Why Austin Sits Atop the Next Wave of U.S. Startup Hubs

Austin’s reputation as a live music mecca and magnet for BBQ buffs may have put the Texas state capital on the map, but its status as a hub for high-tech startups will likely keep it there for years to come.

Thanks to a thriving ecosystem of entrepreneurs, incubators and investors, Austin continues to make headlines as a pro-business city in a pro-business state. Texas is one of only seven states with no individual income tax, and overall it has one of the lowest state and local tax burdens in the country.

“This place is like where Silicon Valley was in 1998,” says Andy Sernovitz, CEO ofSocialMedia.org. “Everywhere you turn, people are saying, ‘I think I’m moving to Austin.’”

Three years ago, Sernovitz was one of those people. He relocated his family and company from Chicago in search of a better quality of life and a more supportive startup culture. New York, Los Angeles and San Francisco were priced out, and contenders like Portland and Minneapolis lacked an established entrepreneurial scene.

Austin, on the other hand, checked every box.

“People who start companies get to pick where they work, which means they’re moving where they can live a good life,” Sernovitz explains. “And if you want to live in a nice house with good public schools, not pay state income taxes and be surrounded by tech-aware executives who love fitness, food and a great party, then Austin’s the place to be. When I go to my kid’s soccer game now, there are a dozen other entrepreneurs on the sidelines with me watching their kids.”

Austin’s densely populated downtown area has emerged in recent years as ground zero for the city’s startup community to live, work and play. And though it’s not immune to growing pains other booming metro areas grapple with – traffic and transportation topping the list – Austin has a far more manageable feel compared to its counterparts.

“It’s just easier here,” Sernovitz says. “And, as a result, there’s an associated psychological lift – and an extra layer of energy – that goes towards being successful.”

Working to Live

With a population of nearly 850,000, Austin is the country’s 13th largest city. It recently toppedForbes’ annual list of America’s Fastest Growing Cities for the third year in a row.

According to the Austin Technology Council, one-third of the city’s jobs are tech-related. Big-name companies like Apple, Google and Facebook have opened offices there in recent years, and many of the country’s biggest thinkers are migrating to the area to hatch their next ideas. In a rare show of bipartisanship, entrepreneurs from both coasts are equally enamored with the Central Texas metropolis.

Why? The as-advertised laid-back vibe and temperate climate are certainly part of the equation. But Austin’s crowning asset is its rich talent base of engineers, programmers, designers and marketers who want to work on a small team and make a big impact – many of whom funnel into the local job market from the University of Texas and other nearby schools.

The city is also teeming with seasoned veterans. Several top Austin entrepreneurs worked at bigger companies in the area before branching off to start their own firms or take senior roles at fast-growing startups. As a result, the city’s crop of entrepreneurs skews a bit older and more experienced compared to, say, the dot-com boom of the ‘90s, when 20-somethings launched companies from their dorm rooms.

“We’re the same people, just 20 years smarter,” Sernovitz says. “Instead of kids doing this for first time, we’re doing it for the fourth and fifth time.”

Take Sam Decker, for example. Like many Austin-based entrepreneurs, he moved from the Bay Area, taking a job at Dell in 1999. He went on to found Bazaarvoice and, most recently,Mass Relevance. He claims Austin’s balance of startup intensity and a family-friendly lifestyle gives it an edge over other cities.

“Austin has an appreciation for working to live, not living to work,” he explains. “And that was important for my family and me.”

A Nurturing Community

Ask just about anyone in Austin’s entrepreneurial community, and they’ll tell you it’s more inclusive and inviting than other tech hubs. The cycle of giving and pay-it-forward mentality here are pervasive says Scott Robinson, who chairs the Austin chapter of the Startup America Partnership, a network dedicated to helping young companies grow and building entrepreneurial communities.

Capital Factory

Austin’s diverse entrepreneurial ecosystem.

“There’s a selflessness and a willingness here of anyone to help anyone else however they can – regardless of what they get out of it,” Robinson says. “Because when they win, Austin wins. When you do that, you can save an entrepreneur serious time, energy and money to leapfrog their vision.”

This spirit of all-boats-will-rise camaraderie breeds loyalty. The average tenure of startup talent is longer in Austin compared to other major cities, Decker suggests, thanks to a lack of what he describes as an ecochamber-like environment found New York and San Francisco – where startups compete with other startups, regardless of industry.

“In Austin, you don’t have as much of that,” he adds. “There’s more of a community feel … a focus on the customer and on building a company people want to be a part of. It’s culturally normal to help each other here.”

Center of Gravity

Associations and networking organizations – plus marquee events like the annual South by Southwest Interactive Festival and the RISE (Relationship & Information Series for Entrepreneurs) conference –contribute to Austin’s collaborative culture. Nowhere is this ethos more on display than at Capital Factory, a startup accelerator and co-working space focused on helping young companies take off.

Currently, about 250 entrepreneurs representing 100 startups are headquartered in a 20,000-sq. ft. space overlooking downtown Austin. President Obama recently toured the facility – which was modeled after similar accelerators like Y Combinator and TechStars – as part of his Jobs and Opportunity Tour.

“We’re the center of gravity of startup stuff happening in Austin,” says Joshua Baer, Capital Factory’s managing director. “Every night of the week, a couple hundred engineers and programmers are here for meet-ups, events and hack-a-thons, and investors and press are coming through all the time. All of this creates a melting pot of ‘startup goo’ that makes good things happen.”

Baer moved to Austin in 1999 at the height of the dot-com boom. After launching his first company, SKYLIST, in college and later selling it, he started angel investing and quickly understood the value of mentoring and networking. In 2009, he teamed up with Decker and other investors to found Capital Factory.

“I realized I wanted to be working and investing with other like-minded people,” Baer recalls. “And we wanted to do more than just invest. We wanted to spend time with companies, work with them and help them grow.”

Capital Factory pairs first-time entrepreneurs with serial entrepreneurs and angel investors who have founded successful companies and are eager to share what they’ve learned – and who they know – with the next generation.

Alex Smith, Capital Factory

President Obama speaks to entrepreneurs at Capital Factory during a recent stop on his Jobs and Opportunity tour.

“We’re not taking anyone who wouldn’t be successful and making them successful,” Baer insists. “These are smart, talented and driven people who work hard. What we do is help make them more successful faster through introductions to customers, partners and talent.”

Capital Factory’s 30 mentors have built large companies and created more than 10,000 total jobs in Austin. Now they spend a significant amount of their time and money helping seed-stage entrepreneurs – most while still running their own companies.

“Having a great mentor with relationships and contacts can be pretty critical to a small company, and working with someone who has walked in your shoes can save a lot of time,” Baer adds.

Startup incubators and accelerators have been part of the city’s entrepreneurial fabric since 1989, when the Austin Technology Incubator (ATI) was founded as the commercialization arm of the University of Texas. ATI incubates wireless, IT, biotechnology and clean energy companies for 12 to 18 months.

“We put a business wrapper around technologies startups bring to us by helping them hone their strategy and direction, circling them with mentors, and polishing their pitch so they can get funding from the sources we think are best for them,” says Mitch Jacobson, co-director of ATI’s clean energy incubator.

To date, ATI has worked with 200-plus companies, helping them raise more than $1 billion in seed funding from venture capital firms and angel investors. Its nonprofit status and nearly 25-year track record set it apart from other incubators, says Jacobson, a former Dell executive.

“’We get you funded’ is our tagline,” says Jacobson. “In the last five years, 85 percent of the companies to come through our program have gotten funded.”

For every dollar Austin puts into ATI, 72 are pumped back into the local economy, he adds, “providing an incentive for other entrepreneurs to go and invest in new stuff and to be successful.”

Fueling the Pipeline

Baer also co-teaches the Longhorn Startup program at the University of Texas, a practicum for students to earn course credit as the build their companies with support from Austin’s entrepreneurial community. “Our goal is to see great companies come out of this,” he says of the program, which just wrapped up its fourth semester.

Texas Venture Labs

The Jon Brumley Texas Venture Labs at UT’s McCombs School of Business transforms students into future entrepreneurs and helps startups raise capital.

Another accelerator-like program at UT’s McCombs School of Business – Jon Brumley Texas Venture Labs – transforms students into future entrepreneurs and helps startups raise capital. Between 40% and 50% of the student-run companies the program works with get funded.

“We offer entrepreneurs a quicker and more effective route to bring their innovations to market,” explains Rob Adams, director of Texas Venture Labs. “We don’t give out money or even know if the answer will be yes or no, but we get companies an investment answer more quickly than they could get on their own.”

Such programs are needed to help educate first-time entrepreneurs on how to secure seed capital – $250,000 to $1 million – which is widely considered to be the hardest round of funding to raise.

“The chasm between entrepreneurs and capital in Austin is early-stage funding,” says Robinson. “We need to do a better job of mentoring first-time entrepreneurs on effective fundraising strategies. And on the other side of the table, we need greater risk tolerance from the angel investor community.”