Austin Startup Ecosystem: Insights from 6 Leading VCs

Austin's Rising Tech Scene: A Comprehensive Overview

Over recent years, an increasing number of technology companies, ranging from established giants to emerging startups, have chosen to establish or relocate their headquarters to Austin, Texas, or to open additional offices within the city. This influx is attributable to several factors, including the city’s relaxed atmosphere, the absence of state income tax, a supportive business climate, and a comparatively lower cost of living – although this is currently changing.

Impact on the Startup Ecosystem

The growth is demonstrably impacting Austin’s startup ecosystem, evidenced by the increasing number of entrepreneurs – many with prior experience at major tech corporations with a significant presence in the city – and investors choosing to call Austin home.

Recent Developments

Recent announcements, such as Tesla’s plans for a gigafactory and Oracle’s relocation of its headquarters to Austin, have garnered national attention.

Comparisons to Silicon Valley

Comparisons to the Bay Area are frequent, extending from the development of a thriving startup community to a competitive and escalating housing market.

Investment Opportunities

Venture capitalists are identifying key areas for investment. While Austin was historically a hub for enterprise software, other sectors, including consumer packaged goods (CPG) and real estate technology, are experiencing substantial growth.

Insights from Leading VCs

The following is a compilation of perspectives from prominent venture capitalists in Austin regarding the future trajectory of the city’s ecosystem.

Featured Investors

• Eric Engineer, S3 Ventures
• Morgan Flager, Silverton Partners
• Joshua Baer, Capital Factory
• Carey Smith, Unorthodox Ventures
• Krishna Srinivasan, LiveOak Venture Partners
• Zaz Floreani, Next Coast Ventures

Future Projections for Austin’s Startup Scene

Where do you envision Austin’s startup landscape in five years? The city has attracted a diverse range of individuals, including established tech companies and emerging startups. How will these elements combine to create something greater than the sum of their parts?

Eric Engineer of S3 Ventures forecasts that by 2030, the Texas startup ecosystem could become the second-largest in the nation.

“Successful tech ecosystems are driven by positive feedback loops. An influx of skilled individuals to Texas will attract more capital, which in turn will draw even more talent,” he explained.

Morgan Flager of Silverton Partners, a firm with a 16-year history, emphasizes that Silverton has consistently invested in Austin and, more broadly, in Texas since its inception.

“We’ve always operated under the belief that Austin’s success is our success,” he stated. “However, we are just one organization, and now we are joined by numerous others who are also committed to Austin’s growth and dedicated to enhancing this ecosystem. Moving forward, a crucial element for success will be nurturing the existing spirit of community collaboration, which has already contributed to Austin’s appeal. Austin fosters an environment where individuals strive to succeed by supporting their community, and they are unwilling to compromise one for the other. If we maintain this core philosophy as we grow, we are poised for a remarkable future.”

Joshua Baer of Capital Factory anticipates that within five years, Austin will transition from being “up-and-coming” to “established,” and from a Tier 2 city to a competitive Tier 1 city. He predicts that this will be signaled by a new wave of Austin-based unicorns, emerging from companies like Aceable, Apptronik, Disco, Eagle Eye, Everlywell, ICON, and Zen Business, alongside substantial Series A funding rounds comparable to those seen during the peak of Austin Ventures’ influence.

Carey Smith, Founding Contrarian at Unorthodox Ventures, expresses hesitation in making predictions, noting the difficulty in characterizing the current scene.

“There are so many companies of varying sizes and focuses, and there isn’t a single unifying characteristic beyond growth and innovation. The future direction is truly open-ended,” he commented.

Krishna Srinivasan of LiveOak Venture Partners highlights Texas’s substantial number of Fortune 500 companies and the resulting concentration of individuals with deep industry expertise in sectors such as energy, healthcare, real estate, hospitality, and retail.

“This domain knowledge, combined with the surge in tech talent from both large corporations and startups, is creating a multiplicative effect and accelerating entrepreneurial activity,” he said. “Beyond the influx of tech talent and the continued maturation of the existing startup ecosystem, we anticipate the emergence of even more category-leading companies in the years to come. As such, we believe Austin’s startup scene is poised for unprecedented growth.”

Zaz Floreani of Next Coast Ventures projects that in five years, Austin will demonstrate signs of market maturity, potentially with half a dozen unicorns and half a dozen startups achieving public offerings.

The Impact of Remote Work

Remote work is reshaping the global workforce. How do you foresee this trend, alongside the continued influx of companies into Austin, impacting the city’s tech evolution?

Eric Engineer of S3 Ventures believes that talented individuals are choosing Austin based on its overall lifestyle offerings, not solely on job opportunities. He suggests that remote work could alleviate some of Austin’s growing pains by reducing the frequency of commutes, allowing the city more time to develop necessary transportation infrastructure.

Morgan Flager of Silverton Partners argues that remote work alters the competitive landscape by providing workers with greater choice regarding where they live versus where they need to live for employment. While acknowledging the increased freedom and efficiency remote work offers, he believes that most roles will require a hybrid model combining remote work with in-person interaction. “Fortunately, Austin offers both – it’s a desirable place to live and boasts a rapidly expanding tech community,” he said. “This is a key reason for the current influx of talent.”

Joshua Baer believes that when individuals have the freedom to work from anywhere, they won’t distribute themselves evenly. He anticipates that certain locations will attract significantly more talent than others, and that Austin will be a major beneficiary of this tech migration. “More companies will relocate their headquarters here, and more individuals will choose to work in Austin, even if their employer’s headquarters is elsewhere,” he predicts.

Carey Smith of Unorthodox Ventures is skeptical about the long-term viability of remote work in Austin. His brief experience working from home during the pandemic led to feelings of disconnection and increased difficulty in completing even simple tasks.

“I thrive on face-to-face interactions and appreciate the energy of the office. It keeps us motivated,” Smith said. “It’s the lubricant that drives innovation in Austin.”

Investment Focus and Exciting Opportunities

What industry sectors do you prioritize within Austin (and beyond)? What developments in Austin are you most enthusiastic about funding?

S3 Ventures has primarily invested in B2B software companies for the past 15 years, with successful exits also in consumer digital experiences and healthcare.

“Texas has a remarkably diverse economy, and technological innovation reflects this breadth,” Engineer said. “We are witnessing significant digitization across various sectors – financial services, real estate, healthcare, education, skilled trades, hospitality, industrial, and energy – as they embrace cloud-based solutions.”

Silverton Partners has always been a generalist fund. Currently, they are particularly focused on disruptions occurring in digital health, fintech/insurtech, and education. “The playbooks in these massive industries are being rewritten, and we are actively seeking entrepreneurs with a strong vision for the future,” Flager added.

Joshua Baer of Capital Factory emphasizes the diversity of Austin’s startup scene as a key strength. “If it’s trending in tech, it’s happening in Austin,” he said. Recent areas of focus include artificial intelligence and machine learning, consumer packaged goods, drones, e-commerce, healthcare, marketplaces, robotics, and SaaS.

Carey Smith of Unorthodox Ventures focuses on investing in companies creating tangible products that address real-world problems. Unlike many other VCs in Austin, he is less enthusiastic about software. “I prefer the challenges of manufacturing consumer goods,” he said. “Software companies lack diversity and primarily benefit a small segment of society with job creation. Manufacturing, on the other hand, benefits a broader range of individuals, from those with GEDs to PhDs.”

LiveOak Venture Partners invests across a wide range of industries. In the past year, they have backed companies in proptech, fintech, retail, supply chain, business compliance, cybersecurity, and edtech.

Proptech is particularly exciting for LiveOak, with companies like Opcity and OJO Labs demonstrating success in the city. Another promising area is startups working in legal/compliance, with established companies like Disco and Mitratech, alongside emerging players like Osano, Eventus, and Litlingo.

Zaz Floreani of Next Coast Ventures highlights the increasing number of successful B2C startups in Austin achieving scale, which strengthens the talent pool and unique advantages beyond Austin’s early reputation as a semiconductor and SaaS hub.

“We still have excellent software entrepreneurs, but we also have the capacity to develop consumer and media companies, as demonstrated by Everlywell, Literati, FloSports, Atmosphere, and others,” she said.

Challenges and Considerations

What local challenges have you encountered or observed founders struggling with? More broadly, how should individuals considering hiring in, investing in, or relocating to Austin approach doing business in the city?

Local investors generally agree that Austin’s tech community is welcoming and collaborative, and they are eager to assist anyone considering a move to the city. Eric Engineer of S3 Ventures notes that recent transplants from both coasts have been pleasantly surprised by this culture, particularly compared to their previous experiences.

Morgan Flager of Silverton Partners acknowledges that relocation is always challenging, but moving during a pandemic presents unique difficulties.

“I’ve observed some founders struggling to establish strong community ties after relocating to Austin during the pandemic,” he said. “The virtual nature of most interactions makes integration into a new ecosystem more difficult. As an investor, I aim to facilitate greater connectivity within the founder community, and we are planning community-building events as vaccine rollouts continue and in-person interactions become safer.”

Joshua Baer believes that Texas investors prioritize loss prevention more than their counterparts in Silicon Valley. He advises companies to develop two distinct pitches tailored to their audience. “The Texas pitch emphasizes risk mitigation, while the Silicon Valley pitch focuses on potential scale if successful,” he said.

Carey Smith of Unorthodox Ventures cautions founders to be wary of organizations that offer assistance in exchange for equity without providing sufficient value in return.

“Founders should carefully select their investors and advisors, choosing individuals who offer more than just capital,” he said.

Krishna Srinivasan of LiveOak Ventures warns that individuals in Austin value relationships and are averse to transactional interactions.

“Outsiders should be aware of this when engaging with the community,” he said. “When making hiring decisions, prioritize cultural fit alongside qualifications. From an investor perspective, focus on building strong relationships in addition to offering attractive deal terms.”

Zaz Floreani of Next Coast Ventures notes that hiring growth leaders has been a consistent challenge across their portfolio. “Austin could benefit from a deeper pool of talented marketing and sales leaders,” she said.

Key Individuals Shaping Austin’s Startup Scene

Who are the key individuals driving success locally – investors, founders, lawyers, designers, growth experts, and others? We aim to highlight the movers and shakers that outsiders may not be aware of.

S3: Founders/CEOs – Leo Resig (Atmosphere), Jag Bath (Favor), Kim Rodriguez (Acessa), Doug Donovan (Interplay Learning), Richard Lebovitz (LeanDNA), Adelle Archer (Eterneva), Andy Ambrose (LiveOak Technology), Adam Berman (TVA Medical), Dion Cornett (Liquibase)

Investors – Rosa McCormick (Wild Basin), Oksana Malysheva (Sputnik), Adam Lipman (Ecliptic Capital), Josh Baer/Bryan Chambers (Capital Factory)

Service Providers – Marc Nathan (E/N), John Gump (CBRE), Lathrop Smith (MLR), Austin Willis (SVB) Paul O’Brien (Mediatech)

Silverton: Heather Brunner and Jason Cohen @ WP Engine, Chuck Gordon and Mario Feghali @ Sparefoot, Jess Ewing @ Literati, Blake Garrett @Aceable, James Garvey @ Self Financial, Brian Cruver @ Alert Media, John Banczak and T.J. Clark @ TurnKey, Michelle Davey @ Wheel, Rob Taylor @ Convey and several others.

Capital Factory: http://baer.ly/austinabc

Unorthodox Ventures: CS Freeland built ATX Kit, a startup supporting over 40 local food entrepreneurs with Austin-centric snack boxes.

Bob Bridge and the Southwest Angel Network (SWAN) support startups addressing societal challenges in areas like environment, health, and social justice.

LiveOak: We are fortunate to have many influential individuals in our network and do not wish to single out one at the expense of another. However, we want to recognize Dan Graham, who funds social impact startups through Notley Ventures, launched a fund for women entrepreneurs via the BEAM Angel Network, and has actively promoted Austin’s growth. Jim Breyer has been a strong advocate for Austin, its startups, and its energy through op-eds, blog posts, and interviews.

Next Coast Ventures: The founders of Everlywell, Upequity, Steadily, Eterneva, Literati, BOXT, and Enboarder have ambitious growth plans for Austin.

Silicon Valley Comparisons and the Influx of Tech Companies

What are your thoughts on comparisons to Silicon Valley? What impact is the influx of tech companies (both large and small) having on Austin’s startup scene?

Eric Engineer of S3 Ventures believes there is only one Silicon Valley and that a comparable ecosystem is unlikely to emerge in the Western world.

However, he believes that if current trends continue for the next decade, the Texas ecosystem has a realistic chance of becoming as large as, or even larger than, New York and Boston.

Morgan Flager of Silverton Partners, having lived and worked in Silicon Valley, is not a proponent of the comparison.

“Each place is unique with its own strengths and weaknesses,” he said. “Whether Austin will ever surpass Silicon Valley in size and activity is uncertain, and frankly, not my primary concern.”

He emphasizes the importance of preserving Austin’s unique character and ensuring that its growth enriches the city rather than diminishing its vibrancy. “Austin’s culture has not historically been tech-centric,” Flager said. “Austin is a powerhouse of live music, great food, arts, outdoor living, and ‘keeping it weird.’ ”

He adds: “As I consider what Austin can learn from Silicon Valley, I spend just as much time thinking about what we can do differently.”

Carey Smith of Unorthodox Ventures believes that “everyone wants to leave Silicon Valley.”

“They finally realized it’s a disaster,” he said. “The influx of intelligent, hardworking, and curious individuals to Austin is a positive development. One of the challenges with Silicon Valley is that a significant portion of VC money remains concentrated there, in New York, or Boston. We need more capital in Austin and other innovative cities throughout Middle America, where we are solving real problems for everyday Americans. As Austin becomes more influenced by Silicon Valley, it’s crucial to fund projects beyond technology and focus on basic human needs.”

Krishna Srinivasan of LiveOak Venture Partners acknowledges that comparisons to Silicon Valley are inevitable and generally welcome, as they bring national and international attention to Austin and reinforce its reputation as a thriving startup hub.

“There’s a lot of vibrancy and momentum in Austin’s startup scene that is reminiscent of Silicon Valley’s early days – the growing number of businesses being launched, the amount of funding being secured, and the influx of talent eager to become part of the tech community,” he said. “However, Austin possesses a unique spirit of collaboration that sets it apart. There’s also an energy and excitement here that is palpable. Austin respects the successes of Silicon Valley and will incorporate its positive aspects while forging its own path.”

Zaz Floreani of Next Coast Ventures believes the comparison has been overused for a decade. “We are not Silicon Valley and will never be it,” she says. “I’m not saying that negatively. I grew up in the Bay Area. I simply believe we grow companies differently here, and even with more SV talent and investors coming to town, I don’t think we will suddenly shift to a more Valley-like approach to growing companies. Rather, I think we will find a happy medium that incorporates fast growth and sustainability.”