Report: Austin’s Startups Need More Homegrown, Later-Stage Capital

Austin may be known as a startup hub, but its homegrown investment scene lags far behind that of the nation’s top technology centers.

That’s the conclusion of a report released today by the Austin Technology Council and the Austin Chamber of Commerce. While Austin’s “funding landscape includes a strong representation of seed- and early stage funding sources, the city’s smaller number of later-stage capital sources is inhibiting companies from reaching their full potential,” the report states.

“We can’t do all the deals,” says Brian Smith, managing director of S3 Ventures in Austin. “We want to see this town flourish and grow and that’s not going to happen on the back of one investor.”

S3, which Smith founded a decade ago, could be considered among the more mature venture capital firms doing business in the region—especially since the essential shuttering of Austin Ventures earlier this year.

This first “Capital Landscape Analysis” study counted capital sources in nine major metro areas, assessing each on eight capital funding sources available various stages of a startup’s growth—the most granular analysis conducted into early-stage company funding to date, the organizations say. The report found that the size of Austin’s funding source network is significantly smaller than other markets and links this finding to the region’s lower overall venture capital investment total and lower average deal size.

Here are the report’s key points:

—While Austin is ranked first for startup activity, according to the Kauffman Foundation, the area ranks 12th for venture capital funding according to data from the National Venture Capital Association.
—Central Texas has 144 funding sources as compared to the top four metro areas: Silicon Valley (711), New York (666), New England (464), and Chicago/Midwest (362).
—While most metro areas average about $10 million per deal, Austin has a $5.4 million mean average deal size.
—Total venture capital investment in Austin is $620 million compared to roughly $4 billion in both the New England and New York regions. Seattle and Southern California receive about $1.2 billion and $2.6 billion, respectively, according to the NVCA. To be sure, all of those areas are bigger than the Austin region.

These patterns are reflected in other sources such as the MoneyTree data released Oct. 16. In fact, so far for the year, the entire state of Texas comes in far behind ($1.147 billion) than other U.S. regions such as the New York metro area ($5.61 billion) and New England ($4.97 billion.) Silicon Valley dwarfs them all at $22.94 billion.

Still, S3’s Smith adds that the startup activity currently ongoing in Austin is at the greatest level he’s seen in his 24 years in city. That should create investment opportunities.

Venu Shamapant, a former Austin Ventures executive who co-founded LiveOak Venture Partners three years ago, says a glance back at recent economic history can help explain the drought. The recent severe recession all but halted what had previously been a robust scene of company formation. While money was being raised, it was largely for follow-on rounds of companies that already had some traction in the market.

“That issue is what is showing up in the numbers now,” Shamapant says. “These are the companies that should be raising the later stage rounds today. They were not funded five or six years ago.”

In the end, he adds, he thinks the focus should be on quality not on the total numbers. “Nothing will make this market be incredibly attractive than having five exits in the next 24 months,” he says.

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