SOFTWARE

After buyouts, Austin’s software sector looks for its next breakout companies

Central Texas has a reputation for its vibrant startup ecosystem. But, experts say, the region has a pattern of building companies that are bought by bigger players before they reach critical mass.

Posted May 12th, 2017

Confetti dropped, champagne flowed and live music rocked the house when Austin’s RetailMeNot employees celebrated a successful initial public offering four years ago at ACL Live.

When the online coupon company reached another milestone last month by agreeing to be acquired by a San Antonio holding company for $630 million, it was hailed as a great deal for shareholders.

But was the deal a good thing for Austin’s economy, which with the sale loses one of its most high-profile publicly held software companies?

A city’s economic growth and its reputation as a center of innovation can be deeply affected by the number - and more importantly, the quality — of publicly traded companies that choose it for their corporate headquarters.

“Public companies bring clout,” said Bob Smith, principal at Austin-based Bridgepoint Consulting, which works with technology companies. “Think of what Dell has done for Austin, and Whole Foods, and Cirrus Logic and Silicon Labs. When you get acquired, you usually get rolled into a division and lose a lot of visibility. You still end up with some big teams here, but you don’t have the senior management that is directing where community involvement happens, the charitable support, the leadership. Some of that just goes away.”

The NASDAQ OMX Group, Inc.Employees of RetailMeNot celebrate the company’s IPO and debut on the Nasdaq on July 19, 2013.

If, for example, Dell Technologies had been acquired by an out-of-state company years ago rather than remaining based in Central Texas, its impact here would likely have been far different.

But the company — which is now privately held, after years as a publicly traded company — has invested in its hometown community. The Dell family foundation donated $50 million to create the new University of Texas Dell Medical School. It has launched other major health initiatives in the region, including $32 million for Dell Children’s Medical Center of Central Texas, $38 million for UT’s Dell Pediatric Research Institute and $19 million for community health initiatives and clinics.

Companies that go public raise money that can create jobs and generate business for other local players such as law and accounting firms and real estate brokers. They also create spinoff companies and make employees richer, which can enable them to launch their own venture or invest in other startups.

Central Texas has built a reputation for its vibrant startup ecosystem — including world-class tech incubator and accelerator programs and a large pool of angel investors eager to write checks to get founders off the ground.

The Central Texas Angel Network is one of the most active angel investment networks in the country, by number of deals done last year, according to a recent report by the Angel Resource Institute. The organization, which is a nonprofit with more than 160 accredited investor members, reported its members invested $14.2 million into 43 companies last year.

But, experts say, the region has a pattern of building promising companies that are bought by bigger players before they reach critical mass. That can happen for a number of reasons, from impatient investors who want a quicker return to an idea that simply isn’t big enough to scale into a multimillion company. Or maybe just a more cautious attitude than the swashbuckling entrepreneurs in Silicon Valley.

“It’s just a different mindset here,” said Alan Knitowski, founder and CEO of Austin-based Phunware, which sells a mobile application management platform for brands like Warner Brothers, NBC Sports and NASCAR and has raised about $90 million from investors. “You don’t hear people saying they want to build a $10 billion company.”

Knitowski points to Los Angeles-based Snap, maker of the Snapchat app, as an example of what one home run IPO can do to jumpstart a region. The Southern California tech community is hoping the wealth unleashed to hundreds of Snap employees will ignite the region’s startup ecosystem.

“Do you think you could build a Snap in Austin, Texas if you told investors ‘We have no idea if we’ll ever be profitable,’ ” Knitowski said. “It’s great that Facebook and Google and Apple are here creating jobs, but we need more homegrown successes that can go public and have a huge impact.”

But the more recent trend for Austin has been to lose large publicly held tech companies without refilling the bench.

‘We need another’

Two years ago, HomeAway, which operates the world’s largest network of online vacation rentals, was snapped up by travel giant Expedia for $3.9 billion. In the time since, Austin has had a few IPOs, mostly small biotech companies, but nothing on the scale of what has left the stock ticker.

Now, a soaring stock market and a rally in technology stocks is fueling a rebound in the IPO market. But currently no Austin tech company has filed plans for an IPO, according to securities filings.

“We need another RetailMeNot, another HomeAway, and another and another,” said Kirk Walden, an adjunct business professor at Texas State University. “Successful companies that people have heard of are short-hand for the Austin brand. If you’re going to claim to be one of the top tech centers of the country, you need strong examples to back it up.”

The RetailMeNot acquisition by Harland Clarke Holdings Corp. could ultimately end up being beneficial to Austin in a different way, Walden said.

With more resources, the company is likely to grow faster, meaning more investment and more jobs. That’s been the case with HomeAway, which has undergone a major expansion in Austin since becoming part of Expedia.

“The thing is that you always need new blood coming in,” Walden said. “You want to see that next break-out ready to happen. That’s the question for Austin — where is it?”

The next wave?

That next wave of growth is happening right now, with promising companies being built that will help seed Austin’s next wave of tech growth, says Joshua Baer, founder of Austin tech accelerator Capital Factory, which has mentored and invested in dozens of Austin startups.

“Is it true that Austin sells out too early? I think it has been true, but the problem fixes itself,” Baer said. “It still puts us on the map. Other companies say Expedia bought a company in Austin and now has an office there. Maybe we should be there too. We have great people moving here and they are coming here to build great companies. It will happen.”

He points to The Zebra, an Austin startup that has built the leading search engine for auto insurance quotes. Founded in Pittsburgh in 2012 by Adam Lyons and Joshua Dziabiak, the company moved to Austin after securing funding from Silverton Partners in 2013.

Today the 50-person company is backed by $23 million from investors including Dallas billionaire Mark Cuban, and it’s expanding into new lines of insurance. In January, Lyons and Dziabiak were named to the 2017 Forbes 30 under 30 list in the consumer tech category.

The Zebra’s co-founders are Joshua Dziabiak and Adam Lyons.

Meanwhile, this month alone, several promising companies have raised sizeable rounds of venture capital to accelerate their growth. Among them is Opcity, an Austin real estate technology startup that collected $27 million to build out its platform and team, and Dropoff, an on-demand courier service that received $8.5 million to break into new cities and hire more staff.

“Compare us to any place other than Silicon Valley or New York and we look great. Other cities want to be us,” Baer said. “Yes, we could use more money, and yes, some people sell too early. But how many people have it better than us? Not too many.”

RetailMeNot is an example of how a company can grow from upstart to market leader with patient investors and an idea that can scale. Led by entrepreneur Cotter Cunningham, the company raised millions in venture capital and private equity, and grew by acquiring smaller websites. It went on to raise $191 million in its IPO.

Today, the company has 500 employees, most of them in Austin at the RetailMeNot’s headquarters on Congress Avenue.

Cotter Cunningham, founder of Austin-based RetailMeNot.

When the sale was announced, Cunningham called it “an exciting and important milestone for RetailMeNot.”

“Not only are we delivering an immediate and significant cash premium to our stockholders, but we are also advancing our goal of becoming a leading savings destination for consumers,” he said.

Now, it will soon have a new owner with deep pockets, making it possible for RetailMeNot to accelerate its growth, hire more people and break into new markets.

That, at least, has been the case of HomeAway. Since the sale to Seattle-based Expedia, the company says it has grown its local workforce. (Now that it’s part of Expedia, the company doesn’t disclose Austin employment. At the time of the sale, it had 1,900 employees, including about 1,100 in Austin.)

“The acquisition allowed us to heavily invest in our transition from a sales-driven advertising platform to a tech-driven e-commerce business,” said John Kim, HomeAway’s president. “HomeAway has increased its hiring pace in Austin and is focused on top talent in the Austin market.”

Ripple effects

Successful public companies create ripple effects that are vital to the startup ecosystem, said HomeAway co-founder Brian Sharples, who led the company through an IPO in 2011 and oversaw the Expedia acquisition before stepping down last year.

HomeAway co-founder Brian Sharples has now launched Twyla, a new site that sells limited edition artwork.

“A break-out tech company ultimately inspires a lot of other people who see the success and then go out and try to do it themselves,” said Sharples, who is now co-founder and chairman of Austin online art marketplace Twyla.

Sharples said that in recent years, at least two dozen people have left HomeAway to start new businesses or become senior executives in new companies that are growing.

Sharples said he believes Austin is positioned for another home run.

“I think it’s a good thing for every few years to have that kind of company, and there are companies I see with that potential,” he said. “One thing is for sure, when it happens, everybody feels it.”

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