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Helping steer tech dollars into the Texas economy and the IT and technology sectors are innovators and entrepreneurs who exist at the earliest stages of product and service development, continuously seeking streams of capital to further develop and market their ideas.
Many of today's tech giants started with little more than a dollar and a dream. The industries are filled with rags-to-riches stories, most of which have reached seemingly mythic proportions amid promises of massive payoff for minimal investment by venture capitalists and angel investors. The online social network Facebook, for example, currently valued by some industry experts at more than $1 billion, received an initial investment of $500,000 just after its inception.
But how does the downturn in the national economy influence the landscape of innovation, especially in Texas, as fewer investments are likely to be made in ideas and startups?
Big business
In 2007, almost $1.7 billion in venture capital poured through Texas, up from about $834 million just a decade before, according to PricewaterhouseCoopers and the National Venture Capital Association's MoneyTree Report.
The nation's largest technology trade association, AeA, reports that Texas ranks second among states in high-tech employment, with more than 450,000 high-tech jobs that pay an average of $81,600 annually. The state ranks second in the number of patents issued annually and third in investments in venture-backed companies.
Texas' technology sectors, which encompass IT as well as biomedical, telecom and semiconductor clusters, among others, are likely diverse enough to survive a hard economic punch relatively unscathed.
But the number of deals being made and the amount of capital being invested, though still strong, has taken a hit over the past year. In the third quarter of 2008, for example, about $275 million was invested in 38 deals, compared with more than $442 million in
46 deals for the same period in 2007.
Been here before
The dot-com bubble, felt throughout several major industries in 2000, burst as a result of poor financial dealings within the tech industry itself. This time, however, the issue is murkier, as the otherwise strong tech sector is feeling ripple effects from the housing market crash and downturns in other markets that influence how banks and other lenders and investors lend to startups. During periods of downturn, many startups and new high-growth companies go unfunded and sit stagnant as investment funds dry up. And though that's bad news for entrepreneurs and startups with no cash reserves, those with ready cash are in for some big bargains.
"This market to me seems a lot like it did in 2001, and it might get worse," said Alexander Muse, a serial entrepreneur and the founder of LayerOne Inc. "And like it was in 2001, this is a great time for companies that have cash and can make acquisitions. This is a great time to be in business if you have resources available, but a horrible time for those that were already struggling to make payroll."
Many venture capitalists and other lenders are keeping a sharp eye on how the global economy affects their bottom line, said Cindi Keith, a technology partner for the North Texas Market of PricewaterhouseCoopers.
"We're seeing several of our VC firms being far more selective when they look to follow-on rounds or investments within their portfolios, and thus they are cherry-picking the companies that are especially strong performers to continue to invest in," she said. "We still expect to see a lot of acquisitions, but not near what they used to be."
For now, VC firms are leaning on cash they accumulated during more robust times, and their portfolio companies are attempting to work through the funding they have or are committed to receiving.
"The VC firms we work closely with are taking the same approach they were a year ago, which is wait and see," Keith said. "No one knows when this is going to turn around. Most CEOs and CFOs are trying to not be too negative overall, taking this in stride with caution and carry on with business as usual with the big picture in mind."
Not all bad
The bust of 2000 had some positive effects on business. Laid-off tech workers with time on their hands whipped up Web 2.0 -- the term to describe community-based networks such as blogging, podcasting and other social media -- in between job interviews. Smart tech players, whether workers or venture capitalists, use economic upswings to hoard cash, and in downturns develop ideas, grow talent and invest. In other words, economic slowdowns may actually help rebuild and strengthen future markets -- especially when it comes to funding ideas.
"It can seem bleak sometimes, but this could really be an opportunity to redefine how business is done and how deals are made," Muse said. "From a venture capital perspective, I see a big change coming to Texas. Times like these have an ability to feed the entrepreneurial spirit, and over time that will create the need for more capital, which will have a significant and positive impact on the economy."
And Bill Morrow, chairman of the Texas Emerging Technology Fund, said smart, innovative ideas are still king.
"HomeAway, an Austin startup, secured a single round last week of $250 million," he said. "This proves that good deals will get plenty of capital, even in the current economic climate."
* Michael Castellon is a staff member in the Texas Comptroller's Office. For an in-depth look at the state of venture capital funding or the startup climate of Texas, visit Alexander Muse's Web site at www.texastartupblog.com. To see which industry sectors and regions captured the most venture capital, visit the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report Web site at www.pwcmoneytree.com.
