My Austin VC Experience

Raising money is tough in Austin. Recently, it’s gotten tougher. A global economic slowdown, Brexit, and the changing landscape of Austin VC have all made it difficult to raise money. However, it’s always been difficult, but never impossible if you have the right business.

My first company, Phurnace, raised money in 2008 on the cusp of the Great Recession. Sequoia had already sent out the “Tombstone PowerPoint”. But, why was Phurnace able to raise money? What was so special about what Phurnace had done? Or, for that matter, my second company, Datical?

You should know that there is no Illuminati behind VC funding, no secret handshake. VC’s are absolutely coin-operated and only care about making money. (Of course, they will argue this point.) If you are not being successful in your fund raising efforts, the market is telling you that you are not an appealing investment. Only you can change that. Once you do, VCs will welcome your efforts. VCs absolutely must fund companies. That is their purpose in life and the only way they make money.

Two hunters were in the woods. They come across an enormous grizzly bear and one hunter begins to put on running shoes. The other runner says, “You’ll never outrun that bear if you stop to put on running shoes.” The first runner says, “I don’t have to outrun the bear, just have to outrun you.”

When you are raising money, your competition is other startups. What are you doing to make yourself more attractive to VCs? Are you faster than the other hunter?

Mercury Fund

Mercury was in my first company, Phurnace, and also my current, Datical. They were part of the convertible debt seed round and lead our Series A. (You can get the details on our funding rounds here.)

Mercury’s strategy is to be first money into a company and maintain enough “dry powder” for pro-rata. Their expectation is that for future rounds, you will go to another source for additional money and they will maintain their position.

Obviously, they want to see a compelling business model with a large and growing company. But, they are also interested in your ability to raise additional money. This is will be true for any small VC firm. Thus, as you begin to work with firms of this size, you must make certain they have LPs with deep pockets and/or affiliated larger firms. An example would be Silverton’s relationship with Floodgate.

Austin Ventures

My awe of Austin Ventures knows no bounds. The reason we have 20% of our workforce in technology in Austin can be attributed, in part, to Austin Ventures. I wanted them in Datical badly because of their track record and pattern recognition skills. Success breeds success.

Unfortunately, our timing was way off. Around the time we closed our Series A, Austin Ventures decided to not raise another fund. That meant our strategy to have them lead the Series B was not going to work.

Founders need to be aware of the inner workings of VC firms, just like they are aware of the inner workings of their customers. You’re selling! Just like a customer sales cycle, you need to make sure there is budget for the initial purchase and follow-on purchases.

Although they were unable to lead the Series B, they coached us through the process. You’ve heard the term “smart money” and that’s exactly what AV’s investment was. Also, they threw awesome parties.

S3 Ventures

S3 led our Series B (and was the largest investor in Phurnace). Their focus is on Series A, B and C companies and are always willing to look at other types of investments…if the fit is right. What S3 looks for is a compelling company and significant growth. Clearly Datical met their criteria.

S3 also looks at the management team and wants to see proven leadership. They don’t expect that from founders, but they want founders willing to bring in best leaders and position them to succeed. If not, you’re going to have a really hard time convincing them you are the right place to put their money.

Once S3 was on the Board, I saw the same behavior at both Phurnace and Datical: a desire to see repeatable success to continue growth. They wanted the management team to not only identify problems but also solutions. Don’t even consider sharing a concern without a plan to address it. Remember: you’re the manager, not the VC. That’s your job, founder.

Raising Money is a Means to an End

You must realize that once you close a round, you now have to execute. That shouldn’t be a problem as you just executed a round. Now, time to get to work and grow that business. You traded dilution for a chance to grow the company value. Now, go and get it done.