Austin’s flow of venture capital slows in 1st quarter

Venture capital activity hits lowest level since 2014; experts ‘hoping this is a blip for Austin.’


A new report on venture capital activity in Austin confirms what many entrepreneurs already know: The flow of money into Central Texas startups has slowed, making this a challenging time to raise money.

Investments in Austin-area companies plunged 58 percent in the first three months of the year, compared with the same period a year ago, according to a survey from PricewaterhouseCoopers and CB Insights.

A total of 15 companies received a combined $114 million during the first quarter, compared with $274 million raised by 36 companies in the same quarter a year ago. That’s the lowest amount received by Austin companies since the third quarter of 2014. It’s also the second consecutive quarter in which Austin saw a significant year-over-year decline, as venture capital funding dropped 29 percent in the fourth quarter of 2016.

Venture capital investment in young companies is important to the Central Texas economy because it allows them to hire more workers, invest in new equipment and ramp up product development and marketing.

“It is the lifeblood of helping these companies take that next big leap to go from 20 or 30 employees to 100-plus employees, while helping them take their products to market on a much wider basis and develop the broader product set,” said Bob Smith , principal at Bridgepoint Consulting, which works with technology companies.

Venture capitalists have pulled back worldwide, rattled by stock market uncertainty and an ongoing skepticism about high valuations for unproven companies. But after a slow 2016, venture investments increased nationally in the first quarter after the lowest level of investing in the past two years.

“There continue to be new sources of capital and strong corporate interest, and that is evident in the first quarter numbers,” said Anand Sanwal, CEO of CB Insights. “A number of large acquisitions and some early IPO activity also portends good things for VC-backed companies.”

It’s not clear why other regions saw a bump while Austin’s numbers fell further, said Larry Westall, managing partner of the PricewaterhouseCoopers Austin office.

“Relative to the national trend, the actual dollars invested here is a little disappointing,” he said. “I’m hoping this is a blip for Austin. We won’t know until we see what happens in the balance of the year, but I am optimistic that Austin will rebound in the back half.”

The quarter did show positive signs for some Austin startups: Money continued to flow into internet-related companies, with $96 million invested in 11 deals.

In fact, the three largest investments were to internet-related companies: uShip, which runs an online shipping marketplace, raised $25 million; TurnKey Vacation Rentals, a full-service vacation rental property manager, received $21 million; and data.world, an online platform for data collaboration, collected $18.7 million.

The investment in uShip is an example of how venture dollars can help fuel a fast-growing company. The company’s online platform matches customers who need to move unusually large items with thousands of transport companies that can take the load.

In recent years, uShip has moved into the $300 billion truckload freight market, and the $25 million it received in February from DB Schenker, one of the world’s largest logistics companies, will help it accelerate development of its logistics software.

The company, which has outgrown its two downtown offices, is also moving into a sleek new 43,000-square-foot campus at 205 E. Riverside Drive, just south of downtown. The new headquarters will allow it to launch an aggressive hiring plan, with the goal of doubling the company’s 200-person workforce, uShip CEO Mike Williams said.

Venture capital firms raise money from pension funds and other big institutions and invest it in promising, young companies. The goal is to get a healthy cut of the profits as those companies are sold or go public.

Venture activity in Austin has seen wild ups and downs, with investors coming and going and markets rising and falling.

Investment activity in Central Texas companies peaked during the dot-com boom in 2000, when 185 Austin companies raised a whopping $2 billion.

When the internet bubble burst, investors pulled back, leading to several lean years when even promising companies struggled to attract funding.

Today, Austin is home to several active venture firms, including ATX Seed Ventures, LiveOak Venture Partners, Silverton Partners and S3 Ventures. Last month, Next Coast Ventures, led by former Austin Ventures investor Tom Ball, announced a new $85 million fund to invest in startups. And Silverton is in the process of raising a new $100 million fund, according to securities filings.

But most of the Austin firms focus on early-stage deals, meaning an investment in the $2 million to $5 million range, which can be used to hire a founding team or develop a product.

Companies in the expansion stage — launching products, breaking into new geographic markets and in need of hiring dozens of employees — are finding fundraising to be more difficult. More often than not, founders can’t find enough local money to complete a $10 million to $15 million funding round, and need to look to the East and West coasts.

Brian Smith, managing director of S3 Ventures, which raised a new $75 million fund last year, has begun putting money to work.

The firm expects to do three to four new deals a year over the next few years, with a focus on enterprise software and medical technology companies. The majority of S3’s investments will be in Austin.

Smith, who says he is currently looking at several promising Austin deals, said he would like to see the region attract more expansion-stage dollars.

“We love where we are, but for the community to be even more significant for its production of great companies, it needs more capital,” Smith said. “We’re filling the gap, but we can only do so much.”

The top 10 Austin venture capital deals in the first quarter

• uShip, online shipping, transport and freight marketplace, $25 million

TurnKey Vacation Rentals, full-service vacation rental property manager, $21 million

Data.world, online platform for data collaboration, $18.7 million

TenFold, sales performance management platform, $15.8 million

Hypori, security software for mobile devices, $6.6 million

YouEarnedIt, employee engagement platform, $6.5 million

Rhythm Superfoods, sells gluten-free, non-GMO foods, $6 million

Briggo, sells an automated barista kiosk, $3.5 million

Querium, online learning software for STEM skills, $3.2 million

OutboundEngine, marketing automation platform, $2 million

Source: MoneyTree Report from PricewaterhouseCoopers and CB Insights

By the numbers

$114 million: Venture capital raised by Austin companies in the first quarter

15: Companies that received the money

$96 million: Investment in internet companies

$6.6 million: Mobile and telecommunications

$6 million: Food and beverages

Source: MoneyTree Report from PricewaterhouseCoopers and CB Insights



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