FROM TEXAS ENTREPRENEUR NETWORKS 32011 THE TEXAS ENTREPRENEUR NETWORKS STARTUP EQUITY CAPITAL REPORT FOR EARLY STAGE COMPANIES
The following report represents the total equity investments made into Texas start up and early stage companies for the third quarter of 2011. In total, venture capitalists and angel investors invested $817.59 million across the following sectors: Biotechnology, CleanTech, Computer, Consumer Products, Digital Media, Financial, Healthcare, Information Technology, Other Technology, Media, Restaurants, and Telecommunications. Out of the five regions of Texas (North, Central, South, Gulf Coast and West), North Texas gained over half of the investment for the state at $480.68 million. Central Texas was second with $280.40 million. The state of Texas started 2011 with just under 500,000 business entities. In each quarter, the state grew the number of new filings by approximately 5% (24,000 new entities). The following major trends can be seen in start up investment: Capital efficient deals are getting funded, with little to no seed stage money for first-time investors. Entrepreneurs must demonstrate a business model that can acquire customers at a low cost and scale the business with few additional capital raises. The number of deals are increasing, but the amount into each deal is decreasing. One of the main contributors of this is a lower barrier to entry in building viable startup companies. Valuations are holding steady. Since valuations have recovered to their 2008 pre-crash levels, valuations have held steady with with no upward movement in the past year. Syndication is occurring with all investors types and is not limited to groups with similar structures. Venture capital/family Funds continue to move to later stage deals, as the VC community is approximately 1/4 of the size it was ten years ago. Accelerator models are on the rise. Microfunding through mentorship programs are growing dramatically around the country and in Texas. Sectors: Cloud software, social media, healthcare IT, mobile devices are seeing seeing a strong surge in growth. Medical devices and consumer products are holding steady while CleanTech is down due to the high cost of follow-on funding. Royalty-based funding is increasing among traditional angel investors allowing faster paybacks and shorter exit cycles. Crowdsource funding is increasing as the amount of funding needed drops and the number of deals increases. Angel Groups are moving towards open formats with accessibility of internet platforms such as AngelList.com Disclaimer: The following report focuses on capital invested in start up and early stage companies throughout the state of Texas and does not include equity investments made in the areas of Oil & Gas, Real Estate, or Banking/ Finance. Numbers for those sectors are included in the full spreadsheet available through the Texas Entrepreneur Networks.
FUNDED COMPANIES BY SECTOR By Sector Biotechnology (Medical devices, pharmaceuticals, orthopedics) $382.15 M across 16 deals Clean Tech (alternative energy) $123.78M across 6 deals Computer (hardware components) $10M 1 deal Consumer Products (food and beverage, health and wellness, retail) $6.9M 4 deals Digital Media (mobile apps, social networking software, web offerings, e-commerce ) $57.13M 21 deals Financial (Financial products) $2.85M 2 deals Health care (urgent care centers, physician services, provider based) $25.63 13 deals Information Technology (cloud based computing, Internet networking applications, security) $48M 10 deals Media (book publishing, magazines, film and entertainment) $7.32M 4 deals Other $10.38 3 deals Other Technology (misc) $48.34M 4 deals Restaurants (hospitality) $22.53 across 4 deals Telecommunications (networking, wireless, telecom hardware and software) $62.73 6 deals 16 94
FUNDED COMPANIES BY SECTOR
FUNDED COMPANIES BY SECTOR
FUNDED COMPANIES BY SECTOR
FUNDED COMPANIES BY TEXAS REGION
FUNDED COMPANIES BY TEXAS REGION
FUNDED COMPANIES BY TEXAS REGION
TEXAS BUSINESS FILINGS The state of Texas started 2011 with just under 500,000 business entities. In each quarter, the state grew the number of new filings by approximately 5% or 24,000 new entities. The regional breakdown of new entity filings is as follows and has remained the same throughout the 2011 year. North Texas: 8767, 36% Gulf Coast: 6626, 28% Central Texas: 4411, 18% South Texas: 3035, 12% West Texas: 1218, 5% Total 24,059 100% This will give the state 100,000 new entities in 2011. The filings include all LLC, LLP, LP, Foreign LLC, and Foreign LP entities. Dissolved entities are not included in this count.
TEXAS START UP INVESMENT TRENDS The following major trends can be seen in startup investment. 1. What is getting funded? Capital efficient deals. Those who can accomplish the most with the least amount of capital receive preference from investors. First time entrepreneurs need to develop a product and go to market to generate product and market validation.there is little seed stage money for first timers. Entrepreneurs must demonstrate a business model that can acquire customers at a low cost and scale the business with few additional capital raises. 2. The number of deals increases but at lower raises. Angel investing continues to evolve with the market. One of the trends seen in the market today is the increase in the number of angel deals while the dollar investment in each deal has dropped. This is due to several factors. The cost of starting a business has dropped dramatically over the last ten years. In the 1990s, entrepreneurs asked for $5M to start a web company. Back then, they had to build their own server systems and buy all the computer equipment. In the post millennium those starting a web-based business asked for $500K because they could rent the equipment and buy time and space on a server farm already in place. In the post 2010 era, the raise continues to drop. It s not uncommon for some startups to use that level of funding to start their business and gain traction. Also, there are more companies raising funding to start their business so the competition for the investment dollar is greater. Finally, the contraction in the financial markets starting in 2008 and 2009 has squeezed down the availability of credit making it more difficult to find capital. This trend can also be seen in survey numbers. According to Jeffrey Sohl of the University of New Hampshire s Center for Venture Research in 2005 the average angel deal size was $523K. By 2010 that number had shrunk to $325K. The number of deals done in 2005 was 49,000 which grew to over 61,000 in 2010. http://wsbe.unh.edu/sites/default/files/q1q2_2011_analysis_report.pdf 3. Valuations are holding steady. The financial meltdown of 2008-2009 saw the markets cut in half. Valuations in startups followed the same path and fell by up to 50% in some cases. Investors in that time frame often cut the proposed valuation in half. Since then valuations have recovered to their 2008 pre-crash levels and have held steady with no move upward for the past year. 4. Syndication with all investor types and not just angel investors. Previously, angel investors only syndicated deals with other angel groups of the same structure, but the trend today is toward syndication with any investor of any type. Entrepreneurs piece together a funding deal from numerous angel groups, early stage VCs, family funds, and individual investors not attached to angel groups. 5. Venture Capital/Family Funds continues its move to later stage deals. The VC community is about one fourth what it was ten years ago and have moved away from early stage startups to later stage deals. Family funds also look warily at the early stage startup and typically wait for more progress.
TEXAS START UP INVESMENT TRENDS 6. Accelerator models are on the rise. Microfunding through mentorship programs are growing dramatically around the country. The Techstars/ YCombinator model of 20 mentors coming together to fund and mentor a handful of companies continues to grow. The typical mentor invests $5K for a small piece of equity and collectively brings critical mass of expertise to five startups. This spreads the mentorship work across several in a peer group and increases the chance of success by engaging several startups at a time. 7. Sectors Cloud software, social media, healthcare IT, mobile devices are seeing a strong surge in growth. Medical devices and consumer products are holding steady while cleantech is down due to the high cost of follow on funding. 8. Crowdsource funding is increasing. As the amount of the funding raise drops and the number of deals increases many entrepreneurs are turning to the web to crowdsource investors for their deal. Websites such as Prosper.com, Microventures.com, Peerbackers.com, Indie-gogo.com, Kickstarter.com, and Rockethub.com cater to those using the web to find investors and make connections. 9. Royalty-based funding is increasing among traditional angel investors. Angel investors tired of waiting seven to nine years for an exit are seeking faster payback times and are turning to investing cash in return for a percent of the revenue rather than equity. It is also called revenue-based funding. This applies to deals with a predictable revenue stream and a steady growth model. 10. Angel groups are moving to open formats. With the growing availability of the internet and the reduced barriers to entry to startup a company, angel groups are moving to open formats as seen by the number of websites such as AngelList (http://angel.co/). The primary software platform used by angel groups is Angelsoft which recently upgraded its platform and renamed itself to Gust (http://www.gust.com/) to reposition itself to take advantage of this trend. Angel investors list their criteria and experience on an open website and invite entrepreneurs to submit deals for review. The investor follows up with the deals that are of interest.
TEXAS STARTUP INVESTMENT FORECAST 1. Investors -- there will be an increase in out of state investors in Texas. With the growth of the Texas economy, more investors outside of Texas will start to fund Texas-based deals. There is a growing number of out of state investors in the deal rooms especially from the Midwest and east coast. 2. Valuations -- there will be a small increase in valuations in the coming six months in particular for Cloudbased startups and mobile applications. The other sectors will remain the same. 3. Deal flow -- there will be an increasing number of out of state deals seeking funding in Texas. There will be more startups moving to Texas to take advantage of the low cost business climate and the availability of funding. Funding forums and pitch sessions with increase in number throughout the state in 2012. 4. Exits -- there will be a shift to exiting early by selling the company in rollups rather than waiting for the company to be acquired by a large purchaser. Startups with an exit in three years or less will become more prevalent due to the high cost of capital required to expand further.
APPENDIX - BUSINESS FILINGS
REFERENCES University of New Hampshire Center for Venture Research Report http://wsbe.unh.edu/sites/default/files/q1q2_2011_analysis_report.pdf Angelinvestmentnetwork.net http://www.angelinvestmentnetwork.net/2011-11/angel-investment-network%e2%80%99sweekly-twitter-roundup-27 AOEF.org http://aoef.org/articles/jef_200608_v11_i02_p27.pdf Form Ds website: http://www.formds.com/filings/newest http://www.investorscopes.com/