VENTURE CAPITAL

Is Austin finally on radar of East and West Coast VCs? New numbers suggest it is.

A new report shows Austin startups raising large rounds of funding from Silicon Valley, New York and Boston.

Posted January 12th, 2018

Is Austin finally on the radar of East and West Coast venture capitalists?

A new survey suggests the answer is yes.

At least 24 Austin startups raised rounds of $10 million or more in 2017, according to a MoneyTree report by PricewaterhouseCoopers and CB Insights. Much of it came in funding rounds led by outside investment firms.

“The problem in the past was that our average deal sizes were really small compared to other markets,” said David Altounian, an assistant professor of entrepreneurship at St. Edward’s University. “What you’re seeing now is not just companies getting funded, but in much higher amounts, and that’s exciting.”

While there are a number of Austin venture firms making early stage investments in the $3 million to $4 million range, bringing in larger sums has been one of the biggest challenges for Austin startups, Altounian said.

“I think people have worked hard to establish relationships with other markets,” he said. “Organizations like the chamber (of commerce) and Austin Technology Council have really worked to build bridges. The startups, rather than just staying in Austin, have gone out and looked across the country. We stopped saying we don’t have a problem and we starting saying how do we change this. I think we’re seeing some of that coming to fruition now.”

The result is that more outside firms are teaming with Austin venture capitalists to lead Austin deals.

“If you look at the last six months, you’re seeing a lot more outside investors coming in and investing in syndication with investors here,” Altounian said. “That’s what you want to see, and it’s great to see it happening.”

A total of 110 Austin startups collected a combined $764.6 million last year, according to the MoneyTree survey. That’s a 15 percent drop in deals and a 16 percent decline in dollars from 2016.

Slow first quarter

The decline can be blamed on Austin’s weak performance in the first quarter, when investments plunged 58 percent. It was part of a pullback by venture capitalists worldwide, due in part to uncertainty following a roller-coaster presidential election year. Stock market fluctuations, a slow market for initial public offerings and skepticism about high valuations for unproven companies also played a role.

But investors got back in the game in subsequent quarters, and the Austin flow of deals resumed at a steady pace.

It remained strong in the fourth quarter, which saw $157.2 million going into 24 deals. Six of those deals were rounds of $10 million or larger.

Austin internet companies brought in the most money overall, with $49 million invested in 10 deals during the quarter. The largest internet investment was Baxter Planning Systems, a supply chain software-as-a-service company that received $25 million Polaris Partners of Boston.

Erik Huddleston is CEO of Austin-based TrendKite.

That was followed by an $11 million investment in TrendKite, which sells analytics software that lets agencies and brands measure and analyze the impact of their print, broadcast and online media coverage.

TrendKite, which received the funding from New York venture capital firm Harmony Partners, said it will use the money to expand its workforce and accelerate research and development.

After tripling its team over the past year, TrendKite now has 200 employees. The company said it plans to add up to 100 new workers in 2018.

TrendKite CEO Erik Huddleston said the company didn’t plan to raise money, but the timing was right to bring in Harmony.

“They’re one of the firms that has been involved in helping foster the Austin technology ecosystem even though they’re sitting in New York,” he said. “They’re willing to bring outside capital to Austin from a major investment center.”

Huddleston said raising a larger round of funding will allow TrendKite to focus on building the business rather than needing to raise more capital.

“It’s hard to hit a home run three or four million dollars at a time,” he said. “Your entire thought process is focused on living hand to mouth, and you’re always thinking of having to go out and raise more. We think we have an amazing growth opportunity, and now we can pursue that 100 percent.”

The new funding will allow the company launch a new wave of expansion. “We wanted to be able to invest in our AI technology more aggressively. And we’re going to hire over 100 people this year so having the extra capital is a strategic lever for us to be able to get the right people.”

The biggest venture capital investment in an Austin startup in 2017 was also in the internet sector: The Zebra, which lets consumers compare car insurance rates online, raised $40 million in the third quarter in a deal led by Silicon Valley-based Accel Partners.

The Zebra said its new cash infusion to expand its product features, ramp up marketing efforts, add new lines of insurance and expand its 75-person workforce.

Startup community maturing

Brian Smith, managing director of Austin venture capital firm S3 Ventures, said the larger rounds led by outside investors is a sign that Austin’s startup community is maturing and becoming capable of bringing in sizable investments.

He points to Austin-based WP Engine, which earlier this month raised a whopping $250 million to fuel its growth. The company, which provides hosting for WordPress-built websites, received the funding from Silver Lake, which is one of the largest technology investors in the world.

Heather Brunner is CEO of Austin-based WP Engine.

In 2013, Silver Lake, based in Menlo Park, Calif., teamed with Michael Dell in his $25 billion deal to take Round Rock-based Dell Inc. private.

“People are starting to realize you can put $50 (million) and $100 (million) and $250 million to work here,” Smith said. “For Austin, it brings attention but it’s also good because that kind of funding lets companies build out their executive talent and create new senior management roles. That’s an area where Austin has had a gap.”

RELATED: Are Austin startups falling behind in the venture capital race?

Nationwide, annual funding to venture-backed companies increased 17 percent over 2016 to $71.9 billion, thanks to a wave of “mega-round” activity — defined as $100 million-plus financings. There were 109 such deals in 2017, topping a record 107 deals in 2015.

The ripple effect of mega-rounds was that investment dollars were spread across fewer deals, meaning less money going to early-stage companies, said Anand Sanwal, co-founder and CEO of CB Insights.

“The year closed strong because of mega-round activity - a theme throughout the year,” Sanwal said. “It is worth noting the pullback in early stage activity and the decline in overall deal activity compared to recent years. Deals are still being completed, especially the bigger ones, but the early-stage activity which is vital to the VC ecosystem’s health did take a hit.”

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