- Associated Press - Monday, January 26, 2015

AUSTIN, Texas (AP) - Venture capitalists significantly stepped up their investments in Austin in 2014 - a sign that the area’s strong startup culture continues to be a boon for the Central Texas economy.

A total of 114 Austin-area companies received $620.6 million last year, according to a survey by Pricewaterhouse-Coopers and the National Venture Capital Association. That’s a 40 percent increase from 2013, when 88 companies collected $444.4 million.

More importantly, the number of Austin startups raising money for the first time soared in 2014. A total of 39 such companies received $113 million, a 90 percent jump in dollars raised a year ago.

Early-stage investment is a closely watched measure of Austin’s startup community because the money allows companies to hire more workers, invest in new equipment and accelerate product development and marketing. New companies create jobs and, if they flourish, wealth.

“This money will get a new generation of startups off the ground,” said Kirk Walden, an adjunct business professor at Texas State University. “As they prove themselves, they’ll go out and raise more money and recruit more people. Some of the top talent they hire will go on to start their own companies. That’s how you want the cycle to work.”

The investments, typically $1 million to $3 million, will be put to work quickly, and much of the money will go directly into the local economy, said Bob Smith, managing director of Austin-based Bridgepoint Consulting.

“They’re hiring engineers, and those are six-figure salaries for the most part,” Smith told the Austin American-Statesman (https://bit.ly/1z23DGM ). “Then they’ll be leasing more office space and buying more furniture, and new servers and PCs. In some cases, they’ll be stocking company kitchens and having catered lunches brought in. It trickles down fast.”

Among the recipients: Brewbot, which will use $1.5 million to create smartphone apps; AdBm Technologies, which will put $1.3 million toward developing an underwater noise abatement system; and Cratejoy, which received $4 million to build out its software that lets companies offer monthly subscription programs.

Two-year-old Pivot Freight is an example of how it can work. The software company was started in Phoenix, but its founders moved to Austin last year to take part in Techstars, a three-month accelerator program for startups.

In December, the company, which helps businesses compare and reduce shipping costs, raised $2.8 million in seed funding led by Austin-based Silverton Partners.

That money enabled Pivot Freight to hire software industry veteran Rob Taylor as its CEO, and the six-person company is now recruiting executives to lead its engineering and sales efforts, including expanding its workforce.

“It’s huge for us because it gives us enough runway to go figure some things out related to the kind of customer we want to target,” Taylor said. “This gives us the ability to make some mistakes, which most startups do.”

Nationwide, venture capital investments rose 61 percent in 2014, with $48.3 billion going into 4,357 deals. As usual, Silicon Valley took in the most venture money, with the San Jose area receiving $23.4 billion in 1,409 deals.

The software industry was the largest investment sector nationally, with $19.8 billion going into 1,799 deals.

In Austin, software also dominated, with 54 companies receiving a total of $312 million.

Kip McClanahan, a venture capitalist with Silverton Partners, expects this year to be just as active as last, particularly in business and consumer software.

“The volume and the quality of startups we’ve been seeing in Austin is really pretty unprecedented,” McClanahan said. “The entire startup scene is as robust as I’ve ever experienced, in terms of talent and ideas and execution, and I expect that to continue and maybe even accelerate in 2015.”

Experts agree that while the outlook is positive, factors such as a possible global economic downturn could lead to a slowdown.

Austin has seen wild swings in venture activity in the past. Investments in Central Texas companies peaked during the dot-com frenzy in 2000, when 178 companies raised a whopping $2 billion.

But when the Internet bubble burst, investors pulled back, leading to several lean years when even promising companies struggled to attract funding. Eventually, the market regained strength, but it took another hit during the financial crisis in 2008.

In recent years, investment activity has bounced back, with venture capitalists funding deals in areas where Austin has long been a player - business software and medical devices - as well as newer markets, including mobile Web, cloud computing and data analytics.

One thing that has helped stabilize the venture industry is that investors now have a higher bar for the deals they back. “This is not the year 2000 all over again,” Walden said. “Investors care about the next big thing, but not blindly. Entrepreneurs have to be more disciplined and jump through more hoops, including having a proven concept, if they want to get funded.”


Information from: Austin American-Statesman, https://www.statesman.com

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