As we move into this New Year, I want to pick up the theme of investing in the next generation of Austin entrepreneurs. This is a large part of our mentality at ATI. Even though we typically have around 20 – 25 companies in the portfolio at any one time, we are supportive of probably another 25+ entrepreneurial teams so that we can have a broader impact in the trajectory of emerging entrepreneurs. Many entrepreneurs express frustration to us as they proceed through the fund raising process and I want to provide my perspective on two related underlying drivers.
Surprising to most, the average age of the entrepreneurs at ATI is probably around 40. Many come to us with significant industry experience and / or prior experience with startups as a junior team member. However, they frequently find it tough to raise funding or attract the critical talent to the team because they are not one of the proven Austin startup leaders. While 75% of ATI companies have received angel or VC funding over the last three years, that statistic does not hold true for the broader ecosystem. That is probably a good thing. However, more entrepreneurs need to get a chance – albeit perhaps to fail fast, but that is the only way they can become next generation of Joel Trammell, Larry Warnock, Richard Schwartz, Brett Hurt, Sam Decker, Curt Bilby, Rob Neville, Josh Baer, etc. (all of these folks have at least one successful exit and are now leading another funded startup). We need to be cultivating 10x the number of future entrepreneurs to have a viable “senior class” in 15 years to replace the current proven startup leaders as they retire or pivot to become investors.
Driver #1
I recently wrote about a “class” of startups that may end up moving to the west coast for funding. This has been a pattern for a while, and it will continue to be for some time to come. The implication is that Austin is potentially loosing a portion of the current generation of up and coming entrepreneurs – and these are not the “wet behind the ears 22 year olds” either. [Disclaimer – yes, I know the counter to that statement is Microsoft, Dell, Google, and Facebook] I think the challenge for this category of entrepreneur is that they are in spaces that do not line up with the sweet spot of Austin investors – i.e., there companies are somehow consumer related. There may be a disconnect between the Austin investors and the Austin talent base, and the types of companies that talent want to create. If so, either the money or talent will flow out of Austin – or new talent or money will flow into Austin. Probably some of both.
Driver #2
A challenge for investors in funding these new entrepreneurs is that they frequently only get to meet them in a transaction context, not a long term relationship context. Those of us who work with these entrepreneurs for 6 or 12 months before they engage the investor community have a different perspective on the entrepreneurs because we have been working so closely with them for so long. It is not that we have become BFFs (best friends forever), it is that we have seen the entrepreneurs execute, explore, struggle, succeed, fail and all the other range of efforts and emotions that come with launching a startup so that we develop a much clearer sense of their capabilities. One reason seasoned entrepreneurs get funded is that the investor has developed a similar long term relationship with them and the investor’s confidence in that relationship allows the investors to believe the entrepreneur can get through the next set of risks and company milestones. In contrast, when an investor first meets a new entrepreneur, it is usually in the fund raising context and for web or software related startups, the market windows are narrow and require an investment decision in weeks or a couple months at most. Although investors work rapidly to get to know the entrepreneur and do background checks, there is still additional risk in that entrepreneur that is not inherent in the proven leader the investor has worked with previously.
I have no idea how to break the conflict – investors clearly cannot spend as much time with 50 entrepreneurs as we do for 6 or 12 months prior to a potential funding event, but the investor needs that level of familiarity to reduce risk. This impasse is a compounding issue for investors when an entrepreneur pitches a company that is outside of the investor’s wheel house as is the case with many consumer related startups – now there are two risks, one relating to the entrepreneur and the other to the market or technology space. That is one too many too frequently, especially when one makes the other worse.
At ATI, we are also working with the Rice Alliance’s Austin Chapter and CTAN on entrepreneur education and have launched a suite of programs aimed at exceptional UT students to help home-grow the next generation of Austin entrepreneurs. In the case of the UT-focused programs, that is a 20 year effort but the ecosystem needs some short term answers as well – in the 6 month to 3 year timeframe. Let me know if you have some ideas.
