An Austin-based venture capital firm recently offered my company $400,000 for 40 percent of its equity. This was one week before their counterpart in the Bay Area offered $2 million for 20 percent of the same company. Nothing had changed in that week, and both received the same pitch and deck in the weeks prior.
The dent is still noticeable from where my head hit my desk after reading the first firm’s offer. Mouth-agape, I found myself holding in a chuckle and a tear. While I can dismiss this sort of discrepancy as an “Austin investor thing,” many young entrepreneurs fall victim to it.
My belief is that the fundraising problems that Austin entrepreneurs are facing include both the age of the funds at Austin’s venture capital firms and the limited number of investors who can invest $500,000.
This article’s information is based on my conversations with partners at venture capital firms in Austin, Boston and San Francisco; conversations with entrepreneurs funded by Austin, Boston and San Francisco firms; and research on CrunchBase.
Austin has aging funds
Venture capital firms in Austin publicly state that they invest in seed-stage companies; but, as you will see, a small percentage of each fund is allocated to seed-stage investments. The sweet spot for venture capital firms are adolescent-stage companies with financials that show accelerated growth, which reduces the overall risk of picking a winner out of the batch of companies.
Over the past year and a half there has been a noticeable change in the way Austin’s venture capital firms are vetting seed-stage companies.
I spoke with one general partner of an Austin venture capital firm who said that they publicly talk about seed-stage investing, but rarely do so — and only when the industry is super hot and the team is coming off a previous big win.
This boils down to my hypothesis on Austin venture capital funds. When I say “fund,” I don’t mean the venture capital firm itself, but the current fund from which they are investing.
The longer a fund has been live, the more conservative and risk-averse the general partners become.