Austin’s Venture Capital

Austin, Texas

Austin, Texas

In my previous blog post, I discussed Austin, Texas’ strong history of entrepreneurship and the many resources in the ecosystem. Supportive Austin policies have resulted in the creation of the Entrepreneur Center of Austin, and resources like Capital Factory and Tech Ranch Austin have emerged. Austin’s entrepreneurial ecosystem appeared to be healthy.

A recent PitchBook Report discussing venture capital in Austin shows the ecosystem to not be as healthy as previously thought. In 2014, Austin saw 286 deals closed at a value of $1.4 billion. Similarly, in 2015, 296 deals closed or $1.3 billion. 2016 saw a substantial decrease in the number and value of deals closed with 199 deals closed at a value of $978 million.

Austin’s ecosystem reflects a nationwide trend in declining deals. According to PitchBook, the number of deals closed nationwide had been rising steadily since 2009, peaking in 2014 with 10,501 deals closed. 2015 and 2016 both saw decreases in the number of deals closed; 10,293 and 8,136 respectively. The 8,136 deals closed in 2016 is the lowest number of deals closed since 2012.

An insufficient supply of startups and an increased perception of risk are decreasing VC investment in the Austin ecosystem. Investors likely fear that the oversupply of capital that has been invested in the system in 2014 and 2015 has led to slumping returns, so they are pulling back their investments. Once VC investment balances out, it is likely that Austin will see investment increase again.

Outside investment in Austin-based companies soared in 2014 and 2015, as respectively, 396 and 370 investors from outside the Austin metropolitan statistical area invested in Austin-based ventures. In 2015, Austin had the most venture capital invested in its first financings with $324 million. However, venture capital activity in the United States overall has declined. Austin’s most prominent VC fund, Austin Ventures, closed in 2015. After the two-year boom period from 2014 to 2015, the rate of VC investing in Austin startups has slid considerably over the 2016 period.

Austin’s diverse ecosystem is an asset to the stability of VC investment in the area. While the majority of VC activity occurs in the software industry, the pharmaceutical and biotech industry also attract significant VC investment. In 2015, 12 deals were closed in health care devices and services, and in 2016, 11 deals. The opening of the Dell Seton Medical Center and Capital City Innovation, which will work to connect entrepreneurs with healthcare research, will likely contribute to increases in VC for health care devices and services.

According to a McNair Center Report, VC investment in Texas is falling. Yet Austin’s relatively low costs and the boom of angel/seed investment have given Austin a reputation as a thriving startup ecosystem in a state where VC investment is dropping. Despite decreases in a 2016 VC investment in the region, it is likely that Austin will see investment in crease again after VC investment balances out.

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