What does the end of Austin Ventures mean for Austin startups?
Austin Ventures (AV) made an appearance in Fortune Magazine this week and the story was also covered in The Statesman and The Austin Business Journal.

The headlines are:

The Austin Ventures management team is breaking up
AV will no longer have a traditional early-stage fund
Some of the AV Partners will invest under a name other than Austin Ventures
Some of the AV Partners plan to do early-stage deals more like super-angels with syndicates
The story hit the news now because AV decided to make a public announcement, but it’s not a surprise to anyone that has been in the Austin venture community for the past three years. They reached the end of their last fund a year ago and haven’t been making any new investments while there was talk of raising a new fund. That dragged out for a while and then this announcement came.

This doesn’t change anything
AV will be missed in early-stage deals, but Austin startups will do just fine without them. In fact, we have already been doing just fine without them. The slowdown in early-stage investing by AV started in 2012 and 2013, and by 2014 there were only a few early-stage deals funded by AV. Yet 2014 was twice as big as 2013 for startup funding and significantly bigger than 2011 and 2012. Apparently, Austin startups are getting funded just fine.

Let me say that again. If you exclude AV completely, 2014 was still the biggest year ever for funding of early-stage deals in Austin. All signs point to 2015 being even bigger than 2014, even without AV.

One reason more startups are getting funded is that there are more early-stage funds in Austin. Silverton Partners, Live Oak Venture Partners, Mercury Fund and the newly announced Techstars Ventures are all ~$100 million funds focused on Series A deals in the Texas market. Techstars is a particularly interesting addition because it’s a nationally focused fund with a strong Austin presence, whereas the others all focus on Texas. There are rumors of new, early-stage Austin funds in the works.

It may have been AV’s slowest year for early-stage deals, but 2014 was Silverton Partners biggest year where they put the most capital to work in early-stage Austin deals. The Central Texas Angel Network (CTAN) is the 4th most active angel investor network in the country with more than 130 members and more than 30 investments in 2014. Capital Factory is the most active fund in Austin, with more than 40 investments in 2014. There are more accelerators in Austin than ever, with DreamIt Ventures, International Accelerator, Medical Innovation Labs, SKU, Techstars and Unltd USA joining the Austin Technology Incubator and Tech Ranch in recent years.

The Austin startup scene is the strongest it has ever been. I’ve been here for 15 years. In that time I’ve seen both quantity and quality of startups go up. Our human capital is increasing as well. The first-time entrepreneurs are more sophisticated and scrappier. We’ve got a strong bench of serial entrepreneurs like Sam Decker, Brett Hurt, Rony Kahan and Bob Quillin who will undoubtedly start ambitious, new companies. Bob Metcalfe and Ben Dyer moved here and joined the faculty at the University of Texas. We have more entrepreneurs than ever moving to Austin to start companies like Jonathan Coon, Jeff Dachis, Dean Drako, Sean Spector and Rob Taylor.

Funding in Austin — then and now
When AV started the world of startups and venture capital was very different than it is today. In the old days of enterprise software, it took a lot more money to start a company and validate its business model.

Raise $5 million from AV in a Series A
Raise $10 million more from AV in a Series B
Syndicate to other VC’s in the Series C and beyond.
A few years ago, Mike Maples, Jr. (an Austin entrepreneur who is now one of the top Silicon Valley investors) said that $500,000 is the new $5 million — referring to how a tech startup can launch for an order of magnitude less funding than before. Today the number is even lower. Many of the material costs for a startup of the 80's and 90's have gone away — no longer do startups have to spend money on software (thanks to open source) or hardware (thanks to cloud computing) or Superbowl and WSJ ads (thanks to Google AdWords and social media). Most of the expenses that required a big investment up front have become incremental costs that are practically free at the beginning. The main cost that remains is payroll, and a scrappy startup with the right team can avoid that at the beginning too.

Most tech startups in Austin have a very different funding story today.

Raise a few hundred thousand dollars on a convertible note from local angel investors, CTAN or AngelList.
Once they show some traction, raise a $2 million Series A from Silverton or Live Oak, then $3 million Series B inside round from the same VC firm. Or raise a $4 million Series A from a Silicon Valley VC firm.
Raise a $10 million Series C from a growth-stage VC outside of Austin like Insight Venture Partners or North Bridge because there aren’t many options for Series C funding locally in Austin.
A good move for Austin Ventures
This change at AV isn’t failure, it’s evolution. The Austin Ventures early-stage strategy of 2014 was the old model of venture capital with a big fund that kept getting bigger. The AV of 2015 and beyond is a recognition of the new model that we have today. Early-stage funding is the realm of angel investors, super angels and seed funds. If you want to put a lot of money to work you focus on Series B and C growth rounds.

It’s very hard to be a successful early-stage stage investor with a billion dollar fund. Most of those are going away and smaller funds around $100 million seem to be the sweet spot. With a smaller fund, one home run can make a good return on the entire fund. Early-stage deals are a waste of time for a fund the size of AV.

Splitting away from the big fund allows AV Partners to play in the early-stage deals when they want to without the overhead of a more traditional fund. I expect that some of their new early-stage investing will look a lot more like a super angel putting together a syndicate. AV Partners have a powerful network of senior executives and institutional investors that they can bring to the table for a syndicate. This is particularly interesting if they can raise larger Series B and Series C rounds that otherwise would need to come from out of town.

I think it’s really interesting that they are moving away from the Austin Ventures name. On the one hand, it’s a very powerful brand that is known all over the world and synonymous with Austin tech. On the other hand, after funding hundreds of entrepreneurs and saying “no” to thousands of them, they have accumulated some baggage they seem eager to unload. The past three years of identity crisis around early-stage deals didn’t help… for most of that time AV was messaging, “We still do early-stage deals!”, even though they were clearly trending away from them and that caused confusion and even some hard feelings.

Thank you, Austin Ventures
AV is the biggest VC firm in Austin and in Texas, with billions of dollars under management. They were the investors behind early Austin giants such as Tivoli and Silicon Labs and more recently industry rollups like HomeAway and RetailMeNot. There were also the Series A investors for most of our tech IPOs over the last eight years, including Bazaarvoice, Convio, HomeAway, RetailMeNot, and SolarWinds. They have invested in early-stage technology businesses but also in later stage growth and private equity deals. They also have worked with oil and gas. Since its beginning almost 15 years ago, there has always been an Austin Ventures stage at the Austin City Limits music festival.

The Austin startup community should be very grateful for AV. They have invested $3 billion in 280 Texas companies since inception, resulting in the creation of over 50,000 new jobs. Most of the biggest tech startups in Austin in the past decade were funded by AV. They have been sponsors and supporters of just about everything that happens in the startup scene and helped make the Austin startup scene what it is today. In an ironic twist, they are primarily responsible for creating an ecosystem that doesn’t need them anymore.

What happens next?
It’s not like the VC’s at AV are going away. They will still be in Austin and will still be investing. They have 50 active companies in their portfolio that still need to be managed. Even though they say they are heading in different directions, they are likely so co-mingled in existing deals that it could take many years to unwind everything.

I expect that the result of this announcement is that the former AV partners will end up investing in more early-stage deals in 2015 than in 2014. There was very little activity in 2014 because there was uncertainty about whether AV would raise another fund or not. This announcement brings closure and will probably allow those individuals to be more active now.

Even the partners who leave AV won’t stop being VC’s — they will most likely be investing under new entities and models. Just like new startups spin out of successful companies, new VC firms spin out of successful firms too. We’ve already seen this happen with Austin Ventures many times — Kevin Lalande left to form Sante Ventures, Ross Cockrell left to form Escalate Capital, Phil Siegel and David Lack left to form Tritium Ventures and Ben Scott, Venu Shamapant and Krishna Srinivasan left to form Live Oak Venture Partners, and further back Bill Wood left to create Silverton Partners. Additionally, AV helped Mike Maples, Jr. create his first fund that was the predecessor to Floodgate.

For 30 years, AV was the only game in town. They knew all the top talent and got the best deal flow. The VC’s from outside of Austin knew it, too. If AV passed on a deal, why should they even look at it?

AV served a critical role in early-stage tech financing and helped make Austin what it is. But everything has its time and place. As Austin matures, maybe there is room for more than one big VC firm. Recently, we’ve seen more early-stage activity from firms such as Charles River Ventures, ff Ventures, Foundry Group, Mohr Davidow and Rothenberg Ventures. AV’s exit should create some oxygen for Silicon Valley VC’s to establish a stronger presence in Austin, for smaller firms to grow, and for new firms and business models to emerge.