The state of tech entrepreneurship in Austin

SXSW has long come and gone in this beautiful city - that was, like, weeks ago! Like years past, it reached more epic heights this year and companies and investors were spending more on gaining attention than ever before. And with SXSW, the typical, "how is Austin doing at tech entrepreneurship?" question was asked again and again. But out of all of the articles written, the one that I personally heard the most about was this one by PandoDaily: "Will the Austin startup ecosystem ever live up to its promise?"". It stirred me up to read it, no doubt. And it lead me to write this post to share my own thoughts - as an insider - on the state of tech entrepreneurship in Austin.

One of my friends in town, Alan Knitowski, the co-founder and CEO of Phunware, related the PandoDaily article to this post: "Silicon Valley is stupid (which is why it works)". As I told Alan, I personally wouldn't have chosen the word "stupid" but instead "persistent" or if I'm allowed two words "more experimental". Alan wrote:

Read the [PandoDaily] article. Hard to disagree with most of it. Austin is Austin. That's good enough. The fact that this issue has to be discussed so much is why there's an underlying problem.
The Valley just moves forward and doesn't spend time worrying about this kind of stuff. I think we would all be best served doing the same.

Alan's comments reminded me of this post by Guy Kawasaki, a friend and brilliant author on entrepreneurship (read his book The Art of the Start), back from 2006: "How to Kick Silicon Valley's Butt". To quote one part of Guy's post that resonated most with me based on my own life experience:

Send the best and brightest to Silicon Valley. I can hear the complaints already: “This will lead to a brain drain which is exactly what we are trying to prevent.” This attitude misses the essence of entrepreneurship: it’s not about preventing bad things, but fostering good things. Would it have been better for Hawaii if Steve Case had become a lawyer at his father’s Hawaii law firm instead of moving to the mainland and creating AOL? I don’t think so.

The goal is to infect them with the disease called entrepreneurship and show them that there can be more to life than “a job;” that two guys/gals in a garage can change the world; and that a lot of money = millions of dollars. Sure, some people will never return—like me. But those who do return come back with a much broader perspective on what life and a career can be. Maybe they will build another Silicon Valley because they’ve seen it done before. Here’s a dirty little secret: Silicon Valley is more a state of mind than a physical location, and you can’t alter a state of mind by staying a home.

After sharing Guy's post with Alan, which he also remembered and read back in 2006, he agrees that the five years he spent in Silicon Valley shaped him. My wife and I personally spent four years there - getting Coremetrics going after my time at The Wharton School (you can read about the start of my entrepreneurial career in my post on the state of entrepreneurship at Wharton). Our time in Silicon Valley had ahuge impact on me when returning to Austin in 2003, as Guy's quote above would suggest - I lived his advice. My experience in Silicon Valley may have been one of the best training grounds for a young entrepreneur as we moved there in early 2000 - the height of the dot-com boom. We saw the absolute peak of exuberance, the depths of despair (where our barista at Starbucks used to be the director of marketing of a dot-com retailer), and the cycle start again - albeit with a lot of bruises, a bad hangover, and only the real entrepreneurs left after the shake out to rebuild. My decision to stay with Coremetrics and help turn it around during this period had a tremendous amount to do with the later success of Bazaarvoice, as is well documented by Lori Hawkins inthis Austin American-Statesman article. There is no doubt that this time led to me being very focused on both opportunity maximization and capital efficiency at Bazaarvoice, as I wrote about in my post on capital efficiency on the way to IPO.

So, I think I'm pretty well qualified to give my opinion about the state of entrepreneurship in Austin. Not only have I started up companies here as well as Silicon Valley, I've also met with 2-3 entrepreneurs per day over the last five months in my new phase of life as an entrepreneurial catalyst and investor, both in my work at Austin Ventures as well as an angel investor. Like previous times in my career, I just dove right in and I've learned a lot in a very short period of time. And after all I've learned, I have to say that the PandoDaily article got a lot right - and a lot wrong.

In my post about my return to The Wharton School as an Entrepreneur-in-Residence, I wrote that consulting businesses are what I call "first-stage" entrepreneurial businesses and that Austin is mostly stuck in this stage and needs capital and mentorship to scale to "second-" and "third-stage" entrepreneurial businesses. First, let me define the stages for you as I see them:

  1. First-stage: consulting or services. It is the most obvious business for an entrepreneur to start and the easiest to bootstrap. Done well, you can make a lot of cash (as I did at Wharton with my own first-stage entrepreneurial venture where I cleared $250-350 per hour at the age of 24). You are essentially selling your own time - and the time of people you hire with a similar delivery skill set. It has limited potential overall to create a lot of jobs or a lot of economic impact. The only consulting businesses I know of that buck this trend are typically those that someone decides to run aggressively for a very large part of their life (twenty or more years) or those that are incredibly acquisitive, like Austin's own Perficient (NASDAQ: PRFT), which is worth around $364 million today after going public 13 years ago during a very unique window - 1999 (during the dot-com boom years) - with around 19 employees, according to, and having only been in business for one year. During any "normal" market window, there is no way Perficient would have gone public at that young of an age. Today, Perficient has around 1,700 employees after many acquisitions and is worth around $214,000 per employee (dividing the $364 million market cap by number of employees). In other words, Perficient represents just about the best story in first-stage entrepreneurial ventures out there - from $0 to $364 million of value in just 14 years - but it was run very aggressively and with a lot of acquisitions along the way to grow that quickly. Most first-stage businesses in Austin, by comparison, are 20 people or less.
  2. Second-stage: a product-based business, and almost always investor backed. Bazaarvoice represents a second-stage entrepreneurial venture. As I wrote about in my post about Wharton and spoke about while I was there, I believe you should swing for the fences while you are a young entrepreneur. You can always go do the obvious - and fall back to being a consultant - if all else fails (and I would argue that you will be a more highly paid consultant if you have failed again and again because you learn more through struggle and failure typically than you do through success). This logic explains why I literally gave my consulting business to my employees to focus on Coremetrics, which was also a second-stage entrepreneurial venture (prior to its acquisition by IBM). To put a fine point on this, as of today, Bazaarvoice is worth $511 million as compared to Perficient. This is around $639,000 per employee (around three times more public value leverage per person than Perficient). HomeAway's public value leverage is much better at around $2.06 million per employee. The point is that second-stage businesses are far more valuable than first-stage businesses under almost any scenario. And if you care about creating a lot of jobs and economic ripples as an entrepreneur, you should focus on thinking bigger than the most obvious business opportunity in front of you - to hawk your own personal skill set.
  3. Third-stage: a product-based business that has returned it's investor capital and then some and is in a long-term phase of growth. Dell and Whole Foods represent third-stage entrepreneurial ventures. These are highly valuable companies where the entrepreneurs effectively made the transition from their initial private investors to a new, longer-term set. These entrepreneurs represent the top of Maslow's hierarchy of needs - self-actualization - and numerous books are written about them (Michael Dell was recently profiled in Clayton Christensen's brilliant book, The Innovator's DNA, and John Mackey at Whole Foods just came out with his book, Conscious Capitalism, and I proudly spoke at his Summit of the same name last year). Of course, Google and Apple are third-stage businesses as well and Facebook is transitioning from a second to third-stage, just as Bazaarvoice is.

As I wrote in my first Lucky7 post when I began this blog, "Bootstrap or VC?":

This post addresses a topic that is still very prevalent in my hometown of Austin today - a never-ending debate about bootstrapping versus VC-backing. Unlike the Valley, Austin entrepreneurs are not as experienced in this area, and, unfortunately, it holds our city back from creating jobs and wealth more quickly - which ultimately drives everything, from philanthrophy to the achievement of your life dreams. As an entrepreneur, you make your own choices about how to raise capital and how ambitious you actually are. What I am dedicated to now is educating on the possibilities - and helping you decide on the path. But to be ignorant is to hold our city, my hometown, back. That is why I am stepping up to help those that want to be helped.

Well, I am convinced after meeting with hundreds of entrepreneurs in Austin over the past five months that our city is mostly stuck in a first-stage entrepreneurial mentality. Let me give you an example of a typical meeting I've had. I recently met with an entrepreneur that has a single-digit million revenue consulting business - a pretty impressive first-stage entrepreneurial venture (most entrepreneurs never make it this far). He is a very smart and talented individual - if he were in Silicon Valley, they would think he is impressive as well. His consulting business has produced a potentially great Software as a Service (SaaS) product idea and he now has the potential to transition from a first- to second-stage entrepreneur. Our conversation started out with him saying, "I'm thinking that I'll use the proceeds from my consulting business over time to fund the SaaS business and eventually I'll transition all of my business from consulting to product but I'm worried that I'll miss the market window for my SaaS business if I make this transition too slowly". I asked, "have you ever heard of a SaaS business, at any significantly scale (and there are probably 200 significant scale SaaS businesses today), that started out as a consulting business and successfully pivoted?". He responded, "No." To which I replied, "You and I have something in common - I haven't either." Then I went on to tell him how my first business was consulting - again, because it was the most obvious thing I could do and it gave me the confidence that I could financially provide for myself - but how I went on to swing for the fences, deliberately choosing to "park" my first-stage ambitions for something much bigger. The person I was speaking to is in his 30s. I said, "you have more energy now than you will in your 40s - now is the time to swing for the fences while you are young". I then went on to predict what would happen if he didn't "go for it" and raise money to fund his SaaS product business and capture this unique window of opportunity. "You'll enter a vicious cycle where you need to sell more consulting business to fund your growing need to pivot to a SaaS business and that will make you even more defocused - which is the very nature of consulting - and less likely to ever successfully pivot". I think I made a difference and he will take my advice. Either way, I tried and he'll make his own decisions.

Being a mostly first-stage entrepreneurial city is okay if this is what we want in Austin. Again, as my friend Alan wrote above, "The Valley just moves forward and doesn't spend time worrying about this kind of stuff. I think we would all be best served doing the same." Alan's right, but I want to shake it up a bit. It's my nature, and I really believe in the potential of this city. And what I've learned is that the potential for entrepreneurship in Austin now is better than I've ever seen it. Here's why:

  1. SXSW is bigger than it has ever been, which puts a spotlight on the potential of Austin and brings smart, ambitious people here from all over the globe. The more people visit Austin, generally the more they want to live here.
  2. The overall economy is in a funk and many talented tech people are fed up with state taxes, bad public schools, and an overall low quality of life and are moving to Austin from California and New York, where people have a lot of entrepreneurial knowhow and more second- and third-stage businesses can be found.
  3. Incubators like Capital Factory, Dreamit Ventures, Tech Ranch Austin, and Incubation Station (not tech per se but product-focused nonetheless) have all started in the last three years. This will lead to more experiments (back to the "Silicon Valley is stupid" article referenced above). More experiments equals more potential.
  4. CTAN, the Central Texas Angel Network, is more active than ever and their Executive Director, Jeff Harbach, is really focused on making a difference. Some of those moving to Austin are leveraging CTAN as a vehicle to find promising investment opportunities and meet entrepreneurials that need both the capital and knowhow.
  5. Both Dean Gilligan (Business) and Dean Fenves (Engineering) at U.T. Austin - who were both appointed in 2008 - moved from California and they are both focused on creating more entrepreneurial energy within the student body. One of the first things that Dean Gilligan did? Recreate the Entrepreneur-in-Residence program at U.T. by bringing in the awesome Gary Hoover, who is doing a second EIR stint but now at U.T.'s iSchool. And let's not forget that the amazing Bob Metcalfe, founder of 3Com, moved here to join U.T. Austin and has founded the Longhorn Startup initiative with Josh Baer, the founder of Capital Factory. You can see a cool interview with Michael Dell right on their homepage.
  6. Austin Ventures is very actively seeking early-stage ventures and funding several,such as Handshakez recently. Some characterize Austin Ventures as only doing large roll-up deals, such as HomeAway and RetailMeNot (formerly named WhaleShark Media), and although those deals may define Austin Ventures for those people, the reality that I've seen first-hand is that Austin Ventures is really focused on early-stage ventures too. Even back in 2005, Bazaarvoice was a product of that focus when Austin Ventures led our Series A. Silverton Partners also appears to be more active in early-stage ventures than ever, and new early-stage funds like Corsa Ventures and others have also emerged recently.
  7. In the last four years, there will have been four tech IPOs in Austin - SolarWinds in 2009, Convio in 2010, HomeAway in 2011, and Bazaarvoice in 2012. If RetailMeNot goes public this year, that Austin will be five for five. This is unprecedented in Austin's history. Everyone here talks about the initial spark when Tivoli was acquired for $743 million by IBM in 1996. No doubt that Tivoli did a lot for the city, including its impact on Austin Ventures and Silverton Partners. But we are living in an unprecedented time for Austin where now aspiring entrepreneurs have both the knowhow and the capital from the IPO outcome to think bigger - to potentially think beyond first-stage entrepreneurship and skip to the second-stage from the beginning. I wrote about this in my 'time is money' philosophical post. As I'll write about in a future post, Bazaarvoice itself is now responsible for eight startups in the city and maybe even more. Lori Hawkins wrote about this potential ripple effect of Bazaarvoice back in June of last year and now here we are - it is happening. The economic ripple effects of four, and potentially five, IPOs in five years will likely be felt for decades to come. By the way, to give credit where credit is due - all of the tech IPOs were initially backed by Austin Ventures. In the case of both HomeAway and RetailMeNot, the companies were actually born within the offices of Austin Ventures, with Brian Sharples and Cotter Cunningham respectively serving as CEOs-in-Residence at the time.

Back to the PandoDaily article, the author wrote:

There are many people in Austin who are interested in “building the Internet” who don’t care about the fame and glory that comes with being part of a startup scene, Rupert said.

That attitude represents both boon and bane. It means you are unlikely to find in Austin the world’s most ambitious entrepreneurs bent on building the next killer tech company. But you are going to find a city of content people who can see life beyond the Internet’s fences.

Sometimes what’s great for building a balanced life can be bad for building the next Facebook.

Personally, this is the part of the article that bothered me the most. The reality is that Austin is stuck in a mostly first-stage entrepreneurial mentality. It needs capital and - critically - mentorship to help it reach a second- and third-stage level. There need to be many more experiments - which the incubators, U.T. Austin, and everyone else listed above stepping up can dramatically increase in number - and potentially produce a Facebook-like outcome. HomeAway is no Facebook - in terms of market valuation - but it is worth $2.54 billion, which is over three times greater than the Tivoli outcome that so famously put many of us here on the map. And HomeAway is still growing. Yes, Silicon Valley is decades ahead of us in terms of IPOs and the ripple effects felt from those. Mentorship is plentiful because there are just many more experienced people there - the entrepreneurial knowhow is decades ahead. And so is the capital. There is much more competition for it, and Valley investors have to really hustle to get in the best deals. So any given night in Silicon Valley you can go to a "teaching event" where an entrepreneur, investor, or group of them are presenting (trust me, I went to so many of these events when we lived there) - that hustle leads to more of those events, which helps more entrepreneurs think bigger - or second-stage - versus stay stuck in a first-stage frame of mind. And as discussed, second-stage outcomes produce more jobs and economic impact, which puts Austin "further behind" if you think about us "catching up".

But I don't think about us catching up and neither should the PandoDaily reporter - frankly, it is impossible for us to do so. Rather, I think about us embracing what is unique in - and cool about - Austin. Austin is a city where people can be themselves - can be authentic, as Bijoy Goswami, founder of Bootstrap Austin, and I recently discussed over lunch. But I do think about providing the capital and the knowhow to those entrepreneurs that want to transition to a second-stage frame of mind. And, in my opinion after hundreds of meetings over the past five months, the future for Austin's tech entrepreneurship scene has never been brighter. Forget about the comparison to Silicon Valley. If we compare Austin today to the Austin of the past, Austin is doing much better in tech entrepreneurship than ever before. And from what I've seen first-hand, entrepreneurs are craving both capital and mentorship - many of them want to transition. I'm proud to live here and call myself an Austinite, and I'm duty-bound to do my part to both provide the mentorship and capital needed to help this city's entrepreneurs reach a higher potential. I'm loving this new phase of my life, and I now believe that I'll be able to create even bigger ripples in this wonderful city than I did in my first phase as a founder of five startups (two of them - Bazaarvoice and Coremetrics - founded right here in Austin).

Update: after reading this blog post yesterday, one of my friends told me about this great post by Austin Gunter, who works at WP Engine's San Francisco office (a principally Austin-based company) and spent time at both Capital Factory and Tech Ranch Austin. He chose to move to San Francisco to be a part of the intensity - all work, all the time. I've been there and done that - for four years as I described above - and I chose Austin for the long-term. The intensity is here too - you just need to bring it yourself and join companies that have it. Bazaarvoice has it in spades and always has.