Austin’s Tech Scene: On the Comeback Trail

Feb 19, 2014

Former U.S. Vice President Al Gore, left, speaks with Wall Street Journal columnist Walt Mossberg during an interview at last year's South by Southwest Interactive Festival (SXSW) in Austin, Texas. Photographer: David Paul Morris/Bloomberg

It’s a warm, sunny Saturday in January and I’m having breakfast with Grover Bynum from the Austin Technology Council. Bynum is explaining how the new Austin tech scene is different from the one that led to the dot-com bust over migas and coffee at Cisco’s on East Sixth Street.

Cisco’s is an Austin institution and total hole-in-the-wall. The place has been around since 1948 and I’m pretty sure it has not been updated in its entire existence. Stucco turquoise exterior? Check. Wood panelled walls? Check. Breakfast tacos with potato, egg and cheese are $3 a piece. And they come with a homemade biscuit.

Directly cross the street is the new vanguard in this fast-gentrifying holdout of east Austin. It’s a low-slung, nondescript building that could easily pass for an insurance office. It’s actually a hot, new restaurant from season nine Top Chef winner Paul Qui. A pasta dish with foie gras, yuzu, and squid ink will set you back $24. No biscuit included.

These two restaurants straddling East Sixth Street couldn’t be more different, and yet they are almost a metaphor for the tech scene itself—the Austin economy isn’t afraid of the new, but it’s going to go ahead and hold on to its’ past, thank you very much. There’s room for everyone in Silicon Hills.

Run for the Silicon Hills?

Actually, that nickname is a misnomer, Bynum informs me. Semiconductors only make up 9% of the current Austin tech economy. That nickname is a left over from a time when Samsung, Intel, Texas Instruments and a score of others rode high on the Austin plain. But, like so much of Austin’s past, it’s hard to shake.

It’s a feeling I know all too well. I left Austin 12 years ago, and even though it continues to change and grow in between my many visits back, I still see a lot of the old Austin I knew and loved.

Being back here to cover the Challenge Cup startup pitch competition in January was particularly bittersweet. As a former Austinite, I’m glad that the city is doing well. But as someone who lost her job and had to move, I’m bitter that it came too late for me. And, as someone who closely followed the city’s tech scene—including the dot-com bubble and subsequent burst—I worry that history is about to repeat itself.

Many of the same factors that led to the dot-com bubble of the late 1990s are still in place in Austin today, particularly a surplus of really great talent. The University of Texas graduates around 12,000 college student a year. All told, there are approximately 122,000 college students in the five-region area attending some nine institutions of higher education.

“It helps to have a constant influx of smart new graduates coming from the University of Texas who love Austin,” said Bryan Menell, publisher of AustinStartup and a director at The Dachis Group in an interview with FastCompany.com. “And if they're going to school here, they want to stay here. I've even met a lot of people who went to school here, graduated and maybe took a job in Chicago or New York or the Valley or whatever and stayed a couple years and then when it comes the time to sort of get married and raise a family, they go, ‘Oh time to go back to Austin to go do that.’”

Those boomerang entrepreneurs aren’t alone. The Austin metro area’s population has been growing throughout the recession and is about 1.87 million today. That number is projected to rise to 2.3 million by 2020. From 2006 through 2013, the area has added 343,832 residents.

Kevin Callahan, co-founder of MapMyFitness (pictured left), is one of those transplants. During a break in the Challenge Cup competition, Callahan explained to me why he started his company in Denver but moved the company headquarters to Austin 

in 2010. “They’re very similar. So imagine if Denver merged with Boulder, you’d get Austin. There’s a growing technology scene in Denver and I look at Denver as maybe trailing Austin by about 5 years in terms of recognition." The two cities have another big selling point in common, Callahan says. "They’re both active outdoor cities, which I like, and we’re happy to have a big presence in both cities.”

Austin Envy

The Austin allure isn’t just the nice weather and abundance of world class barbecue. Austin constantly lives in the top spots of Forbes’ annual lists of best cities for jobs and other demographic rankings. Austin ranked second in a 2012 PayScale.com list of hotspots for startup IT jobs, behind only San Francisco. And, Austin ranks as the No. 1 place to launch your business, according to a ranking by GoodApril, a San Francisco-based tax-planning startup. 

Add to the mix a relatively low cost of living, no personal or local income tax, and state and local business taxes lower than the national average, and it’s easy to entice people to move to Austin.

“If you took the best qualities of Palo Alto and Berkeley and put them together—minus the former’s overambitious striving and exorbitant cost of living, and the latter’s business-unfriendliness and occasional burnout factor—you’d end up with a place like Austin,” Forbes recently noted in an article fittingly titled, “Austin Envy.”

Startups get a lot of exposure in Austin as well. The best known—SXSW Interactivehighlights emerging technologies each year. Founded in 1994 as a side event to the main music festival, SXSW Interactive has ballooned, with more than 25,000 people plunking down $700 to $1,200 for badges in 2013, compared to the 16,000 who purchased badges for the music conference.

Show Us The Money

What’s lacking is funding. For all of 2013, a total of 79 Central Texas companies raised $407 million — which was down 35% from the $625.6 million received by 86 companies the year before, according to the National Venture Capital Association. Venture activity in Central Texas peaked during the height of the dot-com boom in 2000, when 178 area companies raised $2 billion.

The city’s dominant venture fund from the dot-com era, AustinVentures, has been joined by Silverton Partners, Live Oak Ventures, S3 Ventures, but they’re definitely much more cautious than the free-wheeling spending sprees we saw in the late 1990s.

“There is a lot of money in Texas. Much of the private equity capital is invested in oil and gas and real estate. Many individual angel investors are more comfortable with these types of investments than in startup technology and life science companies. Building entrepreneurial teams around technology and innovation is difficult. It’s not what they do. It’s harder to raise seed capital here for technology projects; it’s easier for energy. People here will put money into a wildcatting operation but not an Internet startup. Many individual angel investors are more comfortable with these types of investments then in startup technology and life science companies,”  Blair Garrou, a managing director at Houston’s Mercury Fund told online publication, Xconomy.

To fill the funding void, groups like Central Texas Angel Network, G51 Capital, and the state’s Emerging Technology Fund were born. There's also a number of technology incubators including Capital Factory, Tech Ranch Austin and the Austin Technology Incubator, part of the University of Texas’ IC2 Institute. Add to that more than 20 business associations, including Austin Technology Council and the Greater Austin Chamber of Commerce. “Getting to know the tech community and the organizations like Austin Tech Council, the Austin Chamber, it really made sense that Austin should be the home for our headquarters,”  MapMyFitness’ Callahan told me.

All that activity has led to a few notable successes. Under Armour recently acquired MapMyFitness for $150 million. Two Austin startups had successful initial public offerings recently, with Bazaarvoice raising $114 million in February 2012 and HomeAway’s offering raising $231 million in June 2011. Spiceworks just raised $50 million from Goldman Sachs in what will be their final funding round before the IT support company goes public in early 2015.

And the local economy has certainly benefited. The Austin-area economy surpassed the $100 billion mark for the first time in 2013, according to the U.S. Bureau of Economic Analysis. Approximately $21 billion of that came from the tech industry, according to the Austin Technology Council.

All the signs suggest that startups in Austin are soaring again. But it is not the high-flying, money-slinging atmosphere of the late 1990s. Austin has learned its lesson from the dot-com bust, and is poised to soar to even greater heights than before. 

(Note: This is part two of a two-part series on the Austin tech environment. Read part one here.)

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