With venture capital investments in startups slowing nationwide, Austin is feeling the chill.
Investments in Austin-area companies fell 49 percent in the first three months of the year, compared with the same period a year ago, according to a new survey from PricewaterhouseCoopers and the National Venture Capital Association.
A total of 25 companies received a combined $141 million during the first quarter, compared with $277 million raised by 33 companies in the same quarter a year ago.
“We’re Austin, and that’s great, but we’re not immune to the world economy,” said Kirk Walden, an adjunct business professor at Texas State University and principal of Austin-based Walden Consulting. “When venture capitalists pull back in Silicon Valley and the East Coast, you can bet we’re eventually going to feel it.”
Venture capitalists have pulled back worldwide, rattled by stock market uncertainty and an ongoing skepticism of high valuations for unproven companies. Last year, an investment frenzy helped create dozens of so-called unicorns, privately held companies valued at more than $1 billion.
“There’s a real sense of caution right now,” said Brian Smith, managing director of S3 Ventures, an Austin based venture capital firm. “It’s easier for investors to watch and wait and be more selective.”
Companies with proven business models and products that customers want to buy are still able to raise money, Smith said. “The best deals will get funded, the mediocre deals will struggle and the weak ones won’t get anything,” he said.
The biggest deals in the Austin metro area during the quarter were landed by airport rental car company Silvercar, which raised $28 million, and technology company Pivot3, which raised $19.1 million.
The quarter did show some positive signs for Austin startups: 15 of the 25 investments were in early stage companies, indicating investors are still willing to place risky bets on unproven business models.
Investment in young companies is important to the Central Texas economy because it allows them to hire more workers, invest in new equipment and ramp up product development and marketing.
Austin has a strong network of angel investors -- individuals who put small amounts of money into companies just getting off the ground. But next startups need venture capitalists willing to provide funding to take them to the next level.
Early stage companies “are the lifeblood of the Austin technology market, so this is what you want to see,” said Larry Westall, managing partner of the Pricewaterhousecoopers Austin office. “We can’t predict which will be successful, so you have to keep the funnel full.”
Datical was among the early-stage deals this quarter. The four-year-old company, which builds software to manage databases, raised $8 million from investors including S3 Ventures and Mercury Fund. The money will help the company grow from 30 to 50 employees by year's end, said Derek Hutson, Datical CEO.
Credit: Lori Hawkins
Credit: Lori Hawkins
“We didn’t need the capital yet, but we wanted to really accelerate our ability to develop the product faster and also add additional sales resources and support resources to meet demand, ” Hutson said.
Venture capital firms raise money from pension funds and other big institutions and invest it in promising young companies. The goal is to get a healthy cut of the profits as those companies are sold or go public.
Nationwide, venture capital investments fell 11 percent to $12.1 billion in the first quarter. Investment in Silicon Valley companies declined nearly 20 percent to $4.9 billion.
In Austin, the software industry continued to lead in venture capital, with $57 million going into eight deals. In second place was media and entertainment, with five deals bringing in $32 million.
The quarter also put a spotlight on an emerging Austin sector: consumer goods startups.
Three companies — hard cider maker Austin Eastciders, healthy snacks company Rhythm Superfoods and watchmaker UnaliWear — closed deals in the first quarter.
Rhythm Superfoods will use its $3 million investment to expand sales and marketing efforts of its kale chips, broccoli bites and roasted kale lines and to launch a new line of beet chips, CEO Scott Jensen said.
UnaliWear, a three-year-old Austin firm that aims to make “on-call, emergency assistance” watches for the elderly and the chronically ill, raised $3.1 million.With the funding, 600 people ages 32 to 97 will begin testing the watch.
Meanwhile, Austin Eastciders, which has an urban cidery on Springdale Road, raised $3.8 million from ATX Seed Ventures and other undisclosed investors for expansion.
Venture investment in Austin has always been cyclical, with investors coming and going, and markets rising and falling.
Investment activity peaked in Central Texas companies during the dot-com boom in 2000, when 185 Austin companies raked in more than $2 billion.
When the bubble burst, investors pulled back, leading to several lean years when even promising companies struggled to attract funding. Eventually the market regained strength, but it took another hit during the financial crisis of 2008.
In recent years, venture activity has bounced back, with investors funding deals in which Austin has long been a player — business software and medical devices — as well as newer markets including cloud computing and data analytics.
Now, as the investment landscape shifts again, venture capitalists are making sure their companies know the new rules.
"It has sparked lots of conversations," said Chris Pacitti, partner of Austin venture firm AVX Partners. "It's along the lines of this: Treat your balance sheet as precious and spend money cautiously."
