Young entrepreneurs flock to hip Austin–VCJ regional report

Tech startups are flocking to Austin, Texas, as the city’s reputation as a viable alternative to Silicon Valley or New York is growing.

Entrepreneurs are finding Austin to be a refreshing headquarters option over Silicon Valley, where tech startups are a dime a dozen and rents are astronomical. This is especially true of younger entrepreneurs attracted to the relaxed and so-called “hip” Austin environment, known for live music, sprawling lakes, a vibrant restaurant scene and emphasis on an outdoor lifestyle. The state capital has gained a higher profile in recent years thanks in part to major local events such as South by Southwest (SXSW), Austin City Limits and Formula One racing.

“Keep Austin Weird” is a slogan aimed at promoting small businesses in the city. The phrase encourages a sort of freedom to be whoever or do whatever you want without fear of judgment. It’s perhaps this tolerant attitude that lends itself to the city’s laid-back, accepting vibe that is appealing to young people seeking to stand out in the business world. Austin’s a place where you can get a beer or a latte at the same place. It’s a city where you’ll find a tattoo shop on nearly every corner and potentially a tech entrepreneur inside getting inked up. And all that is totally normal.

The absence of a state income tax, more affordable real estate and a business-friendly climate combined with a robust tech community is also appealing to not only such large companies as Apple, Google and Box, each of which have set up substantial offices in the Central Texas city, but also to entrepreneurs with limited funds and big ideas.

Through the first half of 2015, 59 companies in the Austin metropolitan area have raised more than $431 million in venture funding combined, according to a preliminary analysis of VC activity based on Thomson Reuters data.

That’s on pace to obliterate the funding totals of the previous three years, VCJ found.

Throughout 2014, 103 Austin-area companies raised just over $600 million combined, VCJ found, compared with 89 companies raising $470 million in 2013 and 91 startups raising $638 million in 2012.

Meanwhile, Austin has been home to some impressive exits in the last year or so.

In May 2014, Google purchased Austin-based online ad attribution company Adometry for an undisclosed price. In August 2014, Thoma Bravo acquired SailPoint Technologies Inc, a maker of identity management and compliance software. Austin Ventures, Silverton Partners and Lightspeed Venture Partners fully exited the company through Thoma Bravo’s investment, which consisted of “several hundred million dollars” for a majority stake, according to a report in the Wall Street Journal.

Then in September 2014, a subsidiary of Daimler AG of Germany acquired Austin-based rival RideScout, which has developed a mobile app that allows users to search and compare ground transportation options on demand.

Local venture capitalists believe the Austin market is sorely underserved in the way of investors. The opportunity is great, they say, for early-stage and later-stage investors who may be too focused on the East and West coasts. Austin Ventures’ formal departure from early-stage investing earlier this year left an even bigger hole in the city’s startup investing scene, some locals say.

Krishna Srinivasan, a general partner with Austin-based LiveOak Venture Partners, helped found LiveOak in 2013 based on an “immense conviction that there is a tremendous amount of local opportunity and not much local early-stage availability” in the city.

“We believe Texas is the most capital-restrained part of the country,” said Srinivasan, who previously was a partner at Austin Ventures along with LiveOak’s two other co-founders, Ben Scott and Venu Shamapant.

“Entrepreneurial activity in Austin has never been as robust or as vibrant or this high quality,” Srinivasan said. “People are repeatedly figuring out ways to take very little money and gain traction.”

Meanwhile, accelerators such as the Capital Factory, DreamIt Ventures and TechStars abound and a growing number of venture firms from other markets have a man on the ground in the city.

Former SeedInvest Texas Managing Director Marc Nathan founded Austin consulting firm T-Squared Agency in 2013 with the aim of helping early-stage startups figure out their strategy around outside funding.

“Austin desperately needs more venture firms that can fill the gap between the seed round and growth mode,” Nathan said. “I strongly believe that one or two new $40 million to $50 million funds would fill a serious need here in Austin and make an absolute fortune.”

This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story and tables of top tech deals and recent exits of Austin-based companies by clicking here. To subscribe to VCJ, click here for the Marketplace.

Photo illustration from Shutterstock.