Austin-based Next Coast Ventures Raises $85 Million Fund

Next Coast Ventures announced Thursday that it has closed on its debut fund at $85 million.

The fund was oversubscribed by $25 million and its limited partners include leading institutional investors, funds of funds and family offices.

Next Coast Ventures is looking at investing in deals in Austin and in the middle part of the country in emerging tech hubs – between the coasts, said Mike Smerklo, co-founder and managing director of Next Coast Ventures.

Next Coast Ventures plans to invest in software-powered, full stack business models designed for digital natives as well as innovative companies in the education, retail, business to business and business to consumer sectors. It has already invested in four Austin startups including Umuse, Dropoff, OnRamp and Phlur and one San Francisco-based startup Cloverpop and one New York-based startup Clarity Money, said Tom Ball, Co-Founder and Managing Director of Next Coast Ventures. It has also invested in another company, which it has not publicly announced yet.

“Tom and I have known each other for almost 20 years,” said Smerklo. “We’ve both been entrepreneurs.”

Before launching the firm, Smerklo ran ServiceSource and took it from a small startup to a public company with more than 3,000 employees. Ball was general partner with Austin Ventures. Before that, he founded Tahoe Domains, an ICANN accredited registrar and he worked as CEO and Co-Founder of Openfield and Razorgator Interactive; and Chairman, CEO and Founder of eCoupons.

They decided to launch Next Coast Ventures because of serendipity and market opportunity, Smerklo said.

“We wanted to create a different type of venture firm,” he said.

They are both from the Midwest and they’re both drawn to investing there. They also worked in Silicon Valley. So they have a strong network for future financing opportunities for companies in their portfolio.

Next Coast Ventures plans to invest in 20 to 30 companies over a three to five year period, Ball said. It invests in about five to seven companies a year or 1 percent to 2 percent of the overall companies it looks at, he said.

“At the end of the day, you’re looking for a needle in a haystack,” he said.

What makes the process easier is that Next Coast Ventures takes a thematic approach to investing and is very specific in the themes it looks at, Smerklo said.

“It’s a service to the entrepreneurs because we’re able to say no faster than most,” he said.

With traditional VCs, a lot of the investments flow around a software team and a hardware team, Ball said. That doesn’t allow you to be efficient, he said.

“We’re looking at what are the three or four things happening now and how they are going to change over the next five to ten years,” Smerklo said.

Another way to say it, using a hockey analogy, is they look for entrepreneurs who are skating to where the puck is going, not where it is, Ball said.

Twenty years ago, most venture capital investing was done by former entrepreneurs, Smerklo said.

“We’re just returning to its roots,” he said. “We’ve both been operators. We’ve both been entrepreneurs and we both had exits. When you run that gamut of the life cycle you’re able to give entrepreneurs relevant advice.”

A lot of talk in the Austin technology community for the past few years has been about a lack of funding for early stage entrepreneurs, but firms like Next Coast Ventures have formed to fill that gap. Other local VC firms include LiveOak Venture Partners, Silverton Partners, S3 Ventures, Sante Ventures, ATX Seed Ventures, True Wealth Venture Partners and angel investors like the Central Texas Angel Network. There’s also local technology accelerators with funds like Techstars Austin and Capital Factory.

“I’ve lived here 11 years and I think it’s better than it’s ever been,” Ball said. “There are more options for entrepreneurs in terms of firms now than in the last decade. There’s a good balance and a competitiveness and collaboration among the firms. I think it’s great right now… Good ideas are getting funded in Austin and it’s a great time to be in Austin.”

The super early seed and accelerator networks have filled in the gap left by Austin Ventures when it decided not to raise another fund after having raised a $900 million fund of which $300 million targeted early stage investing, Smerklo said.

“The challenge is Series A and Series B for companies,” Smerklo said.

That’s the role Next Coast Ventures plays. It can tap into its Silicon Valley network to help those investors find some great Austin-based investment opportunities at the later stages, Smerklo said.

Next Coast Ventures bought a house at 12th and Nueces and remodeled it into a cool office with entrepreneurs in mind, Smerklo said. It’s an open work space. They plan to move in by the end of March. They are also bringing on a new venture partner and they are hiring for a few more positions.

The talent in Austin is also great for building tech companies, but Austin can always use more, Ball said.

“A ridiculous number of people move to Austin every day,” Ball said. “The good news is with the successes of the last decade there’s no risk in moving to Austin anymore. When I first moved here it was hard to recruit people.”

Austin’s universities graduate talented students and those students are getting to stick around because of all the tech companies here now, Ball said. Established companies like Oracle, Facebook, Apple and Google allow the younger workforce to stay in town.

“You have all the ingredients that makes this a great talent pool for the tech industry,” he said.

And Austin is the best place to launch a company for a few years running, according to the Kauffman Foundation.

“It has a national buzz,” Smerklo said

And it’s cheaper to build a company here, Ball said.

The downside of that is Austin has venture-backed companies that aren’t going to have big exits and they stick around for a long time, Ball said. In Silicon Valley, there is a huge velocity of turnover, he said.

“Things just fail fast out there,” he said.

Austin needs a better flushing mechanism, Ball said. That way some of the great talent working on things that are never going to hit it big, can roll out and work on another startup, he said.