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Summary:

I live in Texas, where during the tech bubble folks were walking around saying that it was nothing compared to the real estate crisis of the late 80s. So now seemed like a good time to chat with Austin Ventures, which has been investing in the […]

I live in Texas, where during the tech bubble folks were walking around saying that it was nothing compared to the real estate crisis of the late 80s. So now seemed like a good time to chat with Austin Ventures, which has been investing in the state since 1979 and announced two funds worth a total of $900 million in September, a few days after the markets started to collapse.

I spoke with general partner Chris Pacitti, who told me that once the firm, which has a reputation for being financially-oriented rather than operationally-oriented, saw the crunch coming it kicked its fundraising machine into high gear. Now Austin Ventures has $300 million for early-stage deals and $600 million for growth equity.

When it comes to recession or depression fears, Pacitti talked about the fine line entrepreneurs will have to walk between cutting spending to a point where they can last through a protracted downturn and shrinking to the point that they can’t compete once the dollars start flowing again. But he also said that this time around, many of the startups are well positioned to withstand a downturn, especially those with recurring revenue streams.

“We’ve seen this movie before, but this will be different than the last downturn,” Pacitti said. “The economy will be worse, but this is not a tech-led recession that we experienced before with lots of overfunded sectors and business models that didn’t work.”

In his mind, most of today’s startups (especially those at Austin Ventures, which didn’t make a lot of Web 2.0 and cleantech bets) have the type of subscription-based revenue streams that could see them through a protracted downturn. He also sees Texas faring a bit better than the California tech scene.

“There aren’t a lot of cleantech investments here that need a lot of capital, so that will be a net positive,” Pacitti said. “Basically those are large, capital-intensive science experiments that need a lot of project finance. That is very difficult sector to be in right now. We have a different mix here, and are focused on software and media plays.”

For those wondering how to achieve the fiscal discipline to hang on through the downturn, Pacitti put it simply, “This means the CFO is back in control.” For a venture firm that prides itself on financial acumen and strategies, that’s music to Austin Venture’s ears.

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By Stacey Higginbotham

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  1. …..”saw the crunch coming it kicked its fundraising machine into high gear. Now Austin Ventures has $300 million for early-stage deals and $600 million for growth equity”…..

    I’m sure Austin Venture’s Limited Partners must be thrilled to be reading this story. Just so I understand. These brilliant guys saw a financial crises coming and decided to rapidly close $900M even though they will most likely not be making many investments in the coming couple of years.

    $18M in yearly management fees. For what? WHAT A JOKE!!! This is why many people in USA are angry. For example, if I am a teacher in California working my ass off to just get by and you told me some of my retirement money is going to Austin Ventures knowing damm well they will most likely sit on the sidelines for the coming years while collecting $18M/Yearly for their few General Partners guess what my reaction is going to be….. WTF

    I will forward this wonderful post to the California Politicians as well as to CalPers and Calstrs. Thank you for the post.

  2. totally agree with Reckoning……..that is BS.

  3. You should not be angry at Austin Ventures – they don’t hold a gun to anyone’s head – but I would be asking the CTRF why the hell they are giving money to them in this market.

  4. Great catch Reckoning! I’m sure these guys and a lot of other vulture fund “salesmen” have convinced many to invest in whatever hot 15 minute of fame product/service offering is selling. 99% of the investors (sheep) are “pitched” into the next “new” thing. Let’s face it, just because people made mistakes investing in highly leveraged credit swaps does not mean that they are less susceptible to the sales pitch’s of the venture vultures.

  5. Stacey Higginbotham Saturday, October 11, 2008

    Guys, it’s better for entrepreneurs to have access to firms with capital who are ready to deploy it. Nowhere does it say AV is planning to sit on the money. Firms invest during downturns because there are fewer dollars chasing opportunities and valuations are lower. Obviously, they’re more risk-averse, but they’ll still invest.

  6. The upside of a busy VC is much more compelling to the partners then the 2% management fees. They are there to invest.

    And bare in mind the number of real inovations and great companies that were built in the slow years of 2001-2004 (did I mention Google?)

  7. “But he also said that this time around, many of the startups are well positioned to withstand a downturn, especially those with recurring revenue streams.”

    And where do those revenues come from?
    “We have a different mix here, and are focused on software and media plays.”We have a different mix here, and are focused on software and media plays.”

    Sounds a lot like wishful thinking to me.
    If times get tough, people stick with hat they know. Which favors incumbents instead of start ups, iff there is any investment at all.
    Ask the car companies how much money they have left to advertise in new media.

    I also read that Colorado will be better off, then the rest of the Country. Guess California thinks the same, in other words we all will feel the same pain.

    I’m for once with Michael Arrington:
    “Now can we please get back to work? There’s still a ton left to do before we get to Matrix-style virtual reality, the Singularity, and mobile phones with batteries that last a whole day.”
    http://www.techcrunch.com/2008/10/10/an-ignoble-but-much-needed-end-to-web-20/

  8. I put together a list of startups who don’t have the same … optimism … that you might.

    http://www.kyle-brady.com/2008/10/10/how-to-cut-your-startups-costs/

    It applies to Web 2.0 only, of course.

    –Kyle

  9. @Stacey
    I think everyone agrees with you that its better to have access to a firm with capital. However, that was also the case in the 2000 funds and they didn’t deploy crap.
    We have all seen this movie before. These GP’s will make millions per year just collecting mgnt fees at the expense of hardworking teachers, union workers, state workers…. frankly that’s BS. The VC model is broken and the next business cycle may finally take steps to fix it.

  10. Affordable Austin: No Longer a Tech Mecca Friday, June 19, 2009

    [...] flights to California being cut. The service provider community has shrunk and the city, which has historically been a one-VC city — doesn’t have access to a ton of smart capital. We do have a lot of educated, smart [...]

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