Last week was a good one for Austin. Two mega-rounds totaling $400 million were raised. A new unicorn was born. Two new nine-digit funds were announced (read about them here and here). For those of us on the ground in the ATX, it feels a bit like validation for all the “hype” surrounding the city.
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All the great news, though, comes off a pretty unimpressive third quarter not just for Austin, but for Texas as a whole.
As is typically the case, Austin funding amounted to more than the other major cities, representing 63.5 percent, or nearly two-thirds, of what was raised statewide. But numbers overall were less than impressive.
Texas dollar values were down significantly at $372.4 million (52 percent year-over-year) compared to $776.8 million in Q3 2018 and even lower (55 percent) than the $830.6 million brought in by Texas startups in Q2 2019, according to Crunchbase data.
For context, Austin startups raised more last week than Texas companies combined raised in all of the third quarter alone, according to Crunchbase data.
But it’s important to remember that final numbers are all subject to reporting delays. Actual deal counts and dollar volume totals are higher than what Crunchbase currently has on record, and the numbers we’re reporting today are likely to change as more data gets added to Crunchbase over time
Or, perhaps everyone was just busy working on all the deals that seem to be materializing so far in the fourth quarter.
Going local, venture capitalists put $236.4 million into Austin startups across 31 deals in the third quarter—a 46.9 percent drop (in dollars) compared to the $445.5 million raised over 40 deals in the year’s first quarter, according to Crunchbase data.
Austin’s largest known deal in the quarter was fintech startup ScaleFactor’s $60 million raise (which we covered here), which accounted for more than a quarter of all dollars raised. Meanwhile, TurnKey Vacation Rentals, which markets and manages vacation rental homes, landed a $48 million Series E led by Menlo Park-based Altos Ventures. While those are respectable rounds, it’s an overall disappointing result when you considered the city started off the year with a very strong January.
Dallas’ performance in the quarter also reflected a decline when compared to the three-month period that preceded it. In Q3, Dallas startups brought in $70.3 million across nine transactions compared to $126.7 million in 15 deals in Q2. The company that raised the most in Dallas during the third quarter was five-year-old biotech startup Onconano Medicine, which brought in $23.7 million in a Series A led by Los Angeles-based Salem Partners.
Houston’s totals were pretty low even by Houston standards (the city often ranks third in the state in terms of venture dollars raised). Startups there raised a mere $38.4 million in six deals in the three months between June and September 2019, down considerably from the $251 million by 13 companies raised in Q2 2019. The company that brought the most venture funds in Houston during the third quarter was Axiom Space, a four-year-old commercial provider of human spaceflight services, which raised $16 million in a seed round.
“We’re still a relatively small venture funding market, relatively being the key word there. So one or two events can make it look like a major percentage change when, by comparison, those few events could be common in larger venture markets where their happening is a mere blip from the norm,” he said.
Also, I was quick to say, “Oh wow, another quarter where Austin performs better than the rest of Texas.”
But he reminded me that what’s good for one city here is good for the rest of the state too, especially to those cities that aren’t so far away (San Antonio and Houston are about 90 minutes, and 3 hours driving distance away, respectively)
“Folks are really coming together and recognizing that there’s domain expertise in each of the cities that can be leveraged,” he said. “Startups take at least three to four years to get meaningful traction for investors. Austin started seeing significant momentum six or seven years ago, and we’re now seeing the fruits of that. The other markets here started a couple of years behind Austin. So in a few years, I expect we’ll be seeing the same trends in other cities.”
But something that strikes O’Brien as needing some improvement is the fact that despite a lot of money residing in Texas (think high net worth individuals and family offices for example), a lot of the larger deals are being funded by VC firms located outside the state.
Cases in point: Silicon Valley-based a16z led Austin-based RigUp’s massive $300 million Series C last week, which also included participation from UK-based Baillie Gifford. March Capital Partners out of Santa Monica, Calif. led SparkCognition’s $100 million Series C, which also included participation from Singapore’s Temasek.
“Everyone else is pouring capital into the state so why not the people here,” O’Brien asked. “Those deals are a strong signal that folks in our home state should be supporting the state much more aggressively.”
O’Brien challenges the wealthy individuals in the state to appreciate the expertise located here.
“They can no longer wait on the sidelines,” he said. “They need to put capital to work here.”
One example of an out-of-state investor who sees the potential in Texas is Kelly Ford, a partner with Princeton, NJ-based growth equity firm Edison Partners, which has invested in Irving-based Solovis. She is bullish on the state and believes part of what makes Texas attractive is how affordable it is for startups to operate.
“There’s a business-friendly, economically-healthy climate across all major cities and surrounding areas. The unemployment rate is below the national average and companies enjoy low to zero business tax rates,” she told Crunchbase News. “Strong corporate presence from the sectors in which we invest is another reason that Texas appeals to us.”
Indeed, a number of large tech employers such as AT&T, Amazon, Dell, IBM, Apple, Lockheed Martin, 3M, and Hewlett-Packard have a significant presence in Texas, Ford said.
“We also see quality of life is creating a boomerang effect from the coasts where Generation Xers are coming home to start and grow interesting tech businesses,” she added. Meanwhile, personal income is growing in a state where there is no personal income tax.
“These dynamics serve founders well, and are strengthening their ability to recruit from outside the region,” Ford said. “We have also discovered that many founders in the region are wired to be more capital-responsible than in major markets like the Bay Area and NYC. They are not keeping up with the Joneses of Silicon Valley, always focused on raising that next round. They’re focused on capital efficiency, have a more measured mindset in the interest of building solid, scalable businesses.”
And, as O’Brien pointed out, there is capital available in Texas in the form of family offices, high net worth individuals, angel and seed investors.
“So Texas is not ‘underserved’ as many markets are in the middle of the country. Raising $5M or less is relatively easy,” Ford said. “But we hear from entrepreneurs that it is more challenging to find the right investment partner with the right check size, say $8-15 million, and know-how once they reach the growth stage – when they are no longer testing and working on product-market fit, but rather truly ready to scale growth.”
Note: Due to the quarterly, I will not be publishing my monthly Texas-focused column in October. But it will be back in full force next month.
Illustration: Dom Guzman