SA国际传媒

Texas venture once again struggled in the third quarter. But where the state has faltered, some cities have gained. According to SA国际传媒 data, Houston startups effectively matched Austin, a rising star in the startup community, in total funding for Q3. It鈥檚 a first for Houston, which hasn鈥檛 been on equal footing to Austin since SA国际传媒 News first started covering the region in 2017.

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Here鈥檚 what the Q3 dollar distribution looked like:

Overall, venture capitalists pumped $353.7 million into Texas startups across 91 known deals in the third quarter of 2018. In perspective 鈥� just like last year鈥檚 third quarter 鈥� that is less than what was invested in all of Austin alone during the second quarter. VC funding in the Lone Star state was down a whopping 56 percent compared to the $800 million raised in the second quarter 鈥� the exact percentage it was down in last year鈥檚 third quarter compared to Q2 2017. The dollars raised were, at least, 11 percent higher than last year鈥檚 $319.6 million raised during the third quarter.

So, Texas鈥檚 venture activity in dollar terms was down compared to the most recent sequential quarter, but it was up on a year-over-year basis.

At 91 known transactions, deal volume for the state is also particularly low for Q3 2017鈥攂y far the lowest seen since the start of 2017, although it is important to note that numbers (both dollars and deals) will likely go up as more deals are reported over time.

However, while some deals will trickle in (seed-stage rounds are usually the most tardy), it seems unlikely that Texas had a strong Q3 compared to this year鈥檚 Q2 or Q1 in deal volume terms.

All Venture Is Local

Venture capitalists invested $150.6 million into Austin startups across 44 known deals in the third quarter, according to SA国际传媒 data. That鈥檚 28 percent less than the $208.4 million raised in the year-ago third quarter across 52 transactions. It鈥檚 also down 65 percent compared to the $429.7 million raised in the 2018 second quarter.

A number of Austin startups closed on double-digit funding rounds between June and September, but the deals weren鈥檛 as large as those seen in the second quarter. In July, home improvement startup raised $15.7 million and ERP platform raised $15 million. Most of the closed transactions were valued at less than $10 million.

Dallas had a particularly weak quarter. The city accumulated just $38.1 million across 24 transactions. That was down a whopping 86 percent from the $275.2 million raised across 33 deals in Q2 2018. As is frequently the case in Dallas, two companies alone were responsible for the majority of the total raised in the city: Electromagnetic surface wave startup raised $12.2 million, and , which provides field management software, brought in a $10 million Series A round in July.

Dallas-based 鈥攁n off-site package management service for residential complexes鈥攃losed on a $3.1 million seed funding round in early August. At the same time, the startup announced plans to Austin by year鈥檚 end.

As mentioned above, Houston had a relatively good third quarter performance compared to the same period last year. The city鈥攕till recovering from Hurricane Harvey more than one year later鈥攔aised $138.8 million across 16 deals compared to $24.2 million over 18 deals in Q3 2017. Its largest known venture rounds were actually significantly larger than those closed in Austin during the three-month period, which is unusual.

And while most outsiders think Houston is all about oil & gas, the city is also home to the world-renowned Texas Medical Center (which includes the University of Texas M.D. Anderson Cancer Center, among other institutions) and Rice University鈥攂oth of which spawn a lot of research-based startups.

During the quarter, three of the city鈥檚 four biggest funding rounds were raised by healthcare-related companies. In September, immuno-oncology startup brought in $40 million while biopharmaceuticals developer raised $30 million. Utility startup netted $23.6 million in July and , which is developing modified viruses for the treatment of the most aggressive forms of cancer, hauled in $15.5 million in September.

Since the numbers don鈥檛 tell the whole story of Texas鈥檚 venture capital scene, we talked to some investors in the area to get the big picture. Not surprisingly, most VCs take these sorts of reports with a grain of salt.

VCs Weigh In

, general partner at , acknowledges that Austin does tend to see an 鈥渆bb and flow鈥� of activity.

The state as a whole has seen a number of large private equity deals or buyouts in 2018, and Flager believes those transactions, while often considered good for the involved companies and their investors, do take away from venture dollars raised. For example, earlier this year from , and Houston鈥檚 by .

鈥淭he amount of private equity right now is the most ever raised, and I think you鈥檙e going to see more of those types of transactions,鈥� Flager said. 鈥淎s a firm, we saw more volume in the first half of the year of dollars going into private equity or the secondary market than we saw in the previous 10 years of the firm.鈥�

Looking ahead, though, Flager believes Austin is definitely in a growth phase.

鈥淲hile we鈥檝e been around a while, a number of the other VC firms here are only a few years old,鈥� he pointed out. 鈥淚t takes companies five to seven years to get to a stage to justify a valuation that would merit $50 million-plus funding rounds. We鈥檒l get there, but it鈥檚 a process. It takes time.鈥�

, managing director of Dallas-based , believes that the national trend has been fewer companies raising larger amounts, especially in the B and later-stage rounds.

鈥淭his seems to be moving towards the earlier rounds as the amount being raised is getting larger,鈥� he said. 鈥淭exas investors seem to be more prudent and perhaps see these larger rounds and valuations and decline investing in these companies.鈥�

, partner at Houston-based , thinks the quarter is the start of more good things to come for the state鈥檚 largest city.

鈥淭he energy industry, coupled with life sciences, continue to pay off in Houston as the city continues to unite around helping build a vibrant ecosystem,鈥� he told SA国际传媒 News. 鈥淲e鈥檝e got the perfect recipe for growth right now.鈥�

In addition, Gilani noted that Houston also saw more than 20 smaller transactions in enterprise software companies. He told SA国际传媒 News that this gives the city 鈥渁 really healthy and balanced mix鈥� of growing startups.

鈥淚鈥檓 bullish on Texas, but extremely bullish on Houston. In many ways, Houston is finally catching up to its natural position as the largest city in the Texas startup eco-system,鈥� he told SA国际传媒 News. 鈥淗ouston has always been the biggest city in the state and has always had the largest economy, so it was always bizarre that the city lagged so far behind Austin when it comes to VC and PE dollars.鈥�

Having lived in both cities, I think it鈥檚 pretty cool that Houston actually gave Austin a run for its money in the third quarter. As I mentioned, many out-of-staters might not realize that Houston is home to amazing research centers. That鈥檚 why I believe it鈥檚 likely only a matter of time that we鈥檒l see more large funding rounds like the city experienced during the third quarter.

Hey, a little healthy competition among cities never hurt anybody, right?

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