Recently an Austin-based venture capital firm offered my company $400k for 40% of its equity. This was one week before their counterpart in the Bay Area offered $2MM for 20% 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 $500K.

This article’s information is based on my conversations with partners at venture capital firms in Austin, Boston, & San Francisco, conversations with entrepreneurs that have been funded by Austin, Boston & San Francisco firms, and research on Crunchbase.

Problem 1: 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.

Silverton Partners

Silverton Partners raised $75MM in 2013 for Fund IV to invest in Austin companies. A trend emerged in their Crunchbase profile. In 2014 they were heavily invested in seed rounds for companies like The Zebra for $1MM, Favor for $660K, and The Zebra again for a $4.5MM seed investment.

2013–3 seed-stage deals and 5 later-stage deals. (37.5% / 62.5%)

2014–5 seed-stage deals and 6 later-stage deals. (45.5% / 54.5%)

2015–4 seed-stage deals and 11 later-stage deals. (26.7% / 73.3%)

2016 YTD– 0 seed-stage deals and 1 later-stage deal. (0%/100%)

In 2015 their number of seed-stage investments (as a percentage of all deals funded that year) dropped by almost half and the number and size of Series A, B, and C investments increased, culminating with The Zebra taking down a $17MM Series A in January of 2016. That one investment accounts for 22% of the firm’s $75MM fund.

Live Oak Venture Partners

Live Oak Venture Partners closed a $109MM fund in May of 2014. We are now almost two years into their fund and during that time, they have invested over $46MM. This leaves just 57% of their fund to invest over the next 5 years.

2014–2 seed-stage deals and 5 later-stage deals. (28.5% / 71.5%)

2015–2 seed-stage deals and 4 later-stage deals. (33.3% / 66.7%)

2016 YTD — 0 seed-stage deals and 0 later-stage deals. (0%/0%)

Live Oak’s typical seed-stage is $500K where their average of later-stage investment hovers around $5.2MM with some being $10MM+. They need to leave some “dry powder in the chamber” for follow-on investments and only Venu and Krishna can know how much is left for early-stage startups when their follow-on investments have been earmarked.

Austin Ventures

Austin Ventures closed its doors and left the Austin market in 2015, yet their Crunchbase profile indicates that they are still opportunistically investing. It shows $36MM in follow-on rounds just in January of 2016 alone. This should not be seen as a glimmer of hope for entrepreneurs wanting to pitch JT and the gang, but the firm spending its last few fund dollars on what it perceives will make for quick returns to their fund investors.

When a fund is young, Crunchbase shows that the general partners appear to make more [riskier] seed-stage investments because the partners have a longer time to wait for those companies to mature and/or exit.

In my talks with entrepreneurs who received funding when these Austin funds were very young, the number of meetings to get the partners to agree to fund the company was 2 to 3. Now I am hearing that it takes 6 or more meetings before a yes decision is made. This indicates that the general partners are taking more time to ensure they can better determine their risk, which leads to a slower overall funding process.

It is rare that a general partner will come out and tell you no. Most will say they need more information and determining whether that is a subtle no or really an ask for more information is the bane of my existence as an entrepreneur.

Problem 2: Austin’s funds have less money

Austin’s funds have less money available for early-stage investments because later-stage deals have eaten up a lot of the fund.

The amount of equity required to fund an early-stage company seems to be going up. As you read above, I saw a significant ask by an Austin venture capital firm, but it isn’t just me reporting this trend. I have been told by other entrepreneurs that they have been asked for more equity than they were expecting. These are not the run-of-the-mill first-time entrepreneurs, but seasoned entrepreneurs exiting one company and starting another.

The remainder of fund factor drives valuations lower and it is important for every entrepreneur to know how old the fund is prior to talking to the general partners at the firm.

Problem 3: Austin has had very few big exits

Austin is the land of acquisition. Over the years we have had some big exits, but they are a very small percentage of the total number of exits. Most importantly, the big exits have added very few investors to the pool.

Austin has become the R&D lab for the west and east coasts wherein acquisitions take out the company before it can have a massive exit. It is these acquisitions that put some money in the pocket of the founders, but not enough to drive significant investment from them.

When exits are small, the founders leave with a smaller amount of cash. it is this cash that breeds new angel investors and subsequent venture partners.

There have indeed been some bigger wins. Look to the Deep Eddy Vodka acquisition as one. This was a quick exit for Clayton Christopher after his win for Sweet Leaf Tea. It in turn created a new venture partner and was a great win for Austin. But it created only one. The Home Away acquisition was another win that created some great investors. But these are few and far between when compared with other centers of technology innovation.

Companies are apparently raising money from a lot of individual investors. Loop and Tie raised $2.6MM from 52 investors. It seems ludicrous that a company would have to go to 52 investors for $2.6MM. That is $50K from each investor. Sadly, the $50K mark is a big investment for many investors in Austin.

Many of the angel and seed-stage investors I have talked to put $50K a year into startup companies. Not just one company, but all combined. Some investments are in the $10K range, others in the $15K range, and others are in the $25K range. Very few will write a check to one company for $50K as it eats up a big portion of their total dollars available for investment that year.

In the end

As an entrepreneur it is important to know the investment landscape prior to seeking investment. I have had to fly to the Bay Area to get funding for several of my companies. This is partly because few Austin investors understand SaaS platforms, maximizing your company’s valuation in the Bay Area is easy, and mostly because of the relatively large investor pool size.

Many pundits have postured about this year being the time of the real actual businesses building interesting technology (RABBIT). As with any advice, take it for what it’s worth.

Spend 88% of your time building your business and 12% of your time raising money. By taking your executive team out of the game for significant amounts of time to raise money, your company may suffer from declining fundamentals which will hurt your valuation in the end — no matter who invests.

Update on February 22, 2016:

In a response article by Venu at Live Oak, he pointed out that I was reading the Crunchbase profiles incorrectly and the actual investment size for each firm for each deal was different. This critique, as well as any and all comments are welcomed and appreciated. This dialog creates and open and transparent environment where we can all prosper.