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The VC Scene in Dallas

June 20, 2008

Earlier today I wrote a post titled, “VCs, an endangered species” and Charlie Humphreyson spent considerable time commenting on the post, enough time I figured it would be worth reposting here:

Dallas funding for startups and early stage companies is now more anemic than in 1996. In 1996, there was only Sevin Rosen until Bob Paluck started Centerpoint Ventures. As the bubble developed up to 2000, many VC firms and smart individuals joined the VC parade. My fund, HO2 Ventures, was one of the many TX based VC firms that sprung up during the bubble run up. Having been a resident and entrepreneur (ACT!) of Dallas for more than a decade when HO2 was formed in 1999, I had watched many fellow entrepreneurs leave Dallas for CA and the golden opportunity to fund and build their dream. The silicon valley machine was well underway. Dan Owen and I formed HO2 to focus on the Metroplex companies overlooked by SR & CP since they had a more national focus. HO2 funded 8 companies w/ its $35mm fund. 6 companies were in Dallas and two in Austin (5 survived the nuclear winter (’01-’03) and are in various stages of growth).

Today, the venerated 16th floor (Dallas’ Sand Hill Rd) is all but extinct. HO2, Star, CP & SR have not been able to raise follow on funds. InterWest is barely active in Dallas. Jeff Williams and Hunt Ventures (a Dallas based investor group) are looking nationally for investments instead of their own back yard.

There is no angel network to speak of. All my contact w/ high net worth individuals has shown that if they are investing it is in Oil and Gas and if they would consider a startup or early stage company they are looking for so much financial and market risk to be mitigated that it would be cheaper at that point to get a bank loan.

HO2 predicted the bubble burst and understood that there were too many organizations playing at being a VC (having an MBA or just being smart does not make one a good VC for startups and early stage companies), so the industry would have to contract. But, we always thought that Dallas needed to produce new inventory for the private equity group funding, so there would be room for at least 2-3 good VC firms in Dallas to focus on funding Dallas based startup and early stage companies. Heck, Dallas is the 7th or 8th largest metropolitan area in the country (5th for Fortune HQ) and we can’t even muster 2-3 good VC funds. No angel network willing to risk their money on building a homegrown business that employees people and pays local taxes. Wow!

As a CEO of a startup company, I cruise the Internet looking for anything to help me grow this business (or any startup) in Dallas. Dallas needs another big win (aside from TI & EDS). Broadcast.com was almost a big win. It was almost the catalyst to ignite the entrepreneurial and investor spirit in Dallas. Once Mark took his chips off the table and left it to outsiders to run BC it vanished from the landscape. Most of the successful Dallas startups, like BC, were acquired by out of towners and either moved or shut down.

So, yes, I can attest that the VC industry is shrinking, as well it should. There was too much money chasing too few good deals by too many wannabees. But, Dallas needs a thriving startup eco system. Most of the supporting infrastructure is in place. I don’t believe the problem is a lack of smart people with terrific ideas. We are back to pre-bubble conditions of no real interest on the part of wealthy individuals to take risks.

Dallas needs to have greater participation by Guy, Ram, Brandon, Patrick, Ed, Alex, me, et. al. in the Dallas Startup Happy Hour. Let’s make something happen people. Show up today at the Ritz and let’s get some action going.

Written by Alexander Muse · Filed Under Blog, Startups 

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