Austin Ventures changes its playbook - Sent Using Google Toolbar

Austin Ventures changes its playbook

By Lori Hawkins
Sunday, October 21, 2007

Five years ago, Austin Ventures general partner Ken DeAngelis sized up the California venture capital firms that had swarmed into town and made a prediction: "We're the battleship with a lot of other speedboats around nipping at us. But when the storms clear and the sun comes out, they'll be gone and we'll still be standing."

DeAngelis called it right. More than a dozen local and out-of-state venture firms have since closed shop in Austin, and AV has remained the region's leading source of money for new tech companies.

But the firm is operating in a much different era: Gone, for now, are the eye-popping amounts of money it returned to its investors in the 1980s and 1990s.

Today, there is far more competition among deal makers, from a range of sources, including traditional venture capitalists and a new wave of private equity firms flush with cash.

Some venture firms have just given up. Veteran Sevin Rosen Funds says the industry's model is broken, with too much money competing for too few quality deals, and profits too low to justify staying in the game.

How well Austin Ventures navigates the rougher waters will have an impact here.

Unlike Silicon Valley, Austin does not have a raft of venture capitalists to back new companies. Except for a few very small firms, AV is the only game in town. Over its 29 years, it has invested almost $1.3 billion in Central Texas companies and helped establish Austin as a high-tech center. It has groomed young CEOs, helped companies move from startup stage to stock offering, and created jobs and wealth.

John Thornton, one of AV's seven general partners, says the venture capital business isn't broken, just "temporarily unprofitable."

He adds, "You can either pick up your toys and go home or you can say, 'How can we go where other people aren't going?' "

For AV, that means wading into deeper private equity waters. The firm is buying established companies, building up consumer and media concerns, and combining small companies to create market leaders.

AV is also sending two companies it partly owns — Convio Inc. and CreditCards.com —into the initial public offering market, banking that investors will snap up their shares and help boost returns for AV.

The firm is entering new markets as well. It recently spun out Sante Health Ventures, a $100 million fund that will focus on early-stage investments in the health care industry. AV will co-invest with Sante.

At the same time, AV continues to put money into high-tech upstarts, which have been the source of its biggest financial home runs and the reason for its reputation as a top industry deal maker. Its winners include software firms Tivoli Systems and Vignette Corp., chip maker Silicon Laboratories and Dallas-based Medi-solve Inc.

Eleven of the 18 investments made from its current $525 million fund, raised in 2005, have been in early-stage companies.

"It's unusual to see a firm AV's size doing such a wide range of deals, because it's very hard to pull off," says Kirk Walden of Austin-based Walden Consulting, which advises startups and venture firms.

"It's too early to know whether it will be successful. But what they're saying is: 'We're not quitting. We're going to find a way to make this work.' "

Tech-bust woes linger

Austin Ventures has raised nine funds since 1984, drawing money from pension funds and other big institutions and investing it over time in promising companies. AV charges a management fee and gets a healthy cut of the profits as companies are sold or go public.

The stellar returns from its fourth and fifth funds, raised in 1994 and 1996, put it on the venture map as a top-tier firm.

But venture funds invested during the Internet boom into failed dot-coms are awash in red ink. AV's 1999 and 2000 funds are no exception.

"We're struggling to get capital back on the '99 fund," Thornton said. "But we believe the 2000 fund is going to make money."

One AV investor, the University of Texas Investment Management Co., says it's willing to be patient. UTIMCO manages $22 billion in endowments for UT and the Texas A&M systems and other state entities.

It scored big by investing in AV's first two funds. The first delivered a 73 percent return — almost $8 for every dollar invested. The national average for funds started that year was 21 percent, according to Thomson Venture Economics.

UTIMCO hit the jackpot again with Austin Venture's next fund, which recorded a 38 percent return.

UTIMCO invested $40.2 million in the 1999 and 2000 funds and to date has received $16 million back.

The remaining value of UTIMCO's stake in those two funds is estimated at $14 million, meaning UTIMCO might be lucky to come out even.

Bruce Zimmerman, UTIMCO's chief executive, said the endowment is a patient investor.

"Like any long-term relationship, you have your good days and your bad days," he says. "But clearly there have been enough good days — and they've been really good — that we continue to value our long-term relationship."

Because it can take more than a decade to see rewards from a fund, it's far too early to place bets on AV's two most recent funds, raised in 2001 and 2005.

'In the cool startups'

Austin Ventures' sleek offices on the top floor of a downtown office towerare buzzing again.

Instead of waiting for deals to come in, Thornton says, AV is coming up with ideas and then finding the players to make them happen.

"The vision of a venture firm is this court where eight guys sit in a row and a bunch of people parade by with ideas and they vote yes, no, yes, no," Thornton says.

"What we're doing is the antithesis of that. We've got the resources to go out and dig our own holes and build our own fence. It's hard work, and it is very time-consuming, but the idea of creating opportunities where they weren't — putting companies together or injecting fresh management into existing ones — is where we'll set ourselves apart."

HomeAway.com is one example.

AV tapped Brian Sharples, an entrepreneur the company had worked with before, gave him seed money and told him to start a company.

The idea Sharples landed on was buying up Web sites for renting vacation homes and combining them under one banner.

Last year, the company raised $160 million in financial backing, the largest single private equity investment ever in an Austin company. It bought its biggest rival and has acquired a dozen other vacation rental Web sites.

AV is also making new investments with its Sante spinout, including a $16 million venture investment in Austin-based Spinal Restoration, which is developing technology for treating lower back pain.

Meanwhile, AV continues to bet on the "two guys and a dog" strategy, providing seed money to startups with little more than an idea.

It recently led an $8.2 million investment in Black Sand Technologies, a 12-person Austin startup that is developing chips for cell phones.

"You always hear how AV doesn't do early-stage investing anymore," says Mike Maples Jr., a former Austin software entrepreneur who now runs Maples Investments in Silicon Valley.

"But from what I see, every promising seed-stage startup that they come across, they fund. If you ask me to make a list of the cool startups in Austin — Bazaarvoice, Spiceworks, SailPoint — AV is in them."

lhawkins@statesman.com, 912-5955

Austin Ventures, by the numbers

$1.93 billion: Amount invested in Texas companies since inception

$1.25 billion: Amount invested in Austin-based companies

227: Number of Texas companies AV has invested in

161: Number of Austin companies

42,000-plus: Texas jobs created by AV-backed companies

14,500: Austin jobs created

$3 billion: Total amount under management

$525 million: Total of most recent fund, its ninth, raised in 2005. AV has invested

45 percent of the money in 18 deals.

The strategies


AV invests anywhere between a few hundred thousand to several million dollars in young companies. In some cases, it serves as an incubator. That was the case with Black Sand Technologies, which was started by entrepreneurs working out of AV office space. The chip design firm was founded primarily by veterans of Silicon Laboratories Inc., one of AV's most successful Austin investments to date.

Buy and build

AV invests up to $50 million to buy companies in high-growth areas. In 2006, it combined several vacation home rental Web sites into Homeaway.com, seeking to dominate the online vacation rental business. Last year, HomeAway raised $160 million from AV and other investors to make more acquisitions.

New arenas

AV recently spun out a new $100 million fund, Sante Health Ventures, which will focus on early-stage investments in the health care industry. In Austin, LDR Spine and Spinal Restoration are two recent investments.