Don’t Boil the Ocean and Other Words of Advice from Austin VCs to Entrepreneurs

Venture capital investment in Austin has been on the rise.

VC funding hit $1.3 billion in 2018, the highest on record since the dot-com boom in 2000, according to the MoneyTree Report from PwC and CB Insights. That’s up 70 percent from $783 million in 2017.

Yet California deals still get more than 50 percent of the $98.5 billion in VC capital invested in 2018, according to the report.

During a fundraising panel on Texas’ Growing Venture Market: What’s Changing and Ecosystem Impact during Austin Startup Week, Charlie Plauche, a partner in S3 Ventures in Austin, gave an overview of Texas’ growing venture market.

A standing-room-only crowd turned out for the discussion in a meeting room on the 16^th floor at Capital Factory Monday afternoon.

Plauche also showed a slide presentation providing an overview of the VC market here and the rise of Austin-based VC firms and those that have offices here.

Many like True Wealth Venture Partners, Next Coast Ventures, and LiveOak Venture Partners have opened in the last decade. The oldest on the panel, Silverton Partners, raised its first institutional fund in 2006. And S3 Ventures was founded in 2007.

Krishna Srinivasan, co-founder and general partner of LiveOak Venture Partners, Mike Dodd, general partner, Silverton Partners, and Tom Ball, co-founder of Next Coast Ventures, all previously worked at Austin Ventures, the big VC firm that shutdown in 2015. They all served as panelists along with Kerry Rupp, general partner of True Wealth Ventures.

Silverton Partners has four managing partners, Dodd said. It closed on Fund V at $108 million last year. It focuses on early-stage companies and it has made more than 50 investments since launching. About 70 percent of its investments are in Texas, Dodd said.

Next Coast Ventures, founded in 2015 by Tom Ball and Mike Smerklo, raised an $85 million fund in 2017 and announced plans to raise a second fund this year. The firm makes about 70 percent of its investments in Texas, Ball said.

Rupp, general partner of True Wealth Ventures, runs a $20 million fund that invests in women-led startups in consumer health and sustainable products industries. Rupp founded the firm in 2015 with Sara Brand.  Only two percent of VC capital dollars go to companies with a woman CEO, Rupp said. True Wealth Ventures has invested in eight companies so far with two of those investments in Texas. It writes seed-stage checks in the $250,000 to $500,000 range, she said.

LiveOak Venture Partners, founded in 2013, earlier this year closed a $105 million fund, its second fund. The company invests in startups primarily in Austin and Texas overall, Srinivasan said.

While California has seen several $100 million rounds of investment capital into startups, Austin doesn’t really see that kind of activity, Rupp said. An entrepreneur can still raise a pre-seed to seed-stage round in the $250,000 and up range here, she said.

In the valley, there is a massive amount of capital chasing a limited number of entrepreneurs which skews pricing high, said Dodd. So, the entrepreneurs that do end up raising capital burn through it quickly, he said. So, you have these companies that have these massive burn rates, he said.

The investment round sizes and burn rates in Austin and Texas are more reasonable, Dodd said.  Austin has much better unit economics, he said. It’s kind of the way Silicon Valley used to be in a way, he said.

“There is a big difference between building a business here and out there,” he said.

Companies in California that raise those massive rounds of investment capital must be able to deliver massive returns to investors, Srinivasan with LiveOak Venture Partners said. In Austin, if an entrepreneur develops a meaningful sized business and has an exit, they are going to make themselves and investors a good size return, he said. Similarly, early employees end up with a nice return as well, he said. Companies that are capital-efficient can provide good returns to investors and the company, he said.

Plauche asked the panelists what the VC funding landscape is like now that Austin Ventures is no longer around.

“It was good when there was an 800-pound gorilla if you were the 800-pound gorilla,” Ball said.

It was bad for the entrepreneurs with only one big VC firm in town, Ball said.

“It’s obviously a lot better for the entrepreneurial ecosystem to have more options,” Ball said.

There’s talk that there is a funding gap in Austin when it comes to Series B and Series C checks, Plauche said. He asked the panelists what it is like for the entrepreneurs in their portfolios to try to raise later stage rounds.

“The early stage money is definitely the hardest,” Srinivasan said.

In 2013, when LiveOak Venture Partners started there was hardly any early-stage money in this market, he said. Since then, several VC firms have raised meaningfully sized investment rounds, he said. So, the first round of money has gotten easier, he said.

When companies get to a certain breakout revenue run rate, the money is easier to find, Srinivasan said.

“It’s getting better,” he said.

There are a lot of firms that come to Austin and Texas now prospecting for good companies to invest in, Srinivasan said.

Austin is very much on the radar for global VC firms, he said.

“It’s an exciting time for folks like us who write the checks,” Srinivasan said.

There isn’t any lack of capital, Ball said.

“They find their way to Austin,” he said.

Today, it’s cheaper than ever to start a company, but it’s more expensive to scale a company, Ball said.

“That’s why I think you see those round sizes growing and the capital coming in,” he said.

There isn’t as much later stage funding in Austin, but it comes here when needed, Ball said.

Plauche asked the panelists what they are looking for when making a seed-stage round of investment.

“It’s team,” Rupp said. “At the end of the day, we’re betting that you guys can figure it out.”

True Wealth Ventures also looks at the size of the market opportunity, and whether it is scalable, she said. To get a $100 million to $200 million exit, that’s ok, but for a venture fund, the exit must be much bigger, she said. True Wealth Ventures likes to see revenue from software companies, but with hardware companies it knows they need revenue to build out their product, so they are more forgiving if the startup doesn’t have revenue, Rupp said.

At Silverton, the company makes investments in 20 companies per fund, Dodd said. It looks at the team, market opportunity, and product-market fit, he said. It generally invests in Series A rounds, he said.

LiveOak Venture Partners invests in entrepreneurs who are serial entrepreneurs or those that have deep domain experience in the industry they are disrupting, Srinivasan said.

At the earliest stage of raising capital, Rupp advised entrepreneurs to think about the long road and to make projections on how much revenue they think they’ll generate three to five years out and what their exit strategy might be. Even though the financial projections might seem like “garbage” from the minute they are printed, it is important for entrepreneurs to go through the process, she said.

Plauche asked about entrepreneurs who post a financial project slide with hockey stick revenue growth projections and whether those are discounted or taken seriously.

In venture investing, “there is a saying – triple, triple, triple as in tripling revenues three times in a row year after year, and double, double beyond that,” Dodd said.

“In the Valley, everyone wants to see that,” he said. “Don’t even walk in the door if you can’t show that.”

But ultimately, entrepreneurs need to look at how do they get there from the bottom up, Dodd said. Going from 20 customers to 1,200 customers is kind of hard to do, he said.

Don’t look to boil the ocean but find an industry vertical market that is more specific to sell products into, Dodd said.

Plauche asked how often entrepreneurs should raise funding.

Once entrepreneurs raise VC funds, they are always fundraising, Dodd said.

And VC firms are always fundraising, Ball said.

“You are building a relationship,” Rupp said. But entrepreneurs need to reach out to the right investors, she said. Spend the upfront time to find out which investors are the right ones interested in your industry to build a relationship with, she said.

The best way to reach the Austin VCs is through a warm introduction from someone they know in the Austin technology ecosystem. But LiveOak Venture Partners Srinivasan said one of the fastest-growing companies in its portfolio, Disco, came in through a cold email into its office.