October 06, 2017
Mary Ann Azevedo is an Austin-based business writer who has written for Venture Capital Journal, San Francisco Business Times, Crain's and Silicon Valley Business Journal.
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In what is turning out to be a roller coaster of a year for Texas, the state’s third quarter performance marks its lowest both in terms of number of deals reported and dollars raised in at least five years, according to Crunchbase data.

(Note that numbers will likely go up as more deals are reported, but are likely not significant enough to make the above statement untrue.)

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Venture capitalists put $268.2 million into Texas startups across 38 known deals in the third quarter of 2017. In perspective, that is less than what was invested in all of Austin alone during the second quarter. VC funding in the Lone Star state was down a whopping 56 percent compared to the $609.7 million raised in the second quarter, and 21 percent lower versus last year’s third quarter.

Deal volume is also particularly low for Q3 2017. Between 2012 and 2016 (inclusive), the third quarter saw an average of count of 121.8 deals.

Marc Nathan, vice president of client strategy of Austin-based Miller Egan Molter & Nelson LLP’s technology and venture capital practice group, believes the dip is due to a variety of factors.

“The biggest and most likely is that there aren’t enough companies that can accept larger Series A or Series B deals right now,” noted Nathan, who is also publisher of the Texas-Squared Startup Newsletter.

Another contributing factor is that a number of Texas-based venture capital firms are in the fundraising mode of their lifecycle. Austin-based LiveOak Venture Partners, for example, is in the process of a $110 million raise.

“This activity takes time and attention away from new investments,” Nathan added. On top of that, “older deals are getting follow-on funding from past investors, which also takes capital away from new deals.”

Life Finds A Way

On the positive side, newer funds such as Next Coast Ventures are making $4 to $5 million investments at a steady clip, according to Nathan.

Stephen Hays, managing partner of Dallas-based Deep Space Ventures, believes it’s tough to look at funding on a quarterly basis.

“The deals that really drive the bulk of the total dollars invested in a quarter are usually larger deals, and those come in chunks,” he said.

However, Hays conceded, the quarter “felt slow, in terms of deal flow and closings in Dallas.”

In an interview earlier this year, Austin Technology Council CEO Barbary Brunner told Crunchbase News she does feel Austin lacks some “think big global perspective.” While Austin may be a great place for startups, Brunner would like to see the city’s small-to-midsize companies think bigger.

Austin Reigns Supreme

In the second quarter, the Texas capital showed impressive results with startups collectively raising $423.7 million over 45 deals. But for the three months ended Sept. 30, 2017, Austin companies raised just $143.4 million across 22 deals. The dollar amount was not much lower than the $144.6 million raised in the 2017 first quarter; however, deal volume was significantly less than the 41 rounds reported in that time period.

One Austin deal in particular stood out because of its size – the above-mentioned $40 million raised by auto insurance comparison marketplace The Zebra in a Series B round led by Accel Partners out of Palo Alto.

The Zebra has raised a total of $63 million since it was founded in 2012 by then 25-year-old high school dropout Adam Lyons (a Forbes 30 Under 30 winner). Other investors include Dallas investor Mark Cuban, Palo Alto-based Floodgate and Austin-based Silverton Partners.

As part of the latest funding round, Accel and The Zebra tapped Keith Melnick, former president of travel metasearch engine KAYAK as its new CEO.

Left to right: Joshua Dziabiak (COO), Keith Melnick (CEO), Adam Lyons (Founder & Chairman) of The Zebra. Photo courtesy of The Zebra.

“To me the insurance market looked a lot like how the online travel market looked when I started Kayak,” Melnick told Crunchbase News. “Once I met with them [The Zebra team], I got really excited about the opportunity. It’s a great business with a great team in a market with a lot of potential that’s about to take off. I couldn’t say no.”

The investment was a bright light in an otherwise bleak quarter.

Still, LiveOak Venture Partners founding general partner Krishna Srinivasan remains bullish on the Austin startup scene. He said he finds it hard to make trend conclusions based on quarterly aggregate data.

“It might be one large financing, or a financing that slipped into an adjacent quarter especially a later stage one that skews the numbers,” he told Crunchbase News. “I would not attach much significance to it.  The activity is fantastic which perhaps might be reflected in the number of earlier stage deals.”

In fact, Srinivasan said 2017 has been one of his firm’s most active years with five new investments so far. LiveOak describes itself as an “early-stage, lead investor” that will “opportunistically lead late-stage financings.”

“If you look at the five companies we invested in this year, they are all repeat entrepreneurs who have been there and done that who are doing something new and interesting,” he added. “We’re seeing a lot of strong repeat entrepreneurs coming back into the market to start new companies.’

Also, in all five deals, LiveOak had a co-investor that came from outside of Texas. Those investors hailed from New York, California, and Toronto, specifically.

“Overall, we saw great activity in the quarter,” Srinivasan. “It was one of our busiest summers ever in terms of both new and follow-on activity.”

Dallas

During the third quarter, eight Dallas startups raised $52.6 million compared to 21 startups raising $142.6 million in the previous quarter. The dollar amount, at least, was higher than the $46.6 million reported in the first quarter, although there was less than half the number of deals.

The city did see a couple of large deals close in the quarter, and they made up most of the city’s total venture investment. The deals included a $30 million round  by Carrolton-based Crescendo Power – an energy project investment company – and a $20 million raise by financial services startup NexBank out of Dallas.

While Deep Space Ventures’ Hays acknowledged that things felt “slow” in Dallas in the third quarter, he is optimistic about early-stage funding in Texas as a whole.

“I feel like there is a lot of momentum at the early stage across the state with the expansion of (Austin-based incubator) Capital Factory into Houston, Dallas and San Antonio,” he said. “The ecosystem is really coming together across cities within the state, which is creating opportunity and value for investors and founders alike.”

Houston

Hurricane Harvey devastated Texas’s largest city in August. The storm forced many residents out of their homes and many companies out of their office space.

Ironically, Houston is the only city out of the state’s major cities for fundraising that saw an increase in the amount of venture capital raised in the third quarter. That was largely due to the above-mentioned $50 million raise by HighRadius. Overall, funding climbed to $67.2 million for the quarter compared to $42.1 million raised in the second quarter.

Dr. Sarma Velamuri, co-founder of Luminare Inc., was one of those whose home flooded and family displaced as a result of Hurricane Harvey. Still, the startup managed to close on $500,000 in seed funding during the quarter with plans to raise another $500,000 this fall.

Velamuri, who also works full-time as a physician, and Marcus Rydberg founded Luminare in September 2014 with the goal of preventing people from dying of sepsis. The company’s software platform optimizes nursing workflow, accelerates access to care and streamlines medical communication, he said.

“Fundraising has been time-consuming, elaborate and a learning process. Easy is not a term that applies to fundraising,” Velamuri said.

Harvey, Velamuri, his wife, and three kids are currently sleeping in a friend’s guest room.

“I thought my life was busy and complicated before the flood,” he told Crunchbase News. “Now every day requires a more detailed plan. Sometimes stuff gets done in the middle of the night.”

From the VC side, oil and gas continues to be a hot sector – despite the lower oil prices globally.

Jeremy Arendt, managing partner at Houston-based Cottonwood Venture Partners, noted that his firm invests strictly in companies providing digital solutions to the oil and gas industry.

“The third quarter was the hottest time yet that we saw in the digital oilfield space, and we expect the fourth quarter to be even more active,” he said. His firm closed two financings during the quarter. Ironically, neither deal involved a Houston startup. One investment was in a Canadian firm and the other in an Austin-based startup.

Harvey impacted the entire oil & gas space, Arendt noted, and put the industry back by two to three weeks.

“Venture-backed companies were not immune,” he said. “But it has already recovered and is back in full swing.”

The third quarter was by far and away one of the worst for the Texas venture scene in recent times. Despite optimism on the part of local venture capitalists, the state appears to be struggling to gain the momentum it needs to emerge as a shining star in the startup world.