The last three years have seen more movement in the ecommerce funding landscape than in the previous decade. This is worth understanding before drawing hasty conclusions about how the Austin capital markets work.
For years the Austin venture ecosystem was software dominated. Investors were accustomed to evaluating metrics and frameworks associated with software, i.e. recurring revenue models and high gross margins. Ecommerce, and CPG brands in particular, typically have marketing costs, thin gross margins, and require investment to carry inventory. This did not jive with the investment frameworks of most Austin VCs. Consequently, founders raising capital to ecommerce scale their businesses were often told to look to LA and NY where investors focused on Direct To Consumer (DTC) businesses were based.
While that is mostly still the case, this is shifting.
There has been a massive movement of people and capital to Austin in the past couple of years. Many family offices have moved to Austin as well and brought with them mandates focused on consumer brands and ecommerce. A growing number of founders who have built and exited DTC brands are located in Austin. A handful of consumer focused VCs have moved to Austin as well.
Austin, Texas has historically been a software funding ecosystem. For decades, Austin has been home to a thriving software development ecosystem. Talent that moved to Austin in the past couple of years have brought experience building consumer brands and ecommerce companies. With a growing number of domestic investors focused on consumer and ecommerce brands, we are beginning to see a divergence from Austin's software funding tradition.
In Austin, Texas, specifically, revenue-based financing has grown in relevance for ecommerce scaling brands, because in many cases, it aligns better with the capital structure of a growing ecommerce business than a traditional equity round. Brands can maintain equity while being supported by financers for inventory and marketing. Revenue-based financing focuses on a brands growth metrics. Providers have supported ecommerce brands located in Austin and are a viable funding option for growth.
Fundraising in Texas is different from other states. In Texas, there is less of a focus on the narrative of a business and more of a focus on numbers and metrics. This makes it even more important for a business to have strong and supportive numbers. A strong narrative can help a business in fundraising efforts, however this is not the focus in the same way that it is in other areas, like the coasts.
In Texas, to be successful in fundraising efforts, ecommerce scaling brands must have robust numbers and strong unit economics, customer acquisition costs, and lifetime value. Knowing detailed metrics and customer retention rates can be crucial in helping to demonstrate a brand’s effectiveness in conversion and support a growth narrative to funding sources.
The consumer brand and retail legacy of Texas gives investors experience analyzing the space, and makes raising capital easier. Compared to pure tech markets, Texas has a strong legacy of producing successful consumer brands. Texas investors understand brand building, the retail and distribution landscape, as well as consumer behavior and how to apply that knowledge to grow ecommerce brands. Sometimes framing ecommerce brands in terms that relate to the consumer and retail brand legacy of Texas is a better way to position the investment thesis with Texas investors as opposed to telling a traditional DTC story.
In the last few years there have been specific consumer and ecommerce focused accelerators and incubators launched in Austin. These programs are in addition to the many traditional tech focused programs. Some of the newer programs focus on physical product and ecommerce brands. These programs can provide companies with operational support and mentorship in addition to capital.
Angel networks in Austin have become more category-inclusive. The Austin Angel Network, and a handful of informal groups of angel investors, have included consumer brand and ecommerce investments in recent years. As a result, founders who have built successful ecommerce businesses in Austin have become angel investors and brought their domain expertise to the network. Austin Angel Networks, and other informal groups, are often the first sources of capital to early-stage startups in ways that institutional capital is not. The operational experience brought by angels is valuable beyond the capital.
Raising capital is one of the biggest challenges for the ecommerce scaling Austin Texas brands. Strategic capital, which is sponsored by Texas-based retail, consumer goods, logistics and technology corporations, is an underexplored opportunity for many brands. Funds sponsored by Texas based corporations have the added advantage of access to capital, distribution, and operational integration that strictly financial investors do not offer.
Raising capital for ecommerce scaling Austin Texas businesses is not without its challenges. Skepticism, primarily by software investors, remains about funding consumer brand investments. The Austin ecommerce capital market is smaller than New York and Los Angeles. And, often founders of ecommerce scaling Austin Texas brands must educate potential investors about consumer brand investments before they can make an investment case.
Progress is definitely being made. The amount of available capital, sophistication of investors in the category, and the network of successful founders making intros and providing credibility, is continuing to improve. Ecommerce businesses in Austin that are about to enter their fundraising process should start making their presence known in the community. They should attend events and develop relationships with investors before they start needing capital. Furthermore, visible presence in the community, may get them in front of potential investors.
It is true, in the end, that the last several pivotal intros that sealed the funding round in Austin, were made by other founders. The infrastructure for raising capital in Austin is the network of other founders, and developing this network early on pays dividends when you need to raise capital yourself.
