Austin Ventures Changes Tack, Shows Growth of City’s Startup Scene

Austin Ventures funded many of the first generation of technology companies that put the Texas capitol on the innovation map. But after three decades and 10 funds, the venture capital firm has decided not to raise an 11th for early stage investing.

The announcement set off speculation in a recent article in Fortune that the venerable fund had essentially collapsed from a lack of strategic direction and a splintering among partners, some of whom have gone on to starting separate funds. But Kim Hughes, an Austin Ventures spokeswoman, said that characterization was inaccurate.

The move to take itself out of early stage investing was strategic, she says. She pointed to an article in the Austin American-Statesman last week, in which Austin Ventures executives said management had made a strategic decision to change direction and create an affiliate fund that will invest in individual deals from proceeds from its network.

“The bottom line is AV is not shutting down,” Joe Aragona, a general partner at Austin Ventures, told the paper. “The partners don’t have issues among ourselves. It’s confusing to those on the outside, but it’s change. It’s not bad, it just takes some time to understand it.”

The news, of course, hit the Twitterverse with speculation about what this means for Austin’s startup community. For Joshua Baer, founder of the Capital Factory, the announcement is “not a surprise to anyone who has been in the Austin venture community for the past three years.”

Moreover, Baer says, Austin’s early stage startups can live without the firm’s cash. “AV will be missed in early stage deals, but Austin startups will do just fine without them,” he writes today in a post on Medium. “Austin startups are getting funded just fine. … If you exclude AV completely, 2014 was still the biggest year ever for funding of early stage deals in Austin.”

One of the reasons for that, of course, is that compared to when Austin Ventures was founded 30 years ago, Austin today has a number of venture capital firms looking for investment opportunities. Silverton Partners and S3 Ventures, both longtime Austin-based venture firms, are investing from funds of $75 million each.

Since we started Xconomy’s Texas bureau in 2013, other funding sources have cropped up, such as LiveOak Venture Partners, a new venture capital firm founded by Austin Ventures alumni; and the Entrepreneurs Fund, an offshoot of the Silicon Valley program, which is led by IBM veteran Manoj Saxena and is specializing in cognitive computing startups. In addition, Houston’s Mercury Fund continues to take an active interest in early stage opportunities in Austin.

Add to that mix a robust cohort of individual investors through the Central Texas Angel Network and groups like Techstars, DreamIt Ventures, and the University of Texas at Austin, which are all taking a more active role in supporting young entrepreneurs in their endeavors.

In its three decades, Austin Ventures invested about $3 billion in 280 Texas-based companies, including Tivoli Systems, Silicon Laboratories, and HomeAway, the Statesman reported. There’s no doubt the firm had impact. But, to get launched, today’s tech startups need a fraction of the cash they needed even 10 years ago. Austin Ventures employed an old model of venture capital that required big funds to keep getting bigger, something that doesn’t make economic sense today, Baer says. “They are primarily responsible for creating an ecosystem that doesn’t need them anymore,” he added.

Angela Shah is the editor of Xconomy Texas. She can be reached at ashah@xconomy.com or (214) 793-5763. Follow @angelashah

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