Ranked number one for startup activity in the last two years by the Kauffman Foundation, Austin, Texas is one of the strongest emerging entrepreneurship ecosystems in the United States. Austin’s history of entrepreneurship and supportive government has facilitated Austin’s emergence as an entrepreneurial ecosystem.
Austin’s History of Entrepreneurship
During the 1970s and 1980s, Austin’s entrepreneurial ecosystem focused on computer and semiconductor manufacturing. Efforts by the Austin Chamber of Commerce, such as low mortgage rates for relocating staff and tax incentives, fueled the move of several major companies to Austin: IBM in 1967, Texas Instruments in 1969 and Motorola in 1974. A doubling in student attendance at the University of Texas in the early 1970s increased the educated workforce in the region.
The selection of Austin as the home of the Microelectronic Computer Corporation (MCC) in 1982 accelerated this concentration of high-tech companies. Facing fierce competition from Japan’s Fifth Generation Project, major U.S. companies banded together and created MCC, one of the largest computer research companies at the time. MCC chose Austin instead of Silicon Valley and Route 128 because the University of Texas offered MCC a subsidized lease and the Chamber of Commerce facilitated low-cost loans and reduced mortgage rates for staff moving to Austin.
Initially, the Austin ecosystem was primarily large businesses, such as IBM and Texas Instruments. This focus changed after the oil slump and savings and loan crises of the late 1980s and early 1990s crippled the Texas economy. Austin was not spared. It had one of the highest commercial real estate vacancy rates in the country and companies laid off large numbers of employees.
In response, the University of Texas formed the Austin Technology Incubator (ATI) in 1989 to jumpstart the local economy through high-tech startups with high-growth potential. In 1989, Greg Kozmetsky, the brain behind ATI, founded Austin’s first angel network, the Capital Network. These initiatives provided a foundation for growth during the 1990s dot-com boom. Austin companies such as Garden.com, an online gardening shop that raised $50 million in venture capital, and DrKoop.com, an “Internet-based consumer health-care network,” that was worth more than $1 billion, found success in Austin.
In 2000, thirty Austin venture capitalists invested over $2 billion in entrepreneurship ventures. The subsequent burst of the dot-com bubble in the early 2000s hurt Austin. After the 2001-2003 economic downturn, the region experienced major industrial restructuring and a renewal of entrepreneurship.
In 2003, the business community raised $11 million for Opportunity Austin, an economic development program. Opportunity Austin focused on recruiting new businesses, marketing Austin effectively and stimulating entrepreneurship and emerging technology sectors.
Less than five years after the last economic downturn, the Great Recession of 2008 set back many new Austin businesses. While venture capital and small business creation are not at the level they were during the dot-com boom, the rate of startup growth is currently 81.23 percent.
Entrepreneurship in Austin Now
Austin is experiencing yet another entrepreneurship boom. Austin now has the supportive policy structure, mentors and sector diversification required to finally establish a lasting ecosystem.
Austin’s cultural support of local businesses and responsive state and local government policies are fueling its start-up growth. The absence of state income tax incentivizes young professionals to work and settle in Texas. The local Austin government provides services for people considering starting a business such as BizAid Business Orientation and Small Business Program. The Entrepreneur Center of Austin and the Indus Entrepreneurs of Austin specifically provide support for start-ups. The University of Texas’ Herb Kelleher Center for Entrepreneurship, Growth and Renewal connects Austin entrepreneurs with resources.
As a result of Austin’s strong history of entrepreneurship, mentorship opportunities for nascent entrepreneurs are readily available. Austin companies, such as Dell, offer mentorship and accelerator programs. Entrepreneurial hubs, such as Tech Ranch Austin and Capital Factory, serve as an intersection between Austin incubators, accelerators, coworking spaces and also offer mentorship programs for entrepreneurs.
While known as “Silicon Hills,” Austin’s entrepreneurship economy is much more diversified than the computer chip and semiconductor industry that first enabled its growth. According to a 2015 Austin Technology Council report, approximately 14 percent of the $22.3 billion value of Austin’s tech companies came from semiconductors. Computer and peripheral equipment contributed 31 percent. Both Austin-born and transplanted companies focus on the bioscience, energy, clean-technology, water and IT/wireless industries. Austin has an extremely strong tech-focused entrepreneurship industry, but it also has successful media, education and social and craft/lifestyle ventures.
Venture Capital in Texas and Austin
Texas’ venture capital investment has decreased by 19 percent over the past ten years. To maintain a healthy entrepreneurship ecosystem, it is imperative that venture capital investment increases in the coming years.
Austin’s ecosystem lacks capital. In 2014, Austin saw 99 venture capital deals worth $739 million. In contrast, Silicon Valley saw 1,333 deals worth more than $27 billion. While there is no shortage of capital in Texas, there is a lack of capital access, information and government support. The majority of Texas capital is invested in oil, gas and real estate. These are considered by many to be less risky than entrepreneurship ventures. However, as oil prices fall, Texans should consider trying to raise growth and investing in entrepreneurial ventures.
Austin’s most prominent venture capital fund, Austin Ventures, closed in 2015. Phil Siegel and David Lack left to form Tritium Partners to provide capital for startups in Austin. Its first fund of $309 million is a fraction of the $900 million Austin Ventures raised at its peak. Silverton Partners and S3 Ventures have tried to fill the void left by Austin Ventures. However, none of these Austin venture capital funds have the capital or assets that Austin Ventures had.
Entrepreneurial Resources in Austin
Austin has a plethora of resources for entrepreneurs. The annual South by Southwest Festival provides networking opportunities. Companies are taking advantage of the 100,000 college students that graduate each year in the greater Austin area. The University of Texas at Austin boasts the Austin Technology Incubator under the IC² Institute, which has raised almost $700 million in investor capital to achieve this goal. Additionally, the Central Texas Angel Network provides capital and mentorship support for entrepreneurs in the Central Texas region.
What Starts in Austin, Changes the World
Austin’s entrepreneurial ecosystem is moving towards national recognition. Favor, a food delivery app, is an alumni of ATI and backed by Austin’s S3 Ventures and Silverton Partners. HomeAway, an Austin based online rental marketplace, was established in 2005 and acquired by Expedia for $3.9 billion in 2015. In the upcoming years, it is critical that capital investment continues to support new ventures such as Favor and HomeAway. Austin’s ecosystem has the policy, talent and mentorship to be successful, but private and public efforts must continue to ensure its success.