One Step Forward, Two Steps Back? Austin Two-Steps With Tech Startups Again
In my guest bedroom/office, there’s a framed newspaper cover hanging in a place of pride and prominence. It’s the July 22, 2000 edition of the Austin American-Statesman, Austin’s only daily newspaper. The cover story on Lance Armstrong’s marketability in light of his second Tour de France win was written by yours truly.
It was my first cover story, which is why it’s framed.
As your eye wanders from the disgraced cyclist’s bright yellow jersey to the other stories on the page, it’s quite a time capsule. There’s an item on the investigation into the Branch Davidian fire, a short story on the Mideast peace summit, a piece declaring that Bush was close to putting Cheney on the ticket. And hovering down in the bottom right hand corner is a business story about how high tech’s instant success in Austin’s “new economy” was leaving some people “rich with envy.”
It’s a story that would resonate with Statesman readers in 2013, as once again the hype escalates around a new wave of startups in Austin that are disrupting the status quo and changing the way we do everything from renting vacation homes to educating our children.
It’s fair to say: 2013 is not Austin’s first ride at the startup rodeo.
Nor is it mine. In what now seems like a lifetime ago, I worked on the business desk at the Statesman while I was finishing my journalism degree at the University of Texas at Austin. Technically, my beat was commercial and residential real estate, but as anybody writing in Austin in the late 1990s and early 2000s will attest, we all wrote about Austin’s tech economy.
High tech was the star of the Austin economy. By 1999, about 1,750 companies—including IBM, Intel, Motorola, Advanced Micro Devices, and scores of others—employed 110,000 people in high-tech jobs in Austin, or about one-fifth of the city’s total employment, according to state figures. In response, the Statesman launched a personal technology section called Technopolis in 1999, adding eight new positions to the newsroom. The first issue was 26 chunky pages filled with ads for dot-com companies.
Typical stories from my time at the Statesman included the desperate need for more usable commercial space, the skyrocketing real estate prices, the ramped up efforts to revamp sleepy old downtown Austin so it would be more attractive to all those young startup people (one answer: cool, urban lofts—a novelty for Austin at the time). We even wrote a story on how tech entrepreneurs from California were coming in and buying up all the cattle ranches in the area to turn them into weekend retreats.
They needed something to do with all that money. In 1999, Austin companies generated about $18 billion in stock option wealth alone, according to Angelou Economics, an economic development consulting firm in Austin. Between 1997 and 2002, the number of millionaires in Central Texas more than doubled to 30,700.
Several thousands of these new millionaires were former employees of Round Rock-based Dell Computer Inc., the leading direct seller of personal computers at the time. These new “Dellionaires” became millionaires through stock ownership or options, and many of them were eager to get in on the new dot-com boom, where any consumer-facing Internet website was poised to be the next Amazon.com.
Michael Dell speaking in 2000. Photo: Linda Spillers for Bloomberg
Let’s take for example, Garden.com, an online shop that sold gardening products and advice. The Austin-based company launched in 1995, attracting more than $100 million in venture capital, and raising $49.5 million through an initial public offering in 1999.
Before Living.com, an Austin-based home furnishings website, even launched it was able to raise nearly $40 million in venture capital on terms that valued the business at approximately $300 million. It also attracted a $20 million investment from Starbucks and an exclusive equity deal with Amazon.com who took a 20% stake in the company.
The best known Austin startup example from that heady time was online health information company, DrKoop.com. This scrappy little startup with a former U.S. surgeon general as its figurehead raised $88.4 million in its’ June 1999 IPO round, bidding the company value up to a staggering $1.3 billion. Pretty impressive for a company who reported $56 million in losses that very same year.
Super Bowl XXXIV in January 2000 featured 17 dot-com companies that each paid over $2 million for a 30-second spot. Two Austin companies, Agillion Inc. and Netpliance Inc., spent a combined $9 million on Super Bowl ads.
What happened next is, well, pretty predictable. I’ll let entrepreneur David Hauser explain:
Investors threw caution to the wind and invested heavily in businesses based solely on the fact that they added “.com” to the end of their name. They overlooked standard investment metrics like earnings per share, and instead based their investments on the expectation that new internet customers would lead to earnings booms. Some companies even IPO’ed before making a “net” profit.
And then it happened.
The market corrected, stock prices dropped, and most of these companies went bankrupt. They no longer could get the funding they needed, and since they weren’t making any money, they went under. It became known as the dot-com era bubble.
Living.com fired its 300 employees in 2000 and filed for bankruptcy.
Garden.com shut down in 2001, selling off its assets to Walmart and gardening company W. Altee Burpee & Co. for just $4 million.
In May 2000, DrKoop.com was forced to lay off 35% of its 185 employees. As its stock plummeted from $45.75 a share to $2.34, the startup was delisted from the NASDAQ, less than a year after it had been listed. DrKoop finally closed its doors in December 2001.
At Dell, executive wealth—which is based on the number of stock shares that are owned by company executives—tumbled in mid-October 2001 to $8.4 billion from about $14.6 billion in 1999.
Commercial projects were abandoned. The most visible reminder was a $124 million, 400,000-square-foot chip design center that Intel Corporation literally walked away from, leaving a 10-story concrete skeleton lurking behind a chain link fence in Austin’s downtown area until it was finally pulled down in 2007 to make way for a new federal courthouse.
Source: Flickr jebrandt99
The print edition of the Statesman’s Technopolis section shuttered in 2001, a victim of reduced ad revenue.
And in January 2001, just three dot-coms bought advertising spots during Super Bowl XXXV.
The total number of jobs in Austin dropped from a peak of 683,960 in 2000 to a low of 654,230 in 2003.
I was one of those jobless—a victim of the dot-com bubble, but in a roundabout way. I had taken a semester break from working at the Statesman in order to focus on school and finish my degree. I continued to freelance for them, but I was no longer on the payroll. When I graduated in December 2001, the Statesman couldn’t hire me back. Reluctantly, I took a writing job in Washington D.C.
Fast forward 12 years and I’m back in Austin writing about the city’s burgeoning startup scene.
So, what’s so different this time? Had Austin learned its’ lesson from the 2000 dot-com bust? Had I?
Note: This is part one of a two-part series on the Austin tech environment. Part two will be published on Wednesday.