Austin Gets Upstaged, for Now

Ten years ago, Austin led Los Angeles on the deal-making front and barely trailed New York. (At the end of the second quarter of 2002, 88 Texas-based companies raised funding. During the same period, L.A., New York, Boston area, and Silicon Valley companies saw 86, 128, 250, and 441 companies funded.)

Recently, however, investment in Austin has dropped off noticeably. Eighty-one deals were closed in the entire state of Texas in the first two quarters of this year. Meanwhile, during the same period, L.A., New York, Boston area, and Silicon Valley companies sewed up 126, 182, 221, and 514 deals, respectively, according to MoneyTree data.

One successful entrepreneur who recently moved back to Silicon Valley from Austin attributes Austin’s slowing deal pace to its enduring focus on enterprise technology, while the rest of the world became swept up in the consumer Web.

“If I took all of the smartest consumer Internet people in town and put them in the same room, you’d end up with about 20 people,” says the entrepreneur, who asked not to be named. More, he says, “Of those 20, 10 are successful in their own right, don’t need VC, don’t care, and aren’t trying to build the next billion dollar thing. They’re happy making $20 million a year.”

The entrepreneur further suggests a degree of complacency that might seem anathema to founders and employees toiling in other tech centers. “While there’s a subset of people in Austin who will work 24 hours a day for a bigger vision, [a much larger number] are accustomed to working 9 to 6,” he says. “They have a family and a big pool in the backyard, and they’re content.”

Steve Felter, CEO of the gaming company GameSalad, which is headquartered in San Francisco but maintains an office in Austin, where it was founded, doesn’t think working only eight or nine hours a day is such a bad thing.

“In the Bay Area, I’ve seen that kind of stereotypical thinking, with people working for equity and doing whatever it takes to get things done,” says Felter, who doesn’t live in Austin but spends plenty of time shuttling between both cities. “We think it’s important for [employees’] productivity and longevity to strike a work-life balance, and we’re actually able to attract a lot of people because of that,” he adds. “When people say, ‘I have a couple of kids; don’t expect me to work past midnight,’ we get it.”

Still, even Felter acknowledges that Austin is lagging behind other cities such as New York, L.A, and Silicon Valley because it “just doesn’t have the VC ecosystem like in the Bay Area” or, increasingly, New York.

“I’ve talked with a lot of VCs I respect and if you’re not a Silicon Valley-based company, it’s hard for them to get excited about your company. When you’re earlier stage, they want proximity to you, to be able to have coffee with you in the middle of the week. It’s hard to replace that with a phone call.” (GameSalad has raised $7.1 million, most of it after moving its own headquarters out of Austin.)

However, not everyone is willing to cede that Austin is losing ground as a startup mecca. In fact, some argue that the city is more attractive than ever. Tom Ball, a general partner at Austin Ventures, moved from San Francisco to Austin seven years ago, and he says he’s seeing “more activity, more good deals, and more good entrepreneurs” than ever before.

Ball thinks it’s entirely possible that Austin has dropped from the headlines because there’s “more hype” coming out of other markets, including New York and L.A. “In Austin,” says Ball, “you kind of do your work and let it speak for itself.”

As for Austin’s focus on enterprise software, Ball calls it a plus, saying he has seen “Valley guys come through town recently looking at deals, probably more [so] than in the last two years, and I think it’s because [of Austin’s focus on] the next generation of enterprise.”

Ball also points to a couple of recent consumer successes, including still-private WhaleShark Media, a five-year-old online couponing giant in Austin Ventures’ portfolio. He also highlights HomeAway, which specializes in vacation rentals and held a very successful public offering last year (Austin Ventures owned 24.4 percent of the company at the time) and BazaarVoice, which held its IPO in February. (BazaarVoice manages online customer reviews and communities for corporate clients. Austin Ventures owned 25.5 percent of the company at the time of its offering.)

“These big liquidity events around town feel to me like they’ve opened up a new slew of angel investors and executives who are [wondering], ‘What do I do next?’” says Ball.

It’s true that “Austin is not Silicon Valley, but nowhere is,” says investor Mike Maples, when I ask him about the city where he lived for many years. (Maples worked at Tivoli Systems and co-founded the service management software company Motive; since becoming a venture investor, he has made numerous investments in the area.) More, he says, “Austin hasn’t lost a Facebook or a TaskRabbit to the West Coast like Boston has. And [Austin has] had a wealth of exits, broadly distributed across business and consumer.”

Indeed, Maples tells me that he continues to look at Austin as “a major area of focus” and that he doesn’t “buy the premise” that Austin is slipping in stature. “Most of the people I see in Austin complaining about the local tech scene are whiners. They blame other factors when they can’t get their companies funded.”

I ask the recently relocated entrepreneur about Maple’s last sentiment. He tells me, “Mike is right. There are a lot of whiners, people who’ve never built anything but want to be the next Facebook.”

Still, says this person, “There’s a reason Maples left” for the Bay Area in 2006.

“I think it’s a question of whether you want to be in the center of the universe of not. If you’re going to get bought by Google, it’s not going to happen [in] Austin.”

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5 Comments

  • Great comments all around. I do find that most of the people I see whining are people who don’t deserve to get funded anyway. Good deals get funded or don’t need it.

    I do think it’s true that Austin values and priorities might be different than Silicon Valley. That doesn’t mean we can’t have huge successes (HomeAway, Bazaarvoice, Indeed, etc.). It also doesn’t mean it’s bad to create a business that “only” makes $20 million a year in profit.

    Here is a recent blog post I wrote about why I choose Austin.

  • This is a well-balanced article.

    I wonder if number of deals is the best or only barometer for the health of a startup community? Seems to me that there are experienced entrepreneurs flocking to Austin, and the point is made in the article that they may be funding themselves because they know they can get to a stage where a valuation and momentum is much more attractive.

    At any rate, I’m surprised by the numbers. I sense a lot more startup activity in Austin than several years ago. The Solar Winds, Home Away and Bazaarvoice exits has helped (I know many entrepreneurs burgeoning from BV, obviously). VCs coming into town have helped. And there are more incubators and co-working spaces coming to town.

    I came from three startups in the Bay Area before moving here, and I still go back often. Nothing is like the frenetic energy and ecosystem of Silicon Valley. Given that energy and deal volume SV will always have the big consumer hits and lofty valuations. But there is also nothing like the echo chamber there, the competition for talent, and the employee turnover. To the point in this article, people have lives here in Austin, which is one major reason Austin attracts talent. I’d rather have someone that works 9 to 6, has some perspective, and is with me for several years than someone who works 15 hours a day, gets burned out, and is with me a year.

    What’s there to whine about? Let’s not worry about comparison and just keep our heads down, think big, and create some awesome companies!

  • I love this thought, “more activity, more good deals, and more good entrepreneurs” [in Austin] because there is one incontrovertible fact – Austin is more entrepreneurial.

    I moved to Austin from Silicon Valley 2 years ago for 3 reasons:

    1. Austin has a far better lifestyle. I often joke that the first question asked when you meet someone in N. California is “what do you do?” – in Austin, it’s the last. Consider the implicit priorities.

    2. In Austin, everyone does something for themselves (or is trying to). We have a vibrant music, restaurant, and arts culture because people make their own way. There is more entrepreneurship in Austin that Silicon Valley when we look beyond the definition of “entrepreneur” based on the popular convention of tech startup; the cost of living in Austin is such that starting something here doesn’t require the kind of capital that must be raised in California or New York just to be in business.

    3. Those two facts have investors scrambling to do more in Austin but the reality is that the need isn’t as great. What takes $250k in Austin requires $2M in Silicon Valley – which of those gets the hype to which Ball refers? No one covers a $250k raise… no one trumpets one. That has Austin entrepreneurs looking more to the incredible Angel community in Texas and going unnoticed by the Venture scene.

    The challenge and opportunity is that those factors demand more innovative approaches to building businesses. More collaboration, more innovation… I’d offer that Austin is a better reflection of where the rest of the country is going. Silicon Valley is and will always remain a bubble – using that as a barometer for American entrepreneurship can only be misleading as the rest of the country doesn’t have the costs, talent pool, capital markets, or experiences that make Silicon Valley what it is. Austin though is a model for what the rest of the country, the rest of the world, can accomplish. Collaborative entrepreneurship, innovative ideas, and building businesses from your boot straps.

  • If Google is really extraordinarily less likely to buy a company simply because it is headquartered in Austin rather than the Bay Area, Google’s business development people should be replaced. Sort of the point of M&A to find good products and people wherever they are, not only those that are down the road from your headquarters.

  • Austin should just hang in there — the pendulum is swinging back to enterprise-class apps and infrastructure deals, away from daily deals and other consumer-oriented companies.

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