Startups Venture

Capital Factory: The Lone Star State’s Best-Kept Startup Secret

When you step into the doors of Capital Factory, the energy is just what you’d expect from a place that calls itself the “Center of Gravity” for entrepreneurs in Texas.

Capital Factory’s vibe is hip and cool yet warm and welcoming. It’s colorful without being over the top. The 60,000 square foot space sports a Star Wars floor, a live music floor, and murals of Willie Nelson and David Bowie—a testament to its home city’s moniker of being the “live music capital of the world.” There are also secret conference rooms hidden behind bookcases, a virtual reality lab, and animated and concentrated faces everywhere you turn.

Photo credit: Mary Ann Azevedo

Capital Factory has come a long way since it was first founded in 2009. At the time, the city’s startup scene was growing, and Capital Factory’s three-month accelerator program (modeled after Y Combinator and Techstars) was one of the first of its kind to be offered in Austin.

Fast forward to 2018, and Capital Factory now offers a year-round “community” and program, said co-founder and Executive Director Joshua Baer. And that’s putting it lightly. In 2017, Capital Factory hosted 1,348 events with 126,532 attendees. Last year, 2,416 members and 1,480 startups called Capital Factory home. One-quarter of those members were women, and 30 percent are of diverse backgrounds. It has also “really expanded by order of magnitude the number of companies” it works with, according to Baer.

From Humble Beginnings To Large Impact

From 2009 to 2011, Capital Factory worked with just five companies per year. In 2012, that number was up to 50. Now, in 2018, Capital Factory is working with more than 100 startups. In total, about 250 companies have gone through its program.

Along the way, it also became one of the state’s most active investors through a separate early-stage fund that put money in 53 different deals last year. Half the startups it has invested in are racially diverse. Other accelerators might take 6 to 10 percent equity in exchange for a startup participating in its program, but Capital Factory takes one percent equity and under the agreement it’s allowed to invest in the first round of funding the startup may go on to raise..

“While other entities… have had a large impact on the startup community, Capital Factory and Joshua Baer have connected more people to more startups than any other organization in recent memory,” said Marc Nathan, VP of Client Strategy at Egan Nelson, LLP & publisher of the Texas-Squared Startup Newsletter. “It’s clear they are driving force for the Texas startup region.”

Photo credit: Capital Factory

Capital Factory’s strength lies in its ability to build bridges among startups, funding sources, corporate partners, and government agencies to the benefit of all, according to Nathan. Last year, the organization expanded its mentor and venture fund across the state under the banner of the Texas Startup Manifesto.

Also impressive is Baer’s humility. When you talk to the leader of Capital Factory, it’s clear that he is working from a passion and sincere belief in the region’s startup ecosystem. He hesitates to call himself the founder, emphasizing that he co-shares that title with many others including Capital Factory Director Gordon Daugherty and Mellie Price.

“We’re really focused on accelerating—such as taking something that is starting to work and helping to make it work faster by doing things like introducing a company to its first investors, customers and mentors and in some cases, its first employees. This big networking space and community is a magnet that attracts all those resources,” he told Crunchbase News.

And the accelerator just continues to grow. Next month, Capital Factory will unveil 26,000 square feet of co-working space a few hours away in Dallas. Later this year, it’s opening another 15,000 square feet in Austin’s east side at the new Center for Social Innovation.

“Traditionally, we’ve been focused on just Austin geographically,” Baer said. “But now we’ve expanded to working with companies based all over Texas because we think the state is an incredible opportunity. It’s so unique because it’s home to four of the largest cities in the country, that also happen to be four of the fastest-growing cities with top tech hubs, all within a day’s driving distance of each other.”

Joshua Baer, Photo Credit: Capital Factory

Capital Factory’s vision is to connect people from all four cities together and move them around. It wants to expose startups to the big companies, and the big companies to the startups.

“If you’re a startup and not going to Dallas to sell to big companies, you’re missing out,” Baer said. “And there’s a lot of old oil and real estate money in Dallas and Houston that can be invested elsewhere. No matter where a company is in the state, it shouldn’t think of another city as really far away but as a resource that it can tap into. We want to treat the four cities not as separate places but as one big city.”

Fostering Success

In its nine-year history, Capital Factory has seen a number of success stories.

Self-storage software startup SpareFoot was one of the original companies that went through the Capital Factory accelerator program. It recently announced a significant liquidity event when Boston private equity firm took a majority stake in the startup. (Disclosure: I am a freelance writer for SpareFoot.)

SpareFoot’s co-founders Chuck Gordon and Mario Feghali had just graduated from UCLA in 2009 when they decided to move to Austin and go through the Capital Factory program. Capital Factory, according to Baer, helped the pair come up with a name for the company, figure out their business model, and introduce them to mentors and investors such as Silverton Partners.

“The company is still going and growing,” Baer said. “As the first and early investors, it’s been a good outcome for us and everyone involved.”

Morgan Flager, general partner of Austin-based Silverton Partners, agrees.

“SpareFoot was a great example of not only us working together, but of putting Capital Factory on the map as well,” Flager said. “They dropped everything and came to Austin to participate in the first class and had a great experience.”

Another company, WordPress host WPEngine, was introduced to Silverton via Capital Factory. WPEngine recently announced a $250 million private equity investment by Silver Lake Partners.

“WP Engine was actually officing in Capital Factory Space, and Josh was instrumental in terms of getting that company started,” Flager said. “Then we did two early investments in that company as well.”

When Capital Factory first launched in 2009, it filled a gap in the early-stage venture ecosystem in Austin, noted Flager. It offered entrepreneurs the benefit of working in close proximity to—and sharing best practices with—other people with similar challenges.

“That’s really important for early-stage companies,” he said. “And it gives us a great avenue to observe companies as we serve as advisors and mentors.”

In general, Flager believes Capital Factory helped create a positive environment for early entrepreneurs.

“They deserve a lot of credit for really helping get the ball rolling in terms of making Austin a really interesting place to start a company,” he said.

Mobile-first education platform Aceable is another Capital Factory company that Silverton invested in that has grown significantly over the years.

Blake Garrett

Aceable Founder Blake Garrett entered into Capital Factory’s program in 2013 and it was through Capital Factory mentors and potential investors that he realized he needed to switch gears on his early ideas.

The company focuses on mobile-first education that relates to licensure or continuing education. It developed the state-approved driver’s education mobile app, and it recently expanded into real estate education.

“When I entered Capital Factory, I was making trivia games mobile for nonfiction books and training material,” Garrett recalled. “But when a mentor told me I was on the wrong track, I initially was discouraged. But he told me the idea of education on mobile devices with gamification and social mechanics actually made a lot of sense, and that I just needed to do it for things people had to learn.”

It was advice that proved fruitful.

Aceable has since raised about $8.7 million in funding from investors such as Silverton and Floodgate. The startup now has 82 employees and more than 500,000 people have used its app.

Besides the access to valuable mentorship and an introduction to investors, Garrett credits Capital Factory for making him “hustle.”

“I would say what’s different about Capital Factory compared to other programs is that what you put into [it] is directly proportional to what you get out of it,” he said. “In business in general, the only reason you’re successful is if you’re willing to outwork and out-hustle other people. Capital Factory exposes you to all the necessary resources, but it doesn’t do all the work for you. And that’s a good thing.”

As Capital Factory continues to grow, there’s no doubt that hundreds of more startups will benefit from all it has to offer. Here’s to hoping that other accelerators around the country will learn from Capital Factory’s strengths and successes and use the organization as a model for their own programs.

Featured image credit: Capital Factory

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