This is a question that has probably been asked a few times.? Joshua Baer does a great job breaking it down in his blog:
I actually think most of the right things are happening. I've been here for more than 10 years and Austin has only become more attractive to startups and entrepreneurs. We are one of the top cities in the world attracting young smart entrepreneurs, college grads, and young professionals.
We are attracting startups like Gowalla and others that are moving to Austin from elsewhere in Texas and around the country. Austin is a great place to launch a startup because it is a market full of early adopters. I am contacted at least once a month by a startup who is looking for advice about moving here.
What do we need to do? We need to keep Austin attractive to young, smart people and innovative startups. We need to continue growing the early stage venture community and our connections to outside capital. We need to identify our Startup District (East side?) and achieve critical mass. We need to embrace failure. We need to keep being Austin.
I agree with Josh - the important thing isn't being the next Silicon Valley.? The important thing is building on what Austin is, and not losing what's best about Austin as we build toward a more diverse and interesting economy.? In my 17 years in Austin, I've been really impressed how well it has handled the growth, and how diverse the growth in the economy has been.? When I moved to Austin, the state and local governments were our largest employment sector.? Not any longer. I used to have trouble naming the next crop of startups that were likely to be successful here.? Not any longer.
(Another good article summarizing the state of things on Austin Startup - a sign that this topic still has momentum.? )