Tech Bubble: Austin Has Bigger Start-Up Funding but Lesser Deals than Silicon Valley

When one thinks of Austin the picture that comes up in our eye is of a place that has thousands of growing saplings, an immature forest with a select few trees of live oak, and most of just enough water to see it fall short of the Amazon.

The description above is how Austin is in reality today. The media has kept an unflinching eye on the place’s affair romanticizing about its thriving tech scene, a free living low cost society where the economy is booming. The city which has a high startup density even in comparison to Boston, Silicon Valley and Chicago, however, is underperforming with the smallest deals for startup funding around.

This assertion has been made in a recently conducted study by the St. Edward’s University Munday School of Business. The study was basically deigned to compare the much media hyped city of Austin against other such boomtowns that have had some startup involved.

More to It than Meets the Eye

The findings of the study even if they don’t show the picture highlighted by the media, are interesting to say the least and sour as far as the investors are concerned. Year on years there have been startup experts, angel investors, politicians and venture capitalists who have not only bought into the idea of Austin generating tons of money, but have also made sure to transfer their confidence into the general public.

While that may be true to some extent, to put it into context, Austin provides your business the early seed money but does it have the late stage funding resources that really drive a company forward? This is where it is lacking far behind Silicon Valley. The reasons for this demise can be a few, out of which some of the most common ones have been the lack of experience, high quality CEOs at the helm of affairs of the business, while for others it’s the presence of venture capitalists on a large scale.

Dried Up Funding

In another recent study conducted by the Austin Chamber of Commerce, the problem that haunts the city and pegs its transformation into the next Silicon Valley has been laid bare. The study identified a lack of funding as the tormentor in chief for Austin’s woes. The number of funding sources available to the city is around 144.

Now while the number may seem big alone, to put it into context, the numbers of funding sources that are available to The Silicon Valley are 785 which is slightly higher than the funding sources of New York standing at 739. Even the Midwest and New England stand at considerable funding sources of 371 and 475 exactly.

What the study highlights basically is that the town of Austin has tremendous potential.  The city with all of its features mentioned above is great for giving startups to businesses, but taking them up a notch, with help of excessive funding and monetary backing, those are things are best achieved elsewhere.

On the other hand, people who believe in the potential of Austin have interpreted the findings of the study differently. The opinion prevalent amongst them is that this is a sign of the huge opportunities that Austin finds itself on with only a big investor or investment company.

The problems others have argued are not entirely with Austin itself but with the place that is being compared with and brought in contention against. Silicon Valley has been Silicon Valley for a reason and despite the wishes of some, the importance of the valley is nowhere near falling down let alone diminishing.

Why Silicone Valley is Home to Venture Deals

The last 3 decades have seen the brightest minds in the US and policy makers spending tons of hours and hundreds and thousands of dollars on policies and programs as well as incentives to bring investment to their cities and regions. Austin is one example of that and can be declared the poster child of such attempts and yet, 3 decades of effort on, the activity of venture capital investment is more concentrated in the Silicon Valley today than it has ever been.

According to data provided by the National Venture Capital Association in the year 1980, 28% of the venture capital deals and around 28% of the venture capital money went to the Silicone Valley. Fast forward today and the last half decade or so has seen the amount of venture capital dollars rising up to 43% while the percentage deals have also gone up to around 38%.

What is interesting to note is that despite the fact that there has been a rise in the scale of venture activity, cities like Austin still are unable to catch up to the Silicone Valley in terms of the deals made.

While there may be many reasons for the disparity in the number of deals between the Silicone Valley and the city of Austin, it is largely down to the self reinforcing of the advantages they get of investing locally.  The reason for the disparity is still largely undetermined but there are several factors that may play a part.

The rise of the Silicone Valley was because it was an area where investors were able to find the type of entrepreneur with idea that they liked to back and invest in. This was the reason that started the phenomenon of the valley and to this day onwards it is the phenomenon that has caused the concentration of venture capitalist and deals in the area. To this day entrepreneurs that are looking for capital and investment in their business and business idea come to the Silicone Valley.

This means that the investors don’t have to go around looking for business to invest in or use technical personnel to check their claims and ideas. They are getting the best deals in town at their doorstep, where they can pick and choose at their behest without any detriment to them. When they get to do it risk and effort free, why would they want to venture out and open offices in other cities such as Austin even if it does have sufficient potential?