The good news is that Austin companies are getting funded. The bad news is that many really good companies are going to leave Austin so they can get funded on the west coast. The reason is that there is a hole in the funding continuum, with a particular focus on anything that touches the consumer. I know of three great software companies with customer traction, massive scale potential, and prior small angel rounds that are not able to raise a viable Series A here in Austin (even though two are really B-B-C). They will get funded by the west coast. Some may just say it is because “they are crazy on the west coast,” but that is a copout. From an effort-to-results perspective, the startups could bang away in Austin and possibly get funded, or spend an equal effort on the west coast and probably get funded (in reality, likely less effort with a higher valuation). It is a relative effort issue. More importantly, it is likely that all three will move to the west coast if funding comes from there.
At a back-of-the-envelope level of sophistication, there are several major inflection points in a startup’s evolution that show significant reductions in risk. Each one of the four business milestones below can somewhat be correlated with a round of funding:
- Seed funding supports the company to prove the product works
- Series A supports the company to prove customers will buy it and there is a revenue model
- Series B supports the company to prove there is an internally coherent and sustainable business model
- Series C supports the company to prove the product and business model can scale to become a significant company
The specific gap that these software companies are at is between the “customers will buy” and the “business model works” stages. They all did a tremendous job identifying a need, building a product to solve that need and proving that someone will pay to have the need solved. That actually sounds like Series B progress and certainly should be enough to get Series A funding, and it is on the west coast – and at a good valuation. Not in Austin. In Austin, the feedback they are getting is that they need massive amounts more of customer traction, an “upgraded team”, clear path to profitability, and the Series A is too big or the valuation is too high.
Lately, ATI has seen renewed interest by west and east coast investors in the Austin startup scene. More firms are covering Austin – meaning they seek out meetings with startups, asking around about good entrepreneurs and startups, attending key technology and startup events, etc. – and are writing checks. The most recent funding announcement from an ATI company in my portfolio was Calxeda (formerly Smooth-Stone) which was funded by six non-Austin investors. Now, each of those six investors will be in Austin once a quarter and, if the pattern holds, should start considering additional investments here. I certainly plan on hitting them up. While I do not expect to see a frothy market any time soon, it is an optimistic sign for many startups.
