The New Rules for Raising Capital in Austin

Some say anyone can be an entrepreneur — and with the rapid growth of business in Texas these days, that assumption is difficult to deny.

The Kauffman Index of Entrepreneurial Activity (KIEA), a leading indicator of new business creation in the United States, indicates that business creation in Texas during 2013 was 0.32 percent, meaning roughly 320 of every 100,000 Texas adults are entrepreneurs. According to KIEA, this percent falls into the “high activity range” – state percentage rates between .302- .608 – and tops the national average of 0.28% by .04 percent. Given that three major Texas cities — Austin, Houston, and San Antonio — rank in the Top 10 of America’s fastest growing cities, our state’s high affinity for entrepreneurship makes sense. Ease of entry, however, doesn’t translate to immediate success for every entrepreneurial idea. Securing the funds necessary to start a business can be problematic enough to keep many from ever getting off the ground.


CROSS THE AUSTIN HURDLE

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According to Capital Factory Founder and Executive Director Joshua Baer, the end goal is achievable, especially for those living in Austin. “You can’t argue that Silicon Valley is the mecca [for startups],” Baer says. “Most of the most successful companies in tech come from there, but there are some tradeoffs and reasons why you might be successful in other places.” To him, cost of living and quality of life are two considerations that drive many founders away from Silicon Valley. Austin’s strong economy, respected universities, robust tech presence and global event programming, such as SXSW and F1, make the city an attractive breeding ground for startup activity.

We’re seeing a lot of startups focused on concrete ideas that can provide immediate value to their audience, and are less interested in building grandiose ideas.
Ed Ireson
Co-Founder Brazos Tech District,
Partner at Hangar Ventures

Other locals, including Techstars’ Program Manager Andrea Aguiluz, believe that Austin’s true cheerleader spirit is an equally influential factor. “Founders get excited about what other founders are doing, and mentors are happy to take time out of their busy schedules to get to know young entrepreneurs, make introductions, and dig deep to talk about their challenges,” she says.

Both Aguiluz and Baer should know. Their companies are among the most sought after accelerator programs in Austin, each aimed at providing mentorship, funding and networking opportunities that help entrepreneurs convert their early stage startups into successful companies. But they are quick to add that despite the flourishing startup community in town, there is still a major hurdle to cross: fundraising.

Austin is home to many venture capitalists and angel investors, but Aguiluz thinks that the city has a long way to go before startups can feasibly raise the full investment they seek. “Many times, even at the seed level, founders are still having to find lead investors and chase larger checks outside of Austin, which takes time and energy away from building product, talking to customers, and growing their team,” she says.

Ed Ireson, a partner at local incubator Hangar Ventures and co-founder of downtown tech coalition Brazos Tech District, agrees with Aguiluz about the inadequate access to local investment dollars. “Because of the limited early-stage funding available, we’re seeing a lot of startups focused on concrete ideas that can provide immediate value to their audience, and are less interested in building grandiose ideas,” he says.

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Capital-Factory-Tour-Austin-Citygram


GET A TEAM, FIND YOUR CUSTOMER

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In Austin, success (and as a result, money) comes from realities rather than ‘what ifs,’ and that’s a fact that most entrepreneurs, venture capitalists, and mentors in the area agree upon. As Baer explains it, Austin investors have yet to experience the Facebook and WhatsApp-sized successes many Silicon Valley investors have grown accustomed to, so they look for companies that have a clear business model, understand the costs and processes of acquiring customers and are capital efficient from day one. It’s this methodical, strategic approach that makes local investors more inclined to hand over their dollars.

But it takes more than a sound business plan to convince VCs and angel investors that your entrepreneurial idea is worth funding. Every investor Citygram interviewed stressed the importance of a good team; it was almost tantamount to a good plan. Aguiluz says entrepreneurs need to demonstrate their own impressiveness, as well as bring on team members with complementary skills — and the group needs to work well together.

We’ll start investing money when you’ve built something and secured your first customer because…that’s the definition of a fundable company.
Joshua Baer Capital Factory Founder, Executive Director

A company must first show some traction, Ireson says, because investors want validation of the company’s idea before committing investment dollars. He recommends entrepreneurs take advantage of programs like Techstars and Capital Factory to get their initial push. However, because startups in those accelerator programs receive significant investment (up to $118,000 through Techstars and $200,000 through Capital Factory), entry is very competitive.

The most important proof point for gaining entry? According to Baer it’s demonstrating self-secured accomplishments. “As much as we want to help [startups], it’s not just about having great ideas. It’s about having great people, and the first test of that is what they’ve been able to do without our help,” he says. “For our accelerator program, we’ll start investing money when you’ve built something and secured your first customer because that’s what other investors are looking for, and that’s the definition of a fundable company.”


USE YOUR NETWORKS

Blake Garrett of Aceable knows this process well. As member of Capital Factory’s accelerator program, Garrett has raised $1.125 million in angel funding for his app that gamifies required education classes, and he credits the connections initiated through Capital Factory. “I took a list of 125 investors that I met through a Capital Factory demo day and sent each one personalized messages on LinkedIn,” says Garrett. “From those 125 messages, only two people responded.” Though extremely taxing, his doggedness and unrelenting dedication strikes a chord with angel investors. Fundraising takes persistence, he says, and the lengths entrepreneurs are willing to go to see their idea succeed goes a long way with angels. “Because they are not institutional investors, they can be more emotionally attached. Plus, a lot of angel investors are in it because they want to help.”

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Capital-Factory-Tour-Austin-Citygram
 
Outside resources are aplenty for those without membership to an accelerator. Garrett touts Paul Graham’s website, which is full of tactical advice, and Peter Theil’s book, Zero to One, which details the fundraising and startup process. Baer and Ireson recommend taking full advantage of every fundraising network available; CTAN, Kickstarter, Indiegogo, AngelList, Funding Circle. They all have varied investor networks that open more avenues for funding.

And Aguiluz? She believes in the importance of networking with other local companies that began as startups and are considered local success stories today —
HomeAway, Bazaarvoice and RetailMeNot, to name a few. “They are now using their success to give back by both mentoring and investing in new local startups, and having them in our network is incredibly valuable,” she says.


BE VIGILENT WITH EXPENSES

The journey to finding funding in Austin is a long one, and doesn’t always result in success. In fact, many startups close shop before ever securing their funding goals – some, in part to a lack of the very thing they’ve been seeking. Garrett cautions founders to be ever vigilant of their expenses during the funding journey, because the second you run out of money, you have to stop.

Lucky for entrepreneurs low on cash, the many of the resources available in Austin cost very little – networking through meet-ups and coffee dates, funding sites, and good ol’ fashioned pounding of the pavement – yet serve as a pivotal component to finding success throughout the funding journey.

It stands to reason that Austin will not become home to million-dollar single investments overnight, but the wealth of available resources, the dedicated, passionate startup community, and the growing network of investors ready to help are signals of a welcome transformation. With that, the ‘weird’ city may soon be the next VC mecca.

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Written by: Rachel Genson
Photography by: Chris Wiley, Chris Perez


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