Billionaire mogul Elon Musk and Fortune 500 companies Oracle and Hewlett Packard have made big waves by relocating to Texas in recent months, but it might matter even more to the state’s tech industry that Amy Sun has moved here. The former product manager for Uber and Facebook, and former partner at Silicon Valley venture firm Sequoia Capital, came to Austin in the second half of 2020 with plans to start a company. She picked the city after a pandemic-era summer spent slowly driving cross-country with her husband, visiting a number of places after their small wedding with family on the East Coast.
Austin had long seemed appealing, she says, because of the relentlessly positive word of mouth that built up over the years as Bay Area colleagues visited for South by Southwest or transferred to Facebook’s Austin office. Then, during the pandemic, a new attraction arose: space for working from home. “The cost of living in the Bay Area was getting pretty crazy—just really hard to afford even a very modest house or apartment there, especially because we’re spending more time at home,” Sun says. “It’s so nice to be able to have a house with more than one room.”
The past year has run roughshod over millions of Americans, yet the tech industry in Texas is seemingly riding higher than ever. Austin has tended to hog the hype, thanks to announcements such as plans for new high-tech factories (Samsung semiconductors, SpaceX antennae, Tesla trucks), but it was Dallas that placed first in the U.S. in tech investment growth rate in 2020, and Houston and San Antonio are trending up too. Mike Smerklo, cofounder of Austin-based Next Coast Ventures, says that while the well-known names grab the attention, newcomers like Sun may make an even greater impact.
“A lot of the headlines going into the Austin media are: this venture capitalist moved here, or this wealthy person or celebrity moved here,” he says. “That’s fun and interesting and all, but what’s really happening is entrepreneurial talent—both those who start companies and the executives who help build them. That influx is almost unbelievable, how strong it’s gotten. That’s less of a sexy headline, so to speak, but I think it’ll be that element that really drives the Austin start-up scene to the next level.”
Even as its techie profile has risen, Austin has long had a mixed reputation on the executive talent front, including when it comes to start-up founders. But that’s been changing—one of a few factors feeding into Austin’s continued economic boom despite the setbacks of the pandemic.
What’s going on here? Are we seeing two big storylines of the past year—across-the-board tech growth as people stayed indoors and plugged in during the pandemic, and a faltering of Silicon Valley’s grip on the industry due in part to the “new normal” of distributed work environments—combine and play directly into the hands of Texas’s sunny, hip, and business-friendly cities? Or was this boom happening already, before the pandemic, and we’re just seeing the biggest fruits of it now?
Ask around among Texas’s technorati, and you’ll hear that it’s a little of both. Joshua Baer, founder and CEO of Capital Factory, a downtown Austin accelerator and hub for local start-ups, can’t deny that there’s something fundamentally different in the air now. “If you asked me last year, I would’ve said that Austin is the number one tier-two city, king of the midgets,” Baer says. “I don’t know where you draw the line, but it feels like there is a change from last year. Suddenly we’ve gone from us having to beat our chest and tell everybody else how great Austin and Texas are, to everybody showing up here telling us why it’s so great, and why they moved here.”
If success is 90 percent preparation, then Texas, and especially Austin, have been putting the pieces together in recent years. But it took the pandemic’s unforeseeable set of circumstances to deliver on that promise in the ways we’re witnessing now.
The Trans-Texas Idea Pipeline
Bob Metcalfe is a venture capitalist and tech industry pioneer who invented Ethernet and cofounded pivotal Silicon Valley company 3Com in the 1970s. Since 2011, he has also had a front-row seat to Austin’s tech ecosystem, leading innovation efforts at UT-Austin’s Cockrell School of Engineering. Ask him about what makes Texas’s tech industry tick, and he’ll trot out a three-legged-stool metaphor familiar to many a business-school student. “Start-ups need three things,” Metcalfe says. “They need ideas, they need people, and they need money.”
Metcalfe notes that when he uses the word “start-up,” he is referring to the scope of a company’s vision. The term could refer to an enterprise as established as Dell or as new as the latest dream being kicked around over coffee this morning at some San Antonio accelerator. “Small companies are founded by people intending to have small companies,” Metcalfe says. “They behave differently and they have different infrastructure than start-ups, which aim to take over the world.”
Either way, the fundamental needs don’t change. In each of those three dimensions—ideas, people, and access to capital—one can observe how Texas has laid a foundation over decades, then seen the past year throw gasoline on the fire.
So far as ideas are concerned, Silicon Valley’s status as the global center of tech innovation is often attributed to the presence of Stanford University, which nurtured some of the first major U.S. tech companies, as well as the nearby University of California, Berkeley. Austin can likewise point to UT-Austin as an incubator of key historic start-up successes, most notably local icon Dell. But the academic-to-tech-start-up pipelines of the two regions aren’t truly comparable. California’s universities have a much stronger track record of producing major companies.
Metcalfe has been working on building a stronger pipeline at UT. He’s seen promise in medical-device companies coming out of the new UT Dell Medical School and with collaboration between Cockrell engineers and established energy companies on renewables. Elsewhere in the state, UT Southwestern Medical School in Dallas has produced two billion-dollar deals in the past two years, for Peloton Therapeutics and Exonics Therapeutics, and Rice University in Houston recently received a $100 million gift to develop new research in advanced materials science. For Baer, however, the biggest story in the Texas start-up scene in recent years was the 2018 arrival of the U.S. Army Futures Command headquarters in Austin. Capital Factory now works with 31 local companies that have received more $60 million in military funding, for projects involving helicopter drones, vehicle upkeep, construction, and cybersecurity.
Austin offers a welcoming, anything-goes alternative to a dovish tech culture in Silicon Valley that has resisted overt partnerships with the military. Baer points to a 2018 episode when Google canceled a Pentagon AI contract after employee backlash. “They’ve made a conscious decision that they don’t want to be in Silicon Valley, and Silicon Valley pretty much gave them the finger and told them that they didn’t want them there either,” Baer says of the Army Futures Command. “They don’t want to be in D.C., surrounded by the politicians and the traditional defense industrial complex. So they’re coming to Texas.”
Letting Them Come To Us
One of the state’s biggest recent IPOs, a $2.2 billion posting for Austin-based dating app Bumble, underlines how Texas’s attractiveness to newcomers is driving its start-up economy. Bumble founder Whitney Wolfe Herd , a graduate of SMU, got her start in business in Los Angeles, where she was a vice president at Tinder. When she moved to Austin in 2014, she brought knowledge of how to build a successful app, plus all the connections that such experience entails. Though cities like Houston and Dallas have boasted developed business ecosystems for much longer, Wolfe Herd’s move is typical of how a smaller city like Austin suddenly finds itself swimming in high-level executive business talent.
Mike Smerklo says he’s increasingly seeing that talent streaming in not just from California, but also from financial and marketing hubs like Chicago and New York. New growth begets growth: Smerklo adds that it’s easier now to recruit an experienced executive to Austin for a job with a start-up, because he or she can be confident that, if that company craters, there will be plenty of other opportunities in town, given the increasing number of successful start-ups—including not just Bumble but also Workrise, AlertMedia, and more. And the pandemic has tilted that sort of decision-making math for experienced tech executives heavily in Austin’s favor.
For instance, Amy Sun has found that in the era of Zoom and other online collaboration tools, she doesn’t need to count on the Austin talent pipeline to fill every role for the team she’s assembling for her venture (which, she hinted to TechCrunch, will produce a solution to help gig workers earn more money). “The pandemic changed that. We can hire people from anywhere,” she says. “It’s great for the local folks too, because there’s more learning and collaboration with people who have very different backgrounds and different geographies.”
Winning the Money Hustle
New ideas and talented people are nice and all, but arguably the most important element for successful start-ups is access to cash. This too is an area in which Texas has a history of lagging behind. Baer, Metcalfe, and Smerklo all narrate essentially the same story of a recent past when Austin was a one-horse town, venture capital–wise, dominated by the roughly $4 billion Austin Ventures, founded in 1984. “They were the big, bad gorilla,” Baer says. “They kind of scared off all the other VCs, because they all felt like, ‘They’re out there local. If it’s a good deal, Austin Ventures got it first. And if they didn’t take the deal, I probably don’t want it.’ It wasn’t Austin Ventures’ fault, but it didn’t create a good environment. They built a bunch of great companies, but it wasn’t a thriving ecosystem.”
As Austin Ventures came apart in the first half of the 2010s, its partners fanned out to found several smaller VC firms. “Now, instead of it all being at this $4 billion firm, they each have firms with a $150 million fund, or a $200 million fund, or a $50 million fund,” Baer says. “Two people working over here, and one person working over there, and some new people have come in. That has made it now into a much, much more robust, thriving, competitive ecosystem. It makes it much more founder-friendly.”
Smerklo is one of the “new people” of whom Baer speaks, and his cofounder at Next Coast Ventures, Thomas Ball, is a veteran of Austin Ventures. Seventy percent of Next Coast’s investments have gone to Austin companies. Recipients include Everlywell, an at-home medical testing start-up that Smerklo reports is now near a billion-dollar valuation and has mostly raised its money in Austin.
Once again, the past year’s “Texodus” has taken what was already a pretty good situation for Austin and Texas and significantly improved upon it, further broadening the field of play for local start-ups hoping to raise money. Joe Lonsdale of 8VC, a mentee and later business partner of Peter Thiel, has been perhaps the most outspoken of the new arrivals, headquartering his fund 8VC in Austin this fall and publishing a pro-Texas, anti-California manifesto in the Wall Street Journal. Lonsdale is notorious in his home state for having been temporarily banned from the campus of Stanford University after sexual assault allegations.
A less controversial and likely more impactful 2020 arrival is billionaire Jim Breyer, an early investor in Facebook, whose Breyer Capital is now located in both Silicon Valley and Austin. Breyer, in a recent op-ed for CNN Business explaining his move, heaped praise on Austin for its “vast pool of expertise . . . contributing to a remarkably robust climate of innovation” and “a frontier spirit where founders take big problems into their own hands.”
Baer says that, once the pandemic is over, he won’t give up the hustle of flying Austin start-ups out to Palo Alto’s Sand Hill Road to meet VC firms—nor is Capital Factory slacking on Zoom meetings at present. But it is reasonable to wonder for how much longer such trips will be necessary. Not only does Austin boast an ever-growing number of VC firms, but the ties between investors in Austin and on the coasts have also grown stronger.
“When the VC ecosystem is working, you see healthy syndicates,” Metcalfe says. “They’ll typically be big VCs from outside of Austin, partnered with local VCs, because they like having feet on the ground nearby. These syndicates are getting healthier and healthier with participation from outside Austin.”
The more Austin start-ups have successful outcomes, and the more the city attracts newcomers from out of town with a history of start-up success, the more a new kind of venture capital will begin to operate in Texas too.
“I think the most important class of investor for a thriving start-up ecosystem, in any city, is actually the super early investors, the ones that will give you a relatively small check at a very early stage, when it’s just you and your friend and an idea in a coffee shop,” Sun says. “Traditionally, access to that kind of capital was very much a San Francisco thing. You have technology workers who, post-IPO, have a little money, and then they’re just angel investing in their friends’ companies. But now there are a lot of people moving to Austin that can provide that kind of capital, so that people with an idea can afford to quit their day jobs and their regular salaries and go work on new ideas.”
Correction: This article originally misstated in which city Whitney Wolfe Herd got her start in business as a vice president at Tinder.