Fueling Startups: New Firms Emerge on Texas Venture Capital Landscape

A perceived weakness in Texas’s startup communities is a lack of early stage investment capital available for budding tech entrepreneurs.

Texas tech entrepreneurs share anecdotes about the difficulty they can have in securing funding. And data compiled by industry organizations show that venture capital activity in the state is a fraction of what is seen in bigger-name startup hubs like Boston or San Francisco.

By far, Austin companies raised the most of all Texas cities with $976.26 million this year as of Sept. 30, according to PitchBook/National Venture Capital Association data released this week. Dallas posted $309.85 million in the same period, with Houston and San Antonio coming in at $154.58 million and $86.82 million, respectively. (Compare that to the $6.2 billion raised in the Boston metro area by the Sept. 30 cutoff date.)

Texas has homegrown venture firms active in the state’s entrepreneurial ecosystem, of course. Houston-based Mercury Fund, Dallas’s Naya Ventures, and LiveOak Venture Partners in Austin are active investors. And last month, Austin-based AVX Partners announced a name change to Elsewhere Partners to reflect the firm’s focus on neglected startup communities both in and out of Texas.

Recently, new investors in Houston and Dallas are seeing opportunity and have set up shop. We talked to three new investment firms:

Cottonwood Venture Partners, Houston
—Notable investments: Ambyint and Novi
—Founded this year by oil and gas veterans Ryan Gurney and Jeremy Arendt.
—Cottonwood is raising a $50 million fund and plans to make 10 investments of between $3 million to $5 million.

“We’ve always been impressed by the mechanical prowess of the [oil and gas] industry. They can drill miles below the surface of the earth with pretty good precision,” Gurney says. “But we were underwhelmed by the lack of digital adoption.”

Gurney says he and Arendt believe that mindset is changing, so they set up Cottonwood Ventures, focusing on software in the oil and gas industry. A low price environment for oil is driving companies to operate more efficiently and adopt a “digital oilfield” mindset. Also influencing things is “the great crew change”—a generational shift as young workers start to replace retiring Baby Boomers— that “is more receptive to technology,” he says.

Gurney says he believes Cottonwood is in the best position to finance energy tech startups. “If you’re an oil and gas software company, you view yourself as a tech company” that doesn’t necessarily have the contacts in the energy sector, he says. And, on the investor side, “you’re a traditional VC shop, but have no idea what you’re talking about in oil and gas.” Cottonwood wants to bridge that gap, he says.

“A lot of this is explaining what these tech companies are doing, or can be doing for the ultimate customers and making that value proposition crystal clear,” he says.

Gurney and Arendt say they have spent the past year researching the market, getting to know entrepreneurs, and connecting them with contacts in the energy industry. “Deal flow has been terrific and, frankly, a bit overwhelming at times,” Arendt says.

Cottonwood plans on concentrating on what it calls digital oilfield hubs like Texas, Denver, and Calgary.

Intelis Capital, Dallas
—Notable investment: … Next Page »

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