venture Partners investments are not limited to Texas, but that is its focus, Srinivasan said. Last year, LiveOak wrote checks ranging from $250,000 to $4 million, he said.

“We are not likely to put $100,000 into 10 companies and just sit back and see what bubbles to the top,” he said. “If we invest in a company we will spend meaningful time with the team to help them rapidly converge on their next milestones and financing.”

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