I raised over $8MM for an Austin startup: Three reasons I won’t do it again (and two reasons I would)

Every day, it seems like there’s a new article listing the best startup cities. Almost all entrepreneurs want to believe their city is the best. This one goes out to the bootstrappers and air-mattress-sleeping hustlers that have been considering setting up in Austin.

I met my co-founder at Stanford, and we still decided to start our company in Austin. We‘ve been consistently asked about this decision in meetings and we even lost funding opportunities because investors in the Bay wanted to be closer to their companies.

Although we had expected a bit of pushback, we still thought it was a good decision to make the move. Our company would be in the retail technology space, and Austin had a history of success (BazaarVoice, RetailMeNot, and more). We also wanted to extend our runway by keeping costs low.

After raising $8MM in Austin, here’s what I’ve learned:

#1 – You can live like a cockroach 

Grocery bills were cut in half. My co-founder and I found a huge house where we were paying about a third of the rent of a comparable place in San Francisco. As a bootstrapper, housing and groceries are your biggest expenses; limiting them gives you more time to show traction for your company.

#2 – In Austin, the startup community is a family

Maybe it was because it’s an up-and-coming startup scene, or maybe it’s the good ol’ southern hospitality—either way, there’s an unspoken interest in supporting other Austin startups and trying to help however you can. If you’re doing a startup then you’ve got family in Austin. It’s easy to meet other entrepreneurs that are going through similar circumstances, and everyone’s happy to make an introduction to a friend or acquaintance that genuinely wants you to succeed—this was the greatest benefit to us in the early days.

#3 – Where’s the money at? – It matters.

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My biggest critique of Austin is the lack of access to capital. There are some individual, angel investors in the city that are looking to fund companies, and even an angel network, but not nearly at the scale of the bay area or even New York. There are many companies that have raised a seed round in Austin, but fundraising becomes increasingly difficult after that point. With the recent death of Austin Ventures, there are even fewer opportunities for entrepreneurs to fundraise in the city. Yes, there are smaller firms like Silverton (Sparefoot, WPEngine, Favor), S3 Ventures (Phunware, Invodo), and LiveOak (started by former Austin Ventures partners), but we’re not talking about large funds that can make big bets. I’ll admit that there are new funds popping up like BuildGroup Management, a firm started by former Rackspace execs, and non-Austin firms like the Mercury Fund have been involved with some deals in the city, but that’s pretty much it. Yes, in less than a paragraph, I’ve completely summarized the investor community in the city of Austin. So what does that mean for an entrepreneur? You’ll have to seriously consider looking outside of the city to get the capital that you need.

#4 – Austin would have never funded Facebook

For better or worse, the fundraising scene in Austin is staunchly focused on companies that can show strong revenue or traction.

It’s a two-sided coin. On one hand, these investments are less risky, and these businesses have clearly answered the most important question: how do you make money? On the other hand, revenue growth is not the right investment thesis for capital intensive or billion-dollar, ‘change the world’ companies. There’s a large set of startups that could never fundraise in Austin. And some of those startups may look just like Facebook did.

#5 – Recruiting is a full-contact sport

Austin is a small town. This is the drawback to the ‘close community’ I spoke of earlier. Nobody has a problem pulling developer #23745 from IBM. But what do you do when a superstar engineer from your friend’s company asks you for a job? It’s even more difficult when you know that stealing his CTO is pretty much going to guarantee that he won’t be able to raise another round. Recruiting is a full contact sport and you’re playing against your family.

But you have no choice. You have a fiduciary responsibility to your company. That engineer should have a choice, and it’s his right to look for new opportunities if he isn’t happy.

Word travels very fast in the community—startup gossip isn’t unique to Austin, but it’s particularly threatening when there are fewer companies, not to mention that recruiters are like vultures, primed to find a business in crisis to focus their outreach (I’ll discuss this in greater detail in a future post).

Would I start another company in Austin again?

It depends – I probably would if I were planning to bootstrap and never fundraise, but if I wanted to build a consumer business or a company that was disrupting a market, then most likely, no.

Austin is a promising, up-and-coming scene with a fair share of opportunities, but until there’s more capital, companies will have to hold their breath.