Austin's S3 Ventures raises a new fund to invest in startups

New $75 million fund will back companies in Texas, with the majority of them in Austin.

Posted August 23rd, 2016

Story highlights
  • S3 Ventures will target software and medical technology companies

At a time when some venture capital firms are pulling back, Austin's S3 Ventures has closed on a new $75 million fund to invest in technology startups, according to securities filings.

S3, which is one of Austin's most active venture capital firms, is expected to do three to four new deals a year over the next few years.

Most of the investments will be in Texas, with the majority of them in Austin. 

The focus will be enterprise software and medical technology companies that have a viable product and some early customers.

Brian Smith, S3 managing director, declined to provide details on the fund.

Smith founded S3 in 2007 with a $20 million fund. The firm went on to raise three more funds in the $25 million range. In 2013, S3 closed on its fifth fund, which was also $75 million.

Investors in the new fund are wealthy families.

S3's new money comes at a time when the venture landscape in Austin is shifting. Austin Ventures, which dominated investment activity in Austin over a two-decade period, announced last year that it wouldn't raise a new fund for early stage investing. 

While seed stage funding -- typically an investment of less than $1 million used by very early-stage companies to get off the ground -- is still available, it has become more difficult for more established companies trying to raise larger rounds of funding. 

S3 typically invests $3 million to $8 million initially, and may put $10 million to $20 million into a company over its lifetime. 

"Austin is good at seed money and Series A, it's later stages where it's challenging," said Derek Hutson, CEO of Austin software firm Datical. "For a long time, Austin Ventures was very capable with that. But with their departure, it left a gap. Now people like S3 are starting to fill it."

S3 was the lead investor in an $8 million investment late last year in Datical, which builds software to manage databases.

Prior to S3, Smith co-founded venture firm Convergent Investors. Before that, he co-founded Crossroads Systems, an Austin-based storage area networking company, which he led through an initial public offering in 1999.

Of the 25 investments S3 has made, 20 have been in Austin. Of those, six have been acquired, two have gone out of business and the remaining companies are still operating.

S3's active Austin-based investments include Tango Health, which sells employee benefit management software; Pivot3, which develops server and storage virtualization software and hardware; and Gravitant, a cloud-based software maker that was acquired by IBM in November for an undisclosed price.

Hutson said Smith's operational background sets the firm apart.

"The fact that he has run a company is the differentiator," he said. "He knows what level of involvement is helpful. He knows where he can add value to an executive team and where he just needs to let that team run the business. That's a fine line and has to vary with the stage of the company."