Two years ago, Venu Shamapant, Krishna Srinivasan, and Ben Scott, all veteran venture capitalists in Austin, decided to follow their own entrepreneurial path and launch a new VC firm.
“It was absolutely the hardest environment to raise a fund in,” Shamapant says. “People were running away from non-liquid asset classes post-bubble. That, coupled with a preference for staying with existing relationships, meant there were very few spots for anyone else.”
But the three, who each had at least a decade of experience as partners at granddaddy VC shop Austin Ventures, continued to court investors. Their new firm, LiveOak Venture Partners, announced its first fund of $100 million in December, focusing on tech startups in Texas and the Southwest.
Srinivasan says the trio succeeded because of what they believe is a fundamental truth of the Texas venture capital scene: its startups are starved for investment.
“On one side you see an incredible amount of technology, talent, and very strong research at the universities,” he says. “But yet, the amount of venture capital available here for the local market is so small. This made it so obvious that there was an incredible mismatch between amount of opportunity versus the amount of available capital.”
LiveOak has invested in five startups so far, including a $2 million allocation last week to Houston-based CS Disco, a legal IT company that sells software to make the discovery process more efficient. Other investments include Written, a content marketing company, and Veros System, an asset monitoring company.
Word of LiveOak’s first investment came out as a slew of other investments in Texas startups have been announced in recent weeks, including startups in Houston and Austin seeking to innovate in sectors ranging from edtech to e-retail.
In the fourth quarter, venture capital investment in Texas hit $448 million, up from $205 million a year earlier, according to the latest MoneyTree report. For the year, total investment hit $1.3 billion, up from $949 billion in 2012.
“Being on the ground for the past seven years in Austin and having also invested in Silicon Valley, I would say the Texas market is as strong as I’ve ever seen it,” says Morgan Flager, general partner at Silverton Partners in Austin. “Texas is an up-and-coming market that [limited partners] want exposure to.”
LiveOak joins other Austin-based VC funds with ready capital targeting Texas tech startups, including Flager’s Silverton Partners which announced its new $75 million fund in November. S3 Ventures, another Austin VC group, raised a $75 million fund in May, making it the first Texas-based tech fund to raise a pool of investment cash in two years.
Brian Smith, S3’s managing director and co-founder, says the maturing of Texas’ tech community combined with the brain gain from millions of new migrants to the state in the last decade creates a fertile environment for investors. “The prognosis is for good investments in Texas,” he says. “Existing firms are making more investments in Texas. I’m not sure there will be a big growth in number of firms, but we do see improved health and more capital in existing firms.”
Venture, he added, is “a zip code business.”
Flager agrees. “Developing close relationships with the teams, knowing the local talent pool for recruiting, and being able to make local connections with advisors and business partners are all critical for the success of early stage companies, and they are much harder to do at a distance,” he says.
And, in addition to the new funds, some firms are also expanding their operations in the state.
For example, in September, Austin Ventures announced that Rick Pleczko, the CEO and founder of Idera, would become its Houston-based entrepreneur-in-residence scouting for opportunities in the Bayou City. And, two months later, the Big Four’s KPMG created an investment arm, KPMG Capital, to invest in big data and analytics startups. While the arm is officially based in London, it’s headed by Mark Toon, a Houston entrepreneur who is now in charge of the firm’s data and analytics practice, for which he maintains a team locally.
Having more venture capitalists set up shop in Texas is good news for the state’s entrepreneurial ecosystem, which has had to contend with a diminished local investment sector since the tech boom collapsed in 2001. LiveOak’s partners feel that their on-the-ground perspective enables them to better assess the unique opportunities here, ones that can be overlooked in the drumbeat of hype that follows each move in Silicon Valley.
LiveOak says its local focus enables it to spot micro-opportunities that can sometimes be missed by bigger firms. “Dallas is definitely overlooked because there are not many local VCs there,” Srinivasan says. “There’s good engineering talent there, people who know how to build products and provide them to enterprises.”
Texas is a market the men know well. Both engineers, they came to the University of Texas at Austin for their master’s degrees. Each left for a few years to earn Ivy League MBAs but returned around 2000, convinced of the opportunities in Texas. “The adrenaline of being around supremely smart guys solving problems that haven’t been solved before makes this a phenomenal field,” Shamapant says.
Srinivasan says that the experience of setting up Live Oak’s fund during the most challenging economic circumstances in decades has made him and his partners better entrepreneurs. “It taught us some valuable lessons,” he says. “We now have greater empathy for the entrepreneur that comes to meet with us. This is making us better venture capitalists.”
