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:
ValueWalk's Raul Panganiban David Barse, Founder and CEO of XOUT Capital, and discuss his unique approach to investing. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with XOUT Capital's David Barse
- 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
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.
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.
An overview of Austin’s venture investment activity
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?
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 as number of startups per 1,000 firm population), plus second in growth entrepreneurship. It should be noted that the composition of that startup population is diverse enough that it may not be exactly representative of the types of industries that are likely to attract venture capital—food vendors such as taco trucks, for instance. The strong supply of new business formation makes sense in the context of economic data—it’s simply less expensive to build companies in Austin. Accordingly, the total supply of startups likely to vie for funding is not as much of an issue, from both quantitative and anecdotal angles.
But inflated financings and valuations are. Coupled with a decline in financing activity overall plus a drop-off in the number of first-time financings (although VC invested in first-time rounds is quite robust), the resolutely high median financing size and post-valuation—particularly at the late stage—imply that investors’ supply of capital is still ample, yet the benchmarks for obtaining financings of such size have shifted upward. Each venture ecosystem across the US will experience somewhat insulated rises in those metrics, interconnected as they are by information flow but insulated somewhat by relative costs and available/willing sources of capital. It’s easy to ascribe such a shift to a typical period in any investment cycle where investors fear of overexuberance and oversupply of capital leading to slumping returns on sums invested and consequently begin to pull back somewhat. Thus, once reversion to the mean has completed, Austin is likely to see venture financing creep up once more, barring significant macro shocks.
However, when it comes to metro-level analysis, the pipeline of previously financed companies eligible for follow-on rounds becomes more crucial. Sufficient levels of funding across the entire capital stack has a greater impact when analyzing overall activity on a metro scale. There was a significant ramp-up in seed-stage financings in tandem with a much more modest increase in Series A fundings across the past few years, for example. This increase doubtless already fed into Series A financings that are occurring now. Yet any potential slump in the seed stage such as that which was observed in 2016 through late November could portend ill for the width of the startup pipeline when it comes to Series A funding down the line. Such a phenomenon could well have come into effect in 2016 already, happening to any given series of financing and subsequent rounds. Accordingly, with overall supply not being an issue yet the benchmarks of quality for startups to garner venture financing having moved upward in a highly valued climate, the stutter in the startup pipeline could lead to repercussions in the years to come for the Austin area.
Article by PitchBook, read the full report here.