The verdict is in: The US venture ecosystem is healthy.

But as the overall ecosystem is largely a patchwork of activity in metro areas, it behooves us to dig a little deeper to that level. PitchBook’s 2016 Venture Ecosystem FactBook: Austin presents metro-level datasets on dealmaking, venture-backed exits and much more. Utilizing a more holistic method of inquiry, the FactBook analyzes which key factors are having a significant impact in Austin.

In addition, it includes:

  • A snapshot of the Austin economy
  • Venture activity by sector, series and more
  • Analysis of outside investor participation in Austin-centric financings

A promising venture ecosystem facing hurdles

Introduction

When it comes to analyzing trends in venture investment, thinking in terms of an ecosystem is one of the more powerful approaches, as much within venture capital is not quite as quantifiable as one would like. Moreover, framing an investment ecosystem as an overlapping, interlocking system of cycles is especially illuminating when it comes to analysis of VC within a specific region,
given the interplay between general business cycles, fund investing lifecycles, policy mandates and more. For example, the primary narrative for the US venture industry throughout 2016 has been a decline in activity even as valuations have remained relatively strong, with certain metropolitan areas enjoying more resilient numbers than others. But when zeroing in on one of those metropolitan areas, the location-specific historical trend in the supply of startups jockeying for and garnering VC investment becomes a more critical component for analysis. The metro-specific growth over the past several years also matters considerably. On top of that, it’s important to highlight how metro-specific venture activity is necessarily limited by the speed of the spread of viable information within a given network, plus the size of the nodes in a venture network, i.e. the size of capital sources. Likewise, livability and interconnectivity within a metro matter, ranging from metrics such as ease of doing business to tax rates to typical rents to sprawl. The purpose of this PitchBook report series is to place PitchBook venture data within a broader context on a more geography-specific basis, the better to illustrate potential use cases for analysis. It’s critical to note that within that broader context one must take timing into account. The growth percentage over time is an important indicator of a venture ecosystem’s overall health, as one of my collaborators remarked during our review, and there is always more to any existing ecosystem than can be rendered in a dataset.

As this is the inaugural installment of the metro-specific series, we welcome your feedback and questions—reach out to us at [email protected] I’d like to thank S3 Ventures, Sante Ventures, the Austin Chamber of Commerce, PTV Healthcare Capital, and the National Venture Capital Association, among others whom assisted in the production of this report.

GARRETT JAMES BLACK

Review: Austin in US venture ecosystemReview: Austin in US venture-ecosystem

Snapshot of Austin MSA’s size within the US venture ecosystem as a whole

In early August 2016 we released the first US Venture Ecosystem: FactBook, the largest PitchBook report ever and a compendium of venture and relevant economic datasets for the top 12 (by overall venture activity) metro areas within the US. Just as a recap, we have reproduced the table ranking the size of the 12 venture ecosystems below, to provide some context for where the Austin MSA venture ecosystem stood in terms of overall size in mid- 2016. More rigorously assessing the quality of a given venture ecosystem is something we are still working toward, so we’d like to stress that size does not entail quality in any way. What is more important to note from the table below before moving on is which key factors in the venture industry matter most for a smaller ecosystem—which Austin certainly is—among the ones already enumerated in the introduction.

Note: As of 6/30/2016, this ranking was generated by weighting capital raised, VC invested, VC activity and venture-backed exit value equally, tallying up their ranking in each area, then summing and sorting from lowest to highest, with a lower score indicating a larger ecosystem.

Venture Ecosystem

Economy

Austin’s current economic condition & recent trends

When assessing how the health of the local economy impacts the venture ecosystem, some primary factors to look at are tax burdens, relative wages, rental rates and the supply of talent. Seasonal temporary hiring contributed to Austin’s unadjusted employment rate declining to 3% in December 2016, while Texas on the whole saw a 4.6% seasonally adjusted jobless rate in November 2016, per the Texas Workforce Commission. Austin and Texas on the whole are still exhibiting significantly strong numbers, but by and large it appears the marked expansion since the financial crisis is slowing. The Federal Reserve Bank of Dallas released data in late December showing the Austin Business-Cycle Index grew by an annualized rate of 2.9% in October 2016, considerably below relative to the last decade as a whole. We emphasize year-over-year changes—the better to gauge more recent changes that will have affected current sentiment—so the impact of monthly or quarterly influxes of data do not overly drown out longer-term trends. Such longer-term perspectives are crucial to take into account when considering typical venture investment cycles. That said, a more recent decline in economic indicators, however, will contribute to and may have already clouded domestic and outside investor sentiment, at least somewhat. For now, the state of the Austin economy is still quite healthy—any negative changes are distinct mainly due to the fact they are in proportion to previous, markedly strong numbers.

A brief note on Austin’s livability: Given the increasing popularity of events such as SXSW and Austin’s persisting cultural reputation, as well as a sizable transportation bill that passed recently and input from multiple domestic parties, it appears the area is still and will remain quite attractive as a residence for some time.

Texas has no corporate, individual income or state property tax. It also ranks 41st among the 50 US states in taxes paid per $1,000 of personal income, at $88.

Venture Ecosystem

Investment activity

An overview of Austin’s venture investment activity

Venture Ecosystem

Investment in Austin-based startups is on the downswing relative to elevated activity from 2014 to 2015. Beginning in the final quarter of 2015, activity has oscillated in a subdued fashion on a quarterly basis, although aggregate capital invested flatlined in the back half of 2016. There are multiple challenges that could contribute to a cyclical downturn within Austin specifically, relative to the nationwide decline. As we’ve already seen, the local economy is healthy, but among these challenges are: an insufficient supply of startups decreasing the probability of VCs finding worthwhile opportunities; lack of robust domestic sources of capital; declining interest on the part of both local and outside investors due to increases in perception of risk; and a sluggish recycling of capital. So which of these are most relevant for Austin, right now?

Venture Ecosystem

According to the most recent edition of the Kauffman Index of Startup Activity, the Austin metro area ranked first in the US in its rate of new entrepreneurs and fourth in terms of startup density (defined

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