Austin’s venture capital landscape shows signs of recovery, with area startups raising $978 million across 80 deals in Q3 2024, marking a 44% increase from last year, according to data presented at Austin Tech Week.

During a panel discussion at Capital Factory Wednesday, leading Texas venture capitalists discussed how the investment climate has evolved since the market correction in 2022. While deal activity remains below the peak levels in 2021, investors noted that valuations have stabilized, and a renewed focus on sustainable growth and profitability has been renewed.

Charlie Plauche, General Partner of S3 Ventures, moderated the panel. Panelists included Kerry Rupp, General Partner of True Wealth Ventures; Krishna Srinivasan, founding general partner of LiveOak Ventures; Morgan Flager, managing director of Silverton Partners; and Tom Ball, Founding General Partner of Next Coast Ventures.

“The world has flipped,” said Srinivasan with LiveOak Ventures, explaining that companies can no longer pursue growth at all costs as they did in 2021. Instead, investors are prioritizing underlying solid business fundamentals and capital efficiency.

Though with a distinctly Texas twist, the panelists highlighted artificial intelligence as a significant investment theme. Rather than competing with Silicon Valley on foundational AI models, Texas startups are finding success in applying AI to specific industries where the region has deep domain expertise.

However, challenges remain. Rupp, with True Wealth Ventures, noted that despite increased attention to diversity, only 2% of venture funding goes to all-women founding teams. However, mixed-gender teams have improved, reaching about 20% of funding.

Year-to-date, Austin startups have raised $2.3 billion across 268 deals in 2024, positioning Texas as the fourth-largest state for venture capital investment behind California, Massachusetts, and New York.

Other key takeaways:

Texas/Austin Market Status:

  • Texas is now the #4 state for VC funding behind CA, MA, and NY
  • Deal activity is recovering from 2023’s slowdown but not back to 2021 peak levels

Current Market Dynamics:

  • Company valuations have significantly decreased from 2021 peaks:
    • Top companies now valued at ~8x revenue (down from 40-50x)
    • Average companies at ~5x revenue (down from 20x+)
  • The focus has shifted from pure growth to balanced growth and profitability
  • Bridge rounds and inside rounds were common in 2023-24
  • Down rounds were frequent (20-24% of deals in 2023)

AI Investment Trends:

  • Creating a valuation divide between AI and non-AI companies
  • AI companies still commanding premium valuations (20-40x revenue)
  • Texas VCs focusing on:
    • Vertical AI applications with domain expertise
    • Enterprise software enhanced by AI

Advice for Founders:

  • Best ways to approach VCs:
    • Get warm introductions through seed investors, lawyers, or portfolio companies
    • Tailor outreach to specific firms/partners
    • Junior VC team members are valid entry points
  • When raising:
    • Be realistic about growth projections
    • Focus on capital efficiency
    • Demonstrate strong unit economics
    • Show a clear path to cash flow break-even
    • Don’t fixate on “triple, triple, double, double” growth at all costs

Investment Criteria:

  • Early stage:
    • Team quality and domain expertise
    • Market size and problem urgency
    • Unique differentiation
  • Later stage:
    • Revenue metrics
    • Customer retention
    • Capital efficiency
    • Growth rate sustainability