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.
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.
23 thoughts on “I raised over $8MM for an Austin startup: Three reasons I won’t do it again (and two reasons I would)”
After being in Austin for quite a long time, seeing the rise, the fall, and the rise again – I would agree with you. I find that Austin has a perception issue – while it may be an awesome city for quality of life, it absolutely sucks when you are trying to start a company. Limited support, limited access to REAL experience, way too much ego, and lots of talk and little action. As you mention, not only does the money in only care about revenue, (they are all bankers that think they are “visionary,” they also only fund “me-to” products.
As a small ecosystem, it’s also driven heavily by the “your in, or, your out” politics of a few that wield it. With the demise of AV, of which no-one was sad to see go, many are hoping (including me) to see investment dollars arrive that are going to drive change, not adopt the status quo.
The most common response from Austin money is, “If you were generating 1m in revenue, then we would be interested.” If that would the case, I sure wouldn’t be shopping investment in Austin, and why would I go with you?
Don’t get me wrong, Austin is a great city, great people, great quality of life – but the tech ecosystem here is sheltered, narrow, and way to arrogant to ever think it can be anything other than a small town community. After all – if you gauge success of our city in “wins”, the majority of them have all been small in comparison to the west coast, and recently, all except for a few – have been roll-ups. It’s easy to be a big fish in a small pond.
Hype & perception is NOT reality. It’s gonna take a real catalyst to drive change in Austin.
Oh and Morgan – put your phone down and show some courtesy when people are sharing their business, or don’t take the meeting – it’s rude.
Matt said what I wanted to say. I saw a statistic last year that ranked Texas #1 in orphaned start-ups. (and #2 was a distant second). The myth of Austin is slowly getting exposed. A lot of Austin VC made a lot of money BUT a lot of that came from late stage deals that were brought to them from SV.
Austin doesn’t need more capital, it needs more great entrepreneurs. Show me A-list caliber Austin founders who can’t get funded, and I’ll show you a C player in the Valley .
Lord, what a cop out. How the hell do you know? This is exactly why this town has its issues. Attitudes and comments like this completely reflect the arrogance and do nothing to raise the caliber and opportunity of ideas, or businesses. Trust me, raising funding in Austin is not the bar for determining if you are an A or a C player. It just shows your lack of awareness. Get your head out of your ass.
and so says the nameless A PLAYER….
Great post, Mikael. I just saw a photo of Garrett pitching CompareMetrics at the 2012 Capital Factory Demo Day and thought of you. I also immediately thought, “Wow, was that really 3 years ago? Look at how far we’ve all come.”
I think your post is spot on for 2012 when you were raising seed funding. I’m not saying it’s completely different, but it is definitely a lot better. There is more seed money available, more Series A, and now even some new Series B. I know there is more coming in the next year.
Here are some of the new funding sources that have developed over the past 3 years:
– Techstars Fund
– Live Oak Venture Partners
– Capital Factory Fund
– ATX Seed
– Build Group
We’re also seeing east and west coast firms getting more active here. Here are some examples that have all made recent investments in Austin – many of them seed stage:
– Sutter Hill Ventures
– Rothenberg Ventures
– Mohr Davidow
– Insight Venture Partners
There are also a lot of people moving here from both coasts who have more of an appetite for consumer businesses and those without early revenue in their business model. And many of them are writing pretty big checks in the $250,000 range.
I don’t think it’s enough. I’m actively working to recruit more VC’s to Austin. But it is a LOT better than it was 3 years ago.
Interesting read thanks for the write up.
Where do capital seekers post up? Angel.co?? Where’s the list of capital seekers, all in one place, to hand over to a VC or angel and say “here, take your pick!”
I agree with Joshua – it is getting better, but it still has a ways to go. I know Cap Factory has done a good job to really try to bring in the interest to Austin. It’s just a shame that they are the only ones.
Where is there a list of capital seekers? Angel.co??
Where’s the best place to post up if you’re raising?
A list/link that could be given to VC or angel and say “invest in Austin… here, take your pick!”
Are there multiple locations for this? What’s the best list(s)/links?
AngelList is a great resource for finding a list of most of the early stage investors in Austin (and also investors outside of Austin who have invested in other Austin companies).
I host an “Intro to Fundraising in Austin” on the first Tuesday of every month where we go over all of the funding sources in detail. You can sign up for the next one at http://atxstartupscene.com
Here is a video from one I did in March.
You can also post to the Austin Angel Investors group on Facebook.
I’ve spent the past few years traveling around the U.S. and around the world visiting different startup communities and talking to entrepreneurs and investors there. I’ve been to:
– San Antonio
– San Francisco
– San Jose
– New York City
– Los Angeles
– Kuala Lumpur
Later this year I’ll be traveling to Ireland, England and Chile.
I think it’s worth noting that you could reply this conversation (the part about lack of funding) in almost any 2nd tier city and it will sound exactly the same. These issues are not unique to Austin. In fact, pretty much everywhere else would say that Austin is better off than them.
Does that mean we can’t improve? Of course not. It’s a problem I’m focused on myself. I’m trying to fix it by encouraging more entrepreneurs, getting us some wins that will give investors more confidence, learning about crowdfunding, and connecting Austin with capital sources outside of Austin.
From my point of view, it’s not so much about the challenges of 2nd tier cities, of which I agree with. What the issue is – the hype of Austin does not equate to the reality of the situation here. As the top city for “start-ups” the fact that we do not have the same level of “rush-to-get-to-Austin” here from a “capital” is squeezing the oxygen out of the city, just like too many fish in a shrinking pond. At some point, there isn’t gonna be any oxygen left.
With west coast vc’s we have real cultural issues/perception/access issues about Austin. Yes, we have benchmark & KP funding companies like uShip, but we both know that the level of engagement that a VC wants does not warrant an investment in a city that they don’t have a significant presence in, or an ecosystem where they can simply call a lunch meeting and have the heads of google, amazon, etc show up to work a deal.
Until we get that level of access to the tech ecosystem that is really the heartbeat of “tech” It is still going to be an uphill battle to get anyone to look at Austin as anything other than a 3 hour plane flight to go have bbq. I wish it would change too – but every wc vc I have met with says this exact thing: “Are you willing to move here.” Hell, I even had a VC ask me to move my company to Detroit!
What we don’t want is an Austin ecosystem that cannot support entrepreneurs with unique ideas, or who think different. Kicking them out, putting them down or labeling them as “Non-A-players” only because they can’t raise money here, sure seems counter productive to the city we hype and want to see flourish. Until we can keep people like Mikael, and others in Austin, recycle their value and experience back into our ecosystem, we are hosed. That’s the only way Austin will change. Otherwise, it’s gonna have a massive blowback.
This is why I am most frustrated with our funding community here – when you have entrepreneurs pitching you left and right – there is no incentive to start thinking different – same shit different day. I have been here a long time. from the .com to now, and it is the exact same as it has always been, just with a lot more press. As Mikael said – facebook, uber, etc, would have never been started here, but let me tell you, they will sure fund to copy it here.
Why are any people starting companies paying attention to the hype? We know it is only hype. Take advantage of it to the extent that it helps you, but otherwise ignore it. I’ve been here 20+ years and it has doubled in size and the tech (and the rest of the economy) have gotten dramatically more interesting. Heck, there are 11,000 hotel rooms being built right now… And there is *no* hype about it being easy to raise money in Austin, quite the opposite, so honestly, it seems that Austin is living up to its lack of hype in that department.
Matt, the one thing I disagree with is that it’s the same now as it was in the .com days. I’ve been here since 1999 and things have improved a LOT. And maybe I know about one or two things coming that are still in stealth mode 😉
🙂 I am sure….excited to see things what launches. (been here since then too 🙂
There are places you can fund a napkin or a reputation, but those places aren’t where I want to be, personally.
The funding environment is only part of what makes a great startup city though. It’s the quality of life (diversity in proximity and affordability), the larger opportunity (corporate presence and participation), the access to new talent (colleges and universities), density if that’s a preference (a good walkable downtown), easy access (airports, rail, uber, etc.), and a super strong support network (community) where the mantra of give before you get isn’t lip service from top tier founders and money.
The ideal community doesn’t have a building or business as it’s center. Instead it has thousands of people, supported by co-working, accelerators, incubators, successful founders (public and not), and a heavily engaged corporate innovation contingent. The people are the community, right?
As important to the ecosystem is access to consumers. The more the merrier – so that when the leading media companies in the region cover startups and innovation, there are people to read it.
And, a great ecosystem has an engaged city government(s), chamber(s) of commerce, department(s) of economic development, and a regional transportation provider that is eager to work with the community.
In fact, a great ecosystem has billionaires from other industries seeping into its core, with a fresh $100 million fund being deployed and another in progress.
A couple of weeks ago I had lunch with some of the top investors in my city (Dallas), and what I heard was remarkable. They’re seeing lots of deals, and they’re going to start co-investing more. Even top tier money is seeing the value of a truly cooperative community.
My 2¢ from Dallas #Texas
I have to agree that’s it MUCH more difficult to get a truly big idea funded in Austin. On the other hand, it’s possible. There is a lot of seed stage money here. Series B with traction is good as well since that is more get-agnostic. Series A is the tough part and that is tough in SV as well simply due to the seed glut everywhere.
Austin is my home. I want to raise money here because I want to beautify my home. I have a deep loyalty to my friends and family here and I want to help them till this garden…not someone else’s garden.
It’s not optimal to raise here for big B2C market grab. B2B, B2E, retail, Ecommerce, gaming, ad tech, and even life sciences are Austin strong points. All-in-all I’d choose your home city based on where (and who) you want to call home.
“pretty big checks in the $250,000 range.” lol
@Mikael, enjoyed your post and mostly agree with your points. I’ve been doing software startups in Austin since 1981 and after being co-founder or early employee for ten or eleven companies now I have seen the boom and the bust. Like you, I am concerned that, although Austin has a tight-knit, nurturing entrepreneurial environment, we tend to drop the tech babies on their heads when it comes time for the Series A.
I am an immigrant in this country and spent last seven years here in Austin
to ground off a couple of mobile startups. I love Austin community so far and take Austin as home for us. Moreover, I have met a lot of wonderful people around tech. community here.
But regrettably or admittedly what Mikael described here sounds pretty accurate to me.
Especially I couldn’t agree more on “#4 – Austin would have never funded Facebook”
“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.”
It is, I think what exactly where Austin is way behind the Silicon Valley or even New York. My take-away is Austin never create ‘consumer’ internet or mobile, sizable – “capital intensive or billion-dollar, ‘change the world’”- success story yet, not even single one. So the whole ecosystem is primarily based upon a few, enterprise-oriented tractions for last several years. But we all know that ‘consumer’ services and product is dominating innovation scenes in the Valley.
Our team just launched ‘consumer’ mobile app(photo messaging) two weeks ago and are deeply pondering these issues at this moment.
Despite all new activities and in-flows (Joshua also mentioned above),
as an entrepreneur , if you are truly confident about your team, company and your product, in order to move forward and keep services growing, you should seriously look outside Austin to raise seed funds.
But our dilemma is we’re still trying to make Austin for our home of the company
Mikael, thanks for your timely post
While I think there’s not a lot to argue with your (or anyone else’s) factual experiences… I think we have to keep in mind that each startup fundraise effort is a single data point only (and though you can find other data points, you don’t have the same level of information about those).
For example, there is great evidence that fundraising is just hard. AirBnB put up a post about how many dozens of investors said no before anyone said yes. (or was it 100’s?) and they’re in the heart of funding land. eShares posted on medium about how they had to go to the east coast to get funding, despite being in SV. Meanwhile, in Austin, Civitas Learning, TrendKite, Datical, Spredfast, and others have all raised (in Austin terms) larger sums of money recently. This was somewhat informative: http://www.builtinaustin.com/2015/07/22/austins-top-50-startups-watch-where-are-they-now
Lots of them involved some outside-Austin investments.
Contrary to your experience, I’ve found that when I talk to Austin investors they’re pretty up front that they are looking for revenue and are more risk averse (if indeed they are), and the bankers especially are the first to admit they’re only bankers 🙂
As for investors giving you the $1M revenue line… I think when they don’t feel like investing, they give you a benchmark like that. And when you soar past it and hit $5M, they’ll tell you they really are looking for more like $10M and up. It’s just their less-confrontational way of saying no, from what I can tell in my limited experience. Kind of like “it isn’t in our suite spot” and other trite lines. I’m sure we all do similar non-confrontational statements when we’re not hiring someone so it isn’t like we can throw rocks from our glass houses!