Austin's Warped Center of Gravity

By Trevor Gilbert , written on May 29, 2012

From The News Desk

It's impossible to talk about Austin as a tech ecosystem without acknowledging the influence that investment firm Austin Ventures has on the city. To some, it's the multi-billion dollar behemoth that brings all the funding you'd ever need. To others, it is the kiss of death.

With such polarizing opinions on the firm, what's the truth?

It's complicated.

First, the facts. Austin Ventures has nearly $4 billion under management. It has backed some of the most successful companies in Austin, including HomeAway, which is now publicly valued at roughly $2 billion. It has connections with nearly every major player in the ecosystem, giving it amazing deal flow. That is all to say: it’s a pretty successful firm, it’s found a formula for success, and it’s not going away any time soon.

Now, the criticisms. Most of them tend to focus on a somewhat controversial practice called a roll-up. Essentially, Austin Ventures picks a team to run a company (like HomeAway) and gives them capital to buy as many companies as possible to become the dominant player in a market by default. It requires more money than traditional early investments, but it also increases the chances of the company succeeding.

For an institution that exists with the sole purpose of providing a return for limited partners, it's hard to fault AustinVentures for doing all it can to make money. Roll-ups increase the chance of the portfolio company's success by kneecapping competition through acquisitions, and by giving the company enough capital to dominate an area.

With Austin Ventures seeing financial success, then, what do people find disheartening about the firm? It comes down to bad signaling inside the city, which turns into a bit of a public image problem for the firm.

The signaling issue exists for every major firm, but it is more noticeable in Austin because Austin Ventures is so large. The story goes that entrepreneurs go to pitch Austin Ventures, and are then turned down for any number of reasons – a bad pitch, bad product, competing portfolio company for the firm, a few months too soon, or a bad call on the firm’s part. There are any number of reasons why AV would turn down a particular entrepreneur.

That's fine for the firm, but for the entrepreneur – especially a first-time entrepreneur – it could kill the chance of getting funding. If the founders pitch to Austin Ventures first, every other VC in town is going to ask what Austin Ventures said about the deal. If Austin Ventures said no, then chances are that the other VCs will defer to Austin Venture's call and pass up on the terms of the deal.

It shows not only the position of dominance that Austin Ventures has in the city among investors, but also a potential downside of having one dominant firm. It warps the center of gravity away from the entrepreneur and towards the firm.

The public image issue is a different beast entirely. "There are people that think Austin Ventures is arrogant and that they are jerks," says local entrepreneur Joshua Baer, who runs Austin incubator Capital Factory. "But largely you'll find that the same people criticizing AV are the people that have been turned down by AV." Baer concedes that some people may have valid complaints, but that it’s necessary to take the criticisms with a rather sizable grain of salt.

Austin Ventures has another problem. In a refrain that was oft repeated among people I spoke to, Austin Ventures believes it "sees every deal in the town." That’s not true, even when correcting for hyperbole.

A few days after getting to Austin, I met with a stealth startup that was particularly exciting. The founder was raising a round of funding from local VCs and Silicon Valley firms. Later in the afternoon, I met with Tom Ball of Austin Ventures and told him that I was particularly excited about this company. When I mentioned the name, he said he’d never heard of it.

The reason? The entrepreneur wanted to wait to pitch AV because of the signaling issue, and because he didn't want to be turned down and then have his chances of successfully raising money decreased. That's a problem for the firm, but it might just be the best problem to have.

The best thing that could happen is for AV to continue doing what it does best: Post returns. At the same time, it would be great for Austin if firms from other cities arrived in full force. Not only are there great companies in the city that could use the funding, but with another firm in Austin it would end up balancing the warped center of gravity.

[illustration by Hallie Bateman]