First quarter venture investment in Texas once again reflected a common result: Austin nabbed the most investment dollars with Dallas and Houston trailing behind.
The news isn’t shocking considering Austin started off the year with a very strong January, as we reported at the time. The city’s startups raised the majority of total dollars brought in by the state as a whole, as you can see below.
Venture capitalists pumped $493.8 million into Austin startups across 34 deals in the first quarter—a 35 percent spike (in dollars) compared to last year’s first quarter, according to Crunchbase data. Dallas companies’ totals were closer to Austin’s figures than normal, and firmly in second place, raising $245.4 million in 18 deals in the same time period. Houston startups brought in $44.7 million across nine transactions. Two investments were made in San Antonio during the first quarter, valued at $6.5 million.
Overall, Texas dollar values were up at $790.4 million (35 percent year over year) compared to $587.2 million in Q1 2018 although the actual number of deals is significantly lower (46 percent) at 64 compared to 118—indicating larger investment sizes as the state’s startup market continues to mature.
The state has also seen a number of new funds announced this year, including LiveOak’s close of a $105 million fund and the formation of Ecliptic Capital, a new $125 million early-stage VC firm.
Austin Ahead
For Austin, the first quarter validated what we reported in January: the Texas capital’s venture capital scene continues to gain significant momentum. The most recent quarter was easily the strongest for Austin over the past several quarters. Contrasting the above-listed numbers, in the first three months of 2018, 67 Austin startups raised $366 million.
One of Austin’s largest deals in the quarter was AI-powered legal tech startup (and Houston transplant) Disco’s $83 million Series E raise. Meanwhile, Austin-based construction finance startup Billd raised $60 million in a Series A round.
Chris Shonk, managing director of ATX Venture Partners (formerly called ATX Seed Ventures), described the first quarter as having been “really truly gangbusters.”
For one, he noted, the talent pool continues to grow as more companies move here.
“A lot of companies are relocating here, and they’re going to scale up and hire people,” Shonk said. “This causes rounds to happen… Eventually some of those people leave and start their own companies.”
Mike Smerklo, co-founder and managing director of Austin-based Next Coast Ventures, observed a number of positive events taking place in the Texas capital in recent months, including numerous seed or early-stage funds announcing their launch, triple-digit funding rounds and tech heavy hitters such as Google, Apple and Amazon announcing expansions in the city.
“All of these are indicators that the Austin ecosystem has created a groundswell of entrepreneurial and investment activity to support a booming innovation hub,” he told Crunchbase News. “While we’ve known for a while that Austin exemplifies what is possible outside the coasts, it’s great to see tech heavy hitters and the entrepreneurial ecosystem at-large start to know it, too.”
One trend Shonk noticed in Austin was the wide range of sectors receiving funding. Traditionally, Austin has a long history of funding enterprise SaaS startups.
“There’s been such a heavy focus on B2B and that’s been the city’s bread and butter,” he said. “But now you’re seeing other industries pick up steam, including CPG [consumer packaged goods], real estate, energy tech, supply chain/manufacturing and e-commerce.”
For its part, ATX made four portfolio follow-on investments and one new investment in Q1. It led a $7 million Series A for Houston-based GoCo, and also put money in Austin-based Cherry Circle Software and Quota Path.
Meanwhile, Next Coast Ventures made two new investments during the first quarter, including one with headquarters outside of Austin – Localfluence, a Utah-based influencer platform for local brands, and Osano, an Austin-based data privacy monitoring platform.
Looking ahead, Shonk believes VC investment activity in Austin will continue to be strong throughout 2019 despite a potential national shakeout spilling over into the city and state.
“Some of the companies that got funded over the past seven years are companies that should never have been backed,” he told Crunchbase News. “I see a correction coming, and I believe Austin will get some of it.”
Dallas
Like Austin, Dallas has predominantly been home to B2B enterprise software startups. However, one of the companies that raised the most in Dallas during the first quarter was actually a biotech company. In February, Peloton Therapeutics brought in $150 million in a Series E round.
Felipe Mendoza, managing director of Dallas-based Aristos Ventures, said overall the funding potential for companies raising venture capital in the Dallas area looked “good” to him in the first quarter.
“I’ve seen a robust number of companies that are raising smaller rounds and this trend of companies raising smaller amounts is continuing quarter over quarter,” he said. “Historically this makes sense as the infrastructure to build a technology company is less capital intensive as it was even just a few years ago.”
Of the startups his firm looked at, “well over 50 percent” were in the SaaS or software infrastructure space.
“Software, as Marc Andreessen states, is eating the world,” Mendoza said. “But software in the medical services vertical was less ‘hot’ than in previous quarters.”
In the first quarter, Aristos Ventures invested in three companies. Two of those—Edgetensor and Meteora—are Dallas-based. The other, Houston-based Nesh, is a “smart assistant” for oil and gas.
Looking ahead, Mendoza is cautiously optimistic about the VC funding landscape for the remainder of 2019. He is concerned about potential macroeconomic headwinds, specifically on how they could affect customers purchasing a portfolio company’s products, for example, as well as the pressure a potential acquirer of a portfolio company could face.
Houston
Although Houston is the largest of all Texas cities, it (as is typical) lagged behind Austin and Dallas when it came to VC funding in the first quarter. Like Dallas, the company that brought the most venture funds in Houston during the quarter was a biotech startup, Solugen. The company counts Y Combinator as a backer.
Aziz Gilani, a partner at Houston-based Mercury Fund, said he was up to his “eyeballs” in deals over the first quarter.
“My normal cadence is to do one deal every three quarters,” he told Crunchbase News. “In the first quarter, I did two deals and if I’d had my druthers, I would have done three. I’ve been trying to convince a company in Houston to take my money but they have too many options.”
Mercury Fund participated in a seed round in Austin-based-Cloudsnap, an iPaaS (integration platform as a service) startup. (That round was led by San Antonio-based Active Capital.) Mercury Fund also invested in Washington, DC.-based Amify during the quarter.
Gilani believes a big deal for the Houston startup scene has been accelerator Station Houston which gives local companies a place to grow out of.
“There are over 200 startup members of Station Houston,” he said. “If you’re a VC and looking to deploy money, you can just go there and park in a chair and eventually, every startup in town will pass by. It’s made life a lot easier for investors.”
He also describes the recent establishment of nonprofit Houston Exponential as being the “biggest game changer” Houston has seen in awhile. Last fall, the organization raised $25 million to invest in funds aimed at boosting the city’s tech scene.
Despite all the exciting venture activity buzzing in Texas’ larger metros, Austin continues to reign as the state’s startup capital in terms of dollars invested and number of startups. However, with dollars-invested scaling up nationwide, we wouldn’t be surprised if the state’s total venture funding hits the $1 billion mark in the next year or two. That should make for some Texas-sized news ahead.
Illustration: Li-Anne Dias
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