July 11, 2018
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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The Texas venture scene continues its rollercoaster ride.

After a relatively strong first quarter, the venture funding scene in Texas was unable to keep pace in the second quarter. When compared to the first quarter of 2018, venture dollars raised in Texas were down by 17 percent to $506.2 million, according to Crunchbase News research. Compared to the second quarter of 2017 when $762.3 million was raised across 135 deals, dollars raised were down 34 percent and deal volume dropped by 38 percent.

As in previous quarters, Austin startups brought in the majority of the funding. The Texas capital is smaller than both Houston and Dallas in population, yet it raised nearly two-thirds of the state’s venture dollars during the second quarter.

Venture capitalists pumped $328.6 million into Austin startups across 43 known deals in the second quarter, according to Crunchbase data. That’s 9 percent less than the $359.3 million raised in the previous quarter across 39 transactions. A number of Austin startups closed on double-digit funding rounds. SaaS provider Big Commerce raised $64 million in a Series A round, and cashback app DOSH brought in $45 million in a Series A round. Telehealth startup Medici also raised $22.4 million in a Series A round.

Dallas accumulated $138 million across 20 transactions; however, that was down 22 percent from the $178 million raised across 21 deals in the Q1 2018.  One company alone was responsible for nearly one-fourth of the total raised in the city: Dallas-based OrderMyGear —a sporting goods marketplace —closed on a $35 million funding round in April.

Houston’s second quarter performance dipped when compared to the previous quarter. The city raised $33.2 million raised across 14 deals compared to $37.2 million over ten deals in Q1 2018. Its largest known venture round was a $2.8 million raise by medical device startup Saranas in late May.

But the numbers don’t tell the whole story of Texas’s venture capital scene, so we talked to some investors in the area to get the big picture.

Austin

Austin is known for being the Lone Star State’s tech hub. And while it’s true that a number of large tech companies (including Facebook, Apple, Amazon, and Google) have a presence in the city, its startup scene has struggled to gain any real momentum. On the positive side, existing funds have continued to raise money and newer funds have popped up. Trust Ventures, for example, quietly opened up shop with a $35 million fund in the capital city this year.

Venu Shamapant, Partner at Austin-based early-stage VC firm LiveOak Venture Partners, said his team focuses more on new company formation rather than total dollars raised.

“I can see why [dollars raised] is an important benchmark,” he told Crunchbase News. “But from our perspective, we’ve seen so many new and interesting companies over the past couple of quarters. And not just in Austin, but out of Dallas and Houston as well.”

LiveOak Venture Partners closed a $100M fund in 2014 and is in the process of a $110 million raise. The firm invests about 60 percent of its funds in the Austin market; 25 percent in Dallas; and 15 percent in Houston, Shamapant estimates.

In the second quarter, a number of LiveOak’s portfolio companies closed follow-on financings. The firm also invested in Austin-based Eventador.io.

“New deal activity is the most robust we’ve seen in a while,” Shamapant said. “We’re seeing a significant shift toward companies having more revenue traction and an MVP (minimally viable product) before we’re seeing them. They’re not just coming in with a PowerPoint presentation. We’re seeing more than ten companies every week come in for first meetings.”

Austin, he noted, has historically focused on enterprise software. However, Shampant believes the city is starting to see more tech-enabled service companies and vertical SaaS businesses catering to a variety of industries such as legal, pharmaceutical, and real estate.

He also believes the collaboration among the city’s VCs is growing.

“It’s very common for people to ask each other if they’ve looked at a particular company or if they want to work on a deal together,” Shamapant said. “That’s great for the market. At the end of the day, all of us will succeed, and we are defined by each other’s successes as much as our own activity. We believe that Texas is going to be a fantastic VC market.”

Dallas

Felipe Mendoza, managing director of Dallas-based Aristos Ventures, believes the quantity of VC firms is “starting to go up again,” particularly in Dallas and Austin.

“That’s good. I want co-investors to help share the risk, and smarter people around the table,” he said. “And it’s still to the point where no one is competing for deals. But while there’s some growth, more firms would definitely be better.”

In Dallas, Mendoza has seen an increase in AI and machine-learning companies, especially in the SaaS space. His firm, founded in 2011, is focused on enterprise B2B software. It closed its first fund in 2013 (in which it raised $10 million) and is going to close on a second, larger fund.

However, Mendoza is seeing a decline in the quality of the startups seeking money.

“Over the past year or so, we’ve noticed a trend downward in the quality of companies looking for early-stage funding,” he told Crunchbase News. “I’m not sure why that is exactly, but it’s something myself and other investors have noticed—that the quality is not quite there.”

For his part, Live Oak’s Shamapant – a former general partner at Austin Ventures – sees a lot of potential in the Dallas market.

“One of the most successful markets for us personally at Austin Ventures was Dallas. We have always been big believers that Dallas has a lot of entrepreneurship talent, but it’s just taken a while to get organized,” he said. “We expect to see a lot more activity there in the near future.”

Houston

Blair Garrou, co-founder and managing director of Houston-based Mercury Fund, acknowledges that the second quarter was “fairly quiet” in Houston.

The few investments made were mainly in energy tech companies such as FlexGen Power Systems, Geophysical Technology, and Hicor. Life sciences made a small debut through startups such as Saranas (mentioned above) and Corinnova.

During the second quarter of 2018, Mercury Fund made eleven follow-on investments into existing portfolio companies (four of which had headquarters in Houston or have a Houston office) and just one new investment in an Indianapolis-based startup.

Looking ahead, Garrou is optimistic that Houston will see an uptick in venture capital financings based on the companies who are currently out fundraising.

“A number of Texas-based VCs have raised new funds and will be looking to put the capital to work,” he wrote via email.

And while dollars raised is not the only barometer of success, it can’t be ignored.

Editorial correction: A company round in the dataset was incorrectly attributed to Houston. The startup was actually based in Austin. The article has been updated to reflect this change.