ATI Seminar: Early-Stage Funding

On Tuesday evening, 31 attendees gathered at the MCC Auditorium to learn about “Early-Stage Funding” from three speakers: Isaac Barchas, Director of the Austin Technology Incubator (ATI); Hall Martin, Director of the Central Texas Angel Network (CTAN), and Jamie Rhodes, Chair of CTAN.

The various presentations covered:
- Angel investing in general and CTAN in particular
- The role of the Austin Technology Incubator
- Texas’ Emerging Technology Fund (ETF)
- Q&A from the audience

Central Texas Angels’ Network
I schmoozed beforehand with Hall Martin to learn more about what CTAN looked for in its investee companies. In brief, it sought investees which:
- Had skilled & experienced management
- Had products that were already selling or were “near complete” (defined as “being within six months of shipping”)
- Had a low risk of excessive future dilution
- Sought less than $1.5 million (with investments of under a million being preferred)
- Were headquartered in Central Texas.

During his talk, CTAN’s Jamie Rhodes described the “beauty contest” process by which CTAN selected the firms in which it would invest. Basically, its 40+ members sift through one-page descriptions of each investment opportunity, voting for their favorites. Those four which get the most votes, get the opportunity to present. Of these four, two are usually funded by CTAN’s members as a direct result of the presentation (although some of the non-presenting companies are sometimes funded, too). Jamie emphasized that angels invest as much money in start-ups as VC’s do – investing less money per deal, across a lot more deals.

He also encouraged start-ups to form high-powered advisory boards to (a) get good advice and (b) demonstrate to investors that the founders had the potential to attract top-notch future employees. He also said that such advisory board members should not be compensated (with stock or otherwise) unless they were being held to strict accountability in meeting explicit performance targets.

CTAN is working with angel groups Houston, and to a lesser extent with Dallas and El Paso, to inter-connect Texas’ angel groups to facilitate the syndication of angel investments across Texas. CTAN is a non-profit group, and non-profits have a very different structure and culture than for-profit groups, which significantly affects their ability to work together.

Austin Technology Incubator
Isaac Barchas described the Austin Technology Incubator, of which he’s been Director for about a year now. ATI’s operational expenses are funded directly by the University of Texas at Austin. It currently has focus areas on IT, Clean Energy, and Wireless, and is now attempting to establish focus areas in Digital Media and Life Sciences.

Within each of these areas, ATI’s goal is to get its member companies investment-ready, through:
- Mentoring and advice, by providing a “virtual Board of Directors”
- Accountability
- Access to business and capital networks
- Professional services & infrastructure

In choosing which firms to admit to the ATI, it looks for:
- Risk: Is it likely to succeed?
- Fit:
o Can the ATI add value?
o Can the University add value?

Emerging Technology Fund
The Texas Emerging Technology Fund (ETF) was also discussed as a potential source of funding for early-stage companies, but I neglected to take notes on the brief discussion thereof.

Conclusions
My take-aways from this seminar were:
1) Thumtronics is a great fit with the ATI.
a. Thumtronics fits ATI’s emerging focus on Digital Media
b. Thumtronics is a perfect fit with the University’s
i. Electronic Music Studios and
ii. Music Learning Center.
2) Thumtronics is not such a good fit with CTAN.
3) Thumtronics may not be a good fit with the ETF.

CTAN’s “beauty contest” is focused solely on short text-based descriptions of the investee opportunity. This might seem reasonable – after all, if you can’t make compelling case for your product in a short piece of text, how are you ever going to sell it? – but it completely overlooks the power of video. If a picture is worth a thousand words, then a video is worth millions. There’s no way that a 300-word blurb about the Thummer can convey the information that a 30-second video can. This bias towards text is remarkable in the age of iTunes and YouTube (he writes, in text).

Where?

Thumtronics started in Busselton, Western Australia, because that’s where I happened to be living when I thought up my first musical innovations. Busselton is a very pleasant seaside resort town – but it’s a lousy place to start a new high-tech company. It’s three hours’ drive south of Western Australia’s capital city, Perth, which is “the most isolated major city in the world.” It’s as far from the next large Australian city as LA is from New Orleans (about 1700 miles), with absolutely nothing in between but sand, salt flats, and stranded Japanese tourists. Perth is a great place to raise money for a new nickel mine, but a lousy place from which to launch a high-tech disruptive innovation.

Australia’s venture capital community is absolutely clueless. This is not just an opinion; it’s a demonstrable fact. Over the decade from 1995 to 2005, American venture capitalists earned a whopping 41.4% Internal Rate of Return (IRR) on their investments (overall). Over that same decade, Australian venture capitalists earned 0% – that’s right, zero, nada, zilch. Even the top quartile only earned 2.7%, which was less than inflation. Whatever else people might say about American venture capitalists, they know how to pick companies that earn incredible returns – and, demonstrably, Australian venture capitalists don’t. Australian venture capitalists wouldn’t recognize the next Google if it hit them in the face.

So, I couldn’t get funding in Australia, despite the recognized disruptiveness of Thumtronics’ innovations. To get funding, it became clear that I would have to move Thumtronics to the USA.

But… where in the USA should Thumtronics go? Perhaps a high-tech center, like Silicon Valley, Boston, or Raleigh? Or perhaps a center of the music industry, such as New York or Los Angeles? What I really needed was a single city that had successful industry clusters in both electronics and music.

Austin has both. Although its much-touted claim to be the Live Music Capital of the World is somewhat dubious, there is no doubt that Austin takes music – and the music industry – very seriously. Whereas in other cities, having a CEO play live gigs in a local band would be considered somewhat flaky, in Austin it is normal and well-regarded. Austin’s live music scene is mentioned repeatedly in Richard Florida’s Rise of the Creative Class as being one of the hallmarks of, and contributors to, its success as a high-tech city.

Likewise, Austin has a deep local electronics industry, with numerous large firms such as AMD, Applied Materials, Cirrus Logic, Freescale, IBM, Intel, National Instruments, Samsung, Silicon Laboratories, Sun Microsystems, United Devices, and others having headquarters or major facilities there, and thousands of smaller electronics firms. Importantly, Austin also has a deep and broad infrastructure of service providers such as lawyers, accountants, patent attorneys, etc., that understand the needs of innovative high-tech start-ups. Austin’s rapid growth has also spawned a host of high-tech millionaires, who are ready and able to invest in the Next Big Thing.

Austin is Texas’ state capital, giving me access to Texas’ government decision-makers and influencers. This will become important as Thumtronics’ innovations start to move into government-funded educational institutions. With 23 million people, Texas is the USA’s second-most-populous state after California, so influencing Texas can influence the USA, which can influence the world. Furthermore, Austin is still a relatively small city (at 1.5 million, about the same population as Perth), so it’s relatively easy to gain access to Austin’s movers and shakers.

Austin is also a remarkably nice place to live, which has attracted (and will continue to attract) top talent from elsewhere. Finally, its cost of living is low enough to allow Thumtronics to minimize its burn rate.
Fortunately, Austin’s investor community understands disruptive innovation, so I am quite confident that, one way or another, Thumtronics will get the funding it needs to disrupt the $30 billion musical instrument & lesson industries from its new home here in Austin.