Funding is everywhere in Austin, yet remains tough for startups to get. Investments can take three to six months to arrange, assuming companies can get them at all. Here’s how to increase your chances.
For entrepreneurs whose Austin-area startups needed funding, 2021 was a story of good news and bad news.
The good: In the first three quarters of the year—the latest data available at press time—venture capitalists invested $3.77 billion in the region’s early-stage businesses, according to PitchBook and the National Venture Capital Association.
That was more than any yearly total since at least 2014, data from PitchBook and the NVCA show.
The flip side is that getting in front of potential backers remains the most difficult part of fundraising, no matter where an entrepreneur is located, experts said.
“Investors are insular, like to speak amongst themselves and are often wary of people approaching them for money instead of a business relationship,” said Nick Spiller, CEO and fundraising coach at Austin’s Beta Business.
Even when company founders do speak with prospective investors, most meetings go nowhere. This is why fundraising can take three to six months and distracts entrepreneurs from running their businesses, according to Gordon Daugherty, cofounder and chairman of Capital Factory, a venture program with an Austin office.
What follows is a look at the funding scene in Austin and things that executives of emerging companies should keep in mind as they seek capital.
“Organizations like Capital Factory can help compress the fundraising timeline while improving the hit rate on investor commitments,” Daugherty said. “For startups that join as portfolio companies, we have a dedicated investor relations function that has cultivated relationships with more than 1,000 investors, with which we can facilitate curated connections.”
To land funding, the first step is understanding what prospective investors look for.
Venture capitalists, for one, generally seek startups with the potential to return at least 10 times what they put in, and generally closer to 100 times.
Most startups fail, meaning VC’s successful companies must pay for those that don’t make it while providing outsized returns commensurate with high-risk investing. When evaluating a startup to potentially support, venture investors look at the market the company is pursuing, its product or service, and the team that will run the business.
Bringing investors aboard is akin to getting married, so entrepreneurs must perform due diligence on outsiders before accepting their money.
“Some funds ask portfolio companies for compensation in exchange for strategic guidance,” said Salen Churi, general partner at Austin’s Trust Ventures. “We don’t ask founders to pay anything for our services. We win when they win.”
“TO AVOID BEING INUNDATED, PEOPLE
WHO INVEST IN STARTUPS OFTEN SHUN
ENTREPRENEURS WHO TRY TO CONTACT
It’s a similar story with angel investors, meaning wealthy individuals who usually put in capital after friends and family, but before VCs get involved. “Some angels will do more harm than good considering their lack of investing experience,” Spiller said.
Beyond VCs and angels, another option is family offices, which run the business affairs of wealthy clans.
“Family offices are the definition of patient capital,” said Seth Morton, PhD, director of The Family Office Association, a trade group. “They don’t have the same kind of quarterly pressure to make decisions that other firms face.”
In the venture capital space, family offices, private equity firms and corporations are taking a larger share of VCs’ lunch while playing with significantly more capital and fewer restrictions, according to Lauren Washington, co-founder and CEO of Austin-based Fundr, which runs an investment marketplace for seed investing.
Things to Keep in Mind
To avoid being inundated, people who invest in startups often shun entrepreneurs who try to contact them directly. Angels, VCs and such often rely on referrals from people they know, who generally perform initial screens.
This, experts said, is why startup founders must forge relationships with people who can give referrals before trying try to raise money. Those founders should tailor their pitches to the types of deals that given investors prefer to do.
Companies also increase their chances of landing capital by having viable products, customers and revenue in hand when starting talks with those who have money.
Where investors once required face-to-face meetings with entrepreneurs, COVID-19 created a willingness to handle the process remotely. That was how Tiff’s Treats, an Austin-based firm that delivers warm cookies, handled a $30 million round that it announced in November 2021.
“It saved a lot of travel time, if nothing else,” said CEO Leon Chen, who started the business with his then-girlfriend (and now wife) Tiffany.
While Zoom meetings may add efficiency to fundraising, company founders need to remember the purpose behind landing investments, according to Jim Breyer, founder and CEO of Breyer Capital, a Silicon Valley-based venture firm that has backed more than 15 Austin-area startups since establishing an Austin presence in 2020.
“In today’s environment, where there has never been more capital available, many teams are raising money for the sake of raising money,” Breyer said. “I can understand why companies would take advantage of this dynamic, but I also consistently advise founders to raise money only when they know how the new capital will get the business from point A to point B.”
Many young businesses seek to become unicorns, meaning getting valuations of more than $1 billion.
This should never be a startup’s primary goal, Breyer said. “When companies get too caught up in achieving high valuations, they often end up prioritizing the wrong things, like investor meetings, press, and other external metrics that deter from their strategic objectives.”
Women, BIPOC Left Out
As of December, CB Insights listed six unicorns in the Austin area: Workrise ($2.9 billion valuation), ZenBusiness ($1.7 billion), Everly Health ($1.3 billion), Kendra Scott ($1 billion), The Zebra ($1 billion) and Iodine Software ($1 billion).
Yet while early-stage funding has rebounded, women and minorities still receive less than 10 percent of all venture capital combined, according to Washington of Fundr. When they do raise money, their valuations are lower, she said.
“It’s harder to get warm introductions to networks (of people) that minority founders have historically been left out of,” she said. “Investors spend less time reviewing women’s decks, something that leads to hundreds of thousands of dollars in funding difference. When pitching the same concept, men will always get more funding than women and the questions they’re asked will be biased.”
Companies founded and led by women have 250 percent higher returns than male-founded companies, but receive 45 percent less funding than their male counterparts, according to Amber Gunst, CEO of the Austin Technology Council, a trade group.
“As investors, connectors, and legacy founders, we need to stop with the white guys introducing white guys to white guys,” she said. “I am dumbfounded as to the number of bad founders and bad companies, cultural and ethical, that get funding. Yet you see outstanding founders denied the introductions and access because they are women, black, Latinx, AAPI, LGBTQIA+ and indigenous.”
Gunst praised the work of Austin-area organizations like True Wealth Ventures, Beam Founders Network, and DivInc, but added that individuals must do their part with everything from providing introductions for underrepresented entrepreneurs to demanding accountability from funds in which they have invested.
“One of the biggest draws (to Austin) is the high number of women and BIPOC in our director to C-suite roles,” she said. “It is one of the highest in the country. If you are not working on diversity, equity and inclusion in leadership for your company, you may miss out.”
On tap for 2022
While progress on that front may be slow, there are signs things may be improving. Capital Factory, which has been the most active early-stage investor since 2010, is making an increasing mix of investments into startups with underrepresented founders, Daugherty said.
Texas is a friendlier regulatory environment for entrepreneurs, and it shows in the amazing companies we’re seeing coming out of Austin
Another trend impacting investing is large companies moving operations to Austin. They bring with them technology and business professionals, who can become entrepreneurs, new hires for startups and angel investors.
That has helped attract investments and new offices from East and West Coast venture firms.
It has also helped spawn home-grown investors like Trust Ventures, which backs businesses that try to solve societal problems which are held back by regulatory barriers. “Texas is a friendlier regulatory environment for entrepreneurs, and it shows in the amazing companies we’re seeing coming out of Austin,” Churi said.
One of Trust’s portfolio companies, Austin’s Sana Benefits, has raised $47 million since its 2017 inception. The company, which provides high-quality, value-based health insurance and benefits to small businesses, was slated for a January launch in Austin of its first Sana MD advanced primary care center.
The facility’s offerings will include physicians having more time to spend with patients, according to Will Young, the business’ co-founder and CEO. “Sana plans to expand into a handful of new states in 2022, but we’re still determining which ones,” he said in a December interview.
Another growing Austin firm is Elligo Health Research, which is looking to make clinical research available to everyone within the next five years. The company in September announced a $135 million round.
“The pandemic was incredibly challenging for clinical trials, which led to a lot of interest in and adopting of novel research solutions,” said John Potthoff, Ph.D., the company’s CEO.