Will dollars keep pouring in for Austin startups in 2023? What we know
Venture capital investment matters to the Central Texas economy because it allows businesses — both startups and later-stage companies — to create jobs.
But with economic uncertainty looming, the question is: What level of investment dollars will we see flow into Austin in 2023, and how will that impact the area’s startup ecosystem?
First, the good signs
Despite an overall slowdown in U.S. venture capital funding last year, Austin startups actually fared pretty well, scoring the second-highest amount of dollars in history.
Austin-based early stage companies raised $5 billion in funding in 2022, which is down slightly from the record-setting $5.4 billion that startups received in 2021, according to a new report by the Austin Chamber of Commerce and Opportunity Austin, in partnership with startup analytics firm Dealroom.co.
“The Austin region is home to a vibrant tech ecosystem, with a large cohort of rising stars and more than 25 unicorns (companies with a $1 billion-plus valuation) born across the region,” said Roland Peña, senior vice president for global technology and innovation for the Austin Chamber and Opportunity Austin.
Those numbers would seem to paint a good picture heading into 2023, but with the national economy on shaky footing, many VC investors are likely to be even more cautious than usual in the coming days.
More:Austin sees drop in venture capital dollars as worries about economy grow
Trying to avoid risk
While investors have “plenty of dry powder,” investors will likely remain risk-averse due to apprehension over a possible recession, Peña said. “In just the first 10 days of 2023, we’ve seen fewer deals which reflects a trend that is continuing from the last two months of 2022,” he said. “This will make it more challenging for startups to raise capital.”
David Steakley of Texas HALO Fund, which has backed a number of Austin startups including motorcycle rental platform Riders Share, shared a similar sentiment. Even though investors have plenty of cash to invest, the current economic landscape has many sitting on the sidelines, he said.
“They’re saying ‘we’re conserving our cash to help defend our most promising companies, and we’re resigned to the fact that some of our companies are not going to make it,” Steakley said.
That also means some early-stage companies trying to raise money for the first time aren’t going to find it as easy to do so.
“It’s going to be a harsh winter for a lot of companies. If you need to raise funds now and you don’t have it lined up, you are in danger,” Steakley said.
Steakley said he expects an economic downturn this year, and that will have ripple effects. “A recession will probably mean that the performance of the stock market is poor in 2023, and, oddly, while it really shouldn’t be, VC activity is seemingly pretty correlated with the stock market these days.”
More:Elon Musk’s Boring Co. raises a giant pile of cash. What might it do with it?
Still reasons for optimism
Despite those concerns, both Steakley and Peña say they think the Austin area is positioned to ride out the challenging times better than most regional U.S. economies.
“It is important to note that Central Texas has a much more robust economy since the last recession in 2007,” Peña said. “We’ve become more diversified, and our startup ecosystem has become more resilient with the rise of new industry sectors and strategic assets (such as) investors, capital, innovation, and talent.”
Steakley said he is also optimistic about what the future holds for several industries, including business-to-business software, where Austin has a deep base of talent and history of success.
“Texas VCs that I am familiar with are strongly focused on (business-to-business) software companies, and I don’t see that changing any time soon,” he said. “These kinds of companies are well positioned to maintain their revenues even in the face of a recession because they typically enter into long-term contracts with their customers, and, absent the customer literally going out of business, customers may not really have the option to stop using software that’s absolutely critical to their operations. “
He also sees promise in startups developing Internet of Things technology. IoT is an industry term that refers to non-computing devices, such as appliances, that are connected to the Internet.
“IoT companies had a pretty tough ride during the pandemic because of supply chain issues, especially supply of computer chips. But those problems are easing, and these kinds of offerings appeal to customers who are trying to cut costs,” he said.
There is also opportunity in life science startups, Steakley said. “These companies also had a tough pandemic, because it was virtually impossible to make progress on clinical trials. So, I think there’s more timely and well valued life science deals right now than there would normally be.”
More:Will pain in tech, housing industries slow Austin’s economy in 2023?
Big deals, growing valuations
Here are some additional takeaways from the chamber’s report on VC funding:
- Austin-based startups are now worth more than $128 billion, an all-time high, with a diversified group of industry sectors receiving 321 funding rounds in 2022.
- The sectors leading the way in 2022 were transportation and real estate startups, with each raising $1.8 billion in capital.
- The report provides some historical insights as well: Over the past five years, startups in four industry sectors have led the way in total venture capital investments. They are health, with 13.1%; property tech, with 12.5%, financial tech with 12% and transportation with 12%.
- About $1.7 billion, or a third of the 2022 total, was raised across five large deals. The largest recipient by far was the Boring Company, Elon Musk’s tunneling and infrastructure operation. In April, the company raised a whopping $675 million, which is the biggest round ever raised by a company based in the Austin metro area. The Boring Co.’s headquarters is in Pflugerville.
- Rounding out the top five 2022 deals were renewable energy company EnergyX, which received a $450 million funding commitment; parking tech firm FlashParking, which took in $250 million; 3D-printed home maker Icon Technology, which raised $185 million and telehealth startup Wheel, which brought in $150 million.
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