November 18, 2015
Austin, Texas has the highest startup density in the U.S., but lags in crucial late-stage growth funding, according to a recent study conducted by David Altounian, an assistant entrepreneurship professor at St. Edward’s University.
Austin was ranked No. 1 for startup activity in 2015 by the Kauffman Foundation, yet Altounian’s study found that the high density of startups isn’t reflective of investments in the area.
Altounian compared annual startup investments in nine different metro areas — Austin, Colorado, San Diego, Seattle, New York, New England (Boston), Orange County (Los Angeles), and Silicon Valley — and found that Austin had the lowest average deal-size and an abnormally low funding network for late-stage startups.
The average deal size for most metro areas is $10-11 million, almost double Austin’s $5.4 million average. Last year startups in Austin saw $620 million in capital investment deals, compared with $4 billion in the New York and New England (Boston) metros, and $24 billion in Silicon Valley.
The Central Texas region has only 144 sources for funding, which is significantly less than the four biggest metros: Silicon Valley, 785; New York, 739; New England (Boston), 475 and the Midwest (Chicago), 371.
Justin Siegel, founder and managing partner of ATX Angel, LLC (a local early stage investment firm), was a former entrepreneur and investor in Boston. Based on his experiences in both metros, he believes a lack of collaboration between venture capitalists (VCs) and angel investors could account for part of Austin’s funding lag.
“In Boston there is a lot of collaboration between venture capital and angel investors and they work together. I’ve been down here a year and I’m [a] pretty active angel down here, and [I] have had really little to no interaction with venture capitalists down here,” Siegel said.
Siegel is a mentor at Techstars and Capital Factory, where regular events for the startup community are held. The venture capitalists, he says, rarely attend.
“I’m surprise at how rare it is to have one of the local venture capitalists here be present at their events…let alone engage startups and angels in dialogue and investments,” Siegel said.
Despite the dense startup market and rapid metro growth, some community members still aren’t convinced the quality is on par with other metros. Mellie Price, a local eight-time entrepreneur, thinks that Austin needs more talented and driven entrepreneurs to attract investors.
Price was the founder and CEO of Austin’s Front Gate Tickets, which was sold to Live Nation in 2012. She currently serves as the founder and CEO of SoftMatch — a network of more than 40 organizations that connects investors with startups around the world.
“I think if there is one thing that would make all of us rise, it would be driving volume and getting more entrepreneurs because the reality is that of 150 deals a year, very few make it to a series B or series C [in Austin], so why would you open a [VC] office?” Price said.
Bassett also thinks the entrepreneurship quality in Austin isn’t on par with other metro areas.
“There are awesome things happening in Austin, but the level of what’s happening in the Valley, or in Boston or New York, is incredibly high,” Bassett said.
“I think people just need to set the bar really high for themselves in terms of excellence and understand that being one of the more interesting companies here doesn’t necessarily mean you’re a shoe in for things [investments] happening in Boston, or the Valley,” Bassett added.
Jon Bassett, managing director of a national network of angel investors called NexGen Angels, formerly worked as analyst for a VC in Los Angeles. Bassett says if there was more collaboration between the startup industry and the university system like he saw in Los Angeles, it could bring more talent to the industry.
“Stuff at the university level tends to get stonewalled and it’s hard with the private sector trying to work with an institution like a large university,” Basset said. “I think we need to be more collaborative there. We need to get more talent out of the university into the company and vise versa.”
While interning at two startups in Austin, UT sophomore Katherine Allen became involved with the Longhorn Entrepreneurship Agency. She works with the Agency to find funding for student startups, but she says it is incredibly difficult without outside support.
“I’ve found on this campus there isn’t a lot of money for students looking to start their own companies…A lot of other schools with entrepreneurship programs have that access. Here we have a ton of classes about building your startup…but in terms of getting money, your kind of on your own,” Allen said.
If there was a stronger relationship between the university and the startup community, Allen says she thinks it would help fund student startups and bring young talent into the community.
NOTE: This story was produced for a reporting class at the University of Texas at Austin.