Strategy Session: Active Capital Bets on Startups Outside Silicon Valley

Strategy Session is a feature for Crunchbase News where we ask venture capital firms five questions about their investment strategies.

Active Capital is a San Antonio-based venture firm focused on leading seed rounds for B2B and SaaS companies located outside of Silicon Valley.

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In December, the firm closed on its second fund after raising a total of $26.5 million. It began investing from the second fund last April and has made more than 20 investments since. The firm typically invests in pre-seed and seed rounds, writing checks between $100,000 and $1 million. Last week, Active was involved in a $1.3 million pre-seed investment in Stagger, an Austin-based visual storytelling platform, according to Crunchbase data.

During the frenzy of rumors that California founders were “fleeing” the state, my colleague Chris Metinko spoke to some experts in February about if that was the case. He reported that in 2018, 3,166 startups were founded in California, according to Crunchbase data. That number fell to 2,087 in 2019, and then 1,013 in 2020. At the same time, Texas saw a similar trend: 639 companies were founded in 2018, down to 394 in 2019, and just 231 in 2020, according to the data.

I spoke to Active’s founder and CEO Pat Matthews, who talked about what it was like to raise the new fund, and what might be the possible impact of Silicon Valley founders moving to Austin. The following was lightly edited for clarity and length.

What was the experience raising for the fund?

Matthews: At first it was crazy, but not unique to us. We came into 2020 with lots of meetings lined up. It had taken us 2 ½ years to raise the first fund. The LPs were happy with that, so there was enthusiasm coming into Fund II. We made new connections and meetings, but as COVID hit, it was scary for us. No one knew how the world would play out. We made a lot of progress in January and February, but in March and April we were going to go outside of Texas. That got put on hold. We were nervous about Texas investors sticking with us.

We ended up putting fundraising on hold, which was a good thing. We didn’t have the heart to call on people during the mid-March and mid-April timeframe, and we ended up being busy triaging with our portfolio. The truth is, I don’t have problems with that, but it put us to the test: We had to be touching base with everyone. Once things adjusted, it went well.

How does the firm like to work with founders?

Matthews: Our firm is built to lead seed rounds for SaaS. Most of them are building outside of Silicon Valley, which COVID pushed over the chasm. Everything we do is representative of our backgrounds as founders in the B2B and SaaS world. We love to invest in founders in underdog cities. Whether we are lead or co-lead, we like to have a structured cadence, but are constantly in touch with founders. We like to work with the CEO on the long tail of issues as we go from startup to a real company. I like to earn my role as adviser. We tell founders that all problems start to change when they hit product market fit and growth.

Can you explain what you mean by going from a startup to a real company?

Matthews: When startups find product market fit, they are hiring people and scaling different aspects of the business, hiring executives and adding human resources people, maybe even firing a few people. Success changes a lot of things and existing dynamics within a business, sometimes even the relationship between co-founders. Typically, founder CEOs have one area where they are strong, and they want to be CEO — sometimes they don’t. But where I like to spend time is helping founders become the CEO of their growing company. That means learning new businesses and becoming a generalist. I love to work with creative founders and working with them to be broader where needed.

What impact do you think Silicon Valley coming into Austin will have on the VC market there?

Matthews: I think it is a positive thing. Just the explosion of VC firms and seed firms is net-positive overall for the ecosystem. There has always been a feeling from us in Texas that it is hard to get later-stage rounds done unless you are in Silicon Valley. The more VCs that come in from bigger firms, and smaller firms as well, are good.

Do you think that will trickle down to other Texas cities?

Matthews: I do. Like Dallas, Houston, San Antonio and maybe even beyond. There will be a spillover effect. The Capital Factory expanded to Houston and Dallas, as well as to San Antonio recently. I’m a big believer that those cities should stay plugged in to Austin, and also to Silicon Valley. It is still the heartbeat of technology. Other cities are stepping up and it’s possible to build great companies outside of Silicon Valley.

Illustration: Dom Guzman