Raising Money in Austin

Scott Francis
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There are two common themes regarding Austin and startups over the last 5+ years:

  1. Austin is a great place to start a company
  2. You can’t raise money in Austin

It seems like these two themes would be mutually exclusive, but they’re not.  They are both alive and well.  You can find several links in our own blog to articles talking about how great Austin is, or how great a city it is to start a company.

But you can also find posts like this one, about how difficult it is to raise money in Austin.  Ironically, it is by someone who raised $8MM in Austin – which is $8M more than we’ve raised, after all.  So, I think he’s done all right to start.  But his next round will likely have to go outside Austin to get what his company needs.

His positives:

  • Cost of living is low. Grocery bills were cut in half.
  • Startup community here is a family and very supportive.

I would add:

  • your turnover of staff is likely to be lower here – you can more easily build a business. 
  • It isn’t hard to recruit talent to Austin from the rest of the world, with possible exception of SV.
  • Austin is actually a pleasant place to live, besides being less expensive.
  • You can make a difference here (see I choose Austin)

His cons:

  • Too hard to raise money. He claims to have completely summarized the Austin investor community in one paragraph but he missed a few.  Also there are deep pockets in cities nearby, like Dallas and Houston, looking to diversify.  And the picture keeps changing.
  • Austin would never have funded Facebook.  Well, I think it is fair to say that at the time Facebook got funded, no place but SV would have funded it.  Talk about a unicorn.  Not sure what we’re supposed to learn from that.  But Austin could have funded a foursquare or a twitter. They were launched here, and a competitor to foursquare, Gowalla, was here.  I think the key thing is that the company you start has to have the traction.  If you have the traction Facebook had, you’re going to get funded wherever you live.  If someone has an example of a company executing better than Facebook, based in Austin, not getting funding, I’d like to hear it!
  • 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.”

I guess I don’t have a lot of sympathy for this last one.  Recruiting is a full-contact sport in SV as well, and your CTO won’t think twice about leaving you high and dry in SV.  If the CTO of another company no longer believes in what they’re doing, that other CEO is better out without her (or him).  In Austin that CTO would think about the consequences of not helping his former company secure a new CTO before bailing.  My advice is to start recruiting at UT – and at schools outside Austin – to import new talent into your company.  Facebook would do that.  If anything, it is at college recruiting that most Austin startups really fail to invest.  And they rarely get outside of Austin to do their recruiting.

Raising money in Austin has its challenges.  As a software and services company, we’re familiar with those challenges and related challenges to just having a lot of services revenue on your P&L.  But I think the best thing to do is figure out how to run your business sustainably, given your access to capital, whatever that access is.

We’re fortunate that we started a business that required less up-front funding, and so access to capital was less of an issue at first.  This is how we survived the Great Recession, and the lessons learned have helped us thrive as we grow.  I don’t think you can raise $100MM in Austin very easily… but we’ve seen companies raise north of $30MM in Austin several times over the last 12 months, and being in Austin didn’t seem to cost them that opportunity – they just raised a lot of that money from other locations.

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