A Cold Stove in Texas
Can both of these statements be simultaneously true?
- Texas Technology companies are thriving (Investor’s Business Daily)
- Texas VC is in turmoil (also in Wall Street Journal)
This reminds me of a favorite story Trammell Crow used to tell about his partners from the 1970’s. They had been through some challenging market conditions, and escaped to fight another day. As market conditions improved, however, other developers were being more aggressive than the Crow Company. When they were together at a partner’s meeting, he told them a developer’s parable something like this: “You know, when a cat gets burned by a hot stove, he won’t go near a hot stove again. Problem is, he won’t go near a cold one either. The stove’s cold. We need to get moving.”
Today’s Cold Stove – Texas VC funding challenges - stem from the sins of the past: specifically, from the poor returns being generated from VC investments made in 2000-01. As a result, today’s good Texas technology companies have fewer opportunities to get locally funded than their counterparts on either coast, both in the amount of new investment dollars available and in the number of VC’s actively investing in new deals.
The first article above points out the degree to which the stove is cold, with tech companies growing and hiring employees. The second article points out the hangover of the “stove is still hot” mentality which has resulted in a consolidation of investment capital in Texas, giving fewer options for funding, which for Austin Ventures at least has not been a bad thing.
These two conditions can’t coexist forever. Two scenarios:
- If capital remains a constraint in funding business, growth companies and investment opportunities will move to where the money is. Or:
- If capital responds to the improved Texas investment climate, new investors will be rewarded with better valuations on the front end, generating solid returns, and beginning a cycle of increased capital availability in Texas.
-John Reed