With first quarter numbers now released, it’s time to take a look at venture capital activity in North Texas—specifically, what kinds of investments VC is chasing, and which sectors are hot.

According to figures from Crunchbase, the region continues to attract interest in a variety of sectors from venture capitalists, with the Dallas area reaping the second most VC dollars in the state behind Austin and ahead of Houston in Q1.

In the first quarter, Dallas companies raised $245.4 million in 18 deals, Crunchbase reports. Austin raised $493.8 million in 34 deals during the same period, while Houston lagged behind both with $44.7 million in nine deals.

In the first quarter, Texas’ statewide dollar value was $790.4, a 35 percent increase over the same period a year earlier. While the dollars were up, the actual number of deals statewide was down markedly—just 64 deals in Q1 of 2019 versus 118 a year earlier.

Among the big winners in funding from North Texas were the biotech company Peloton Therapeutics, which brought in $150 million in a Series E funding round in February; Dallas-based esports team Envy Gaming, which said it received $20 million in external funding, and Dallas’ Phynd Technologies, which announced in January that it received $8 million in Series B funding.

Looking specifically at Dallas-Fort Worth, the final quarter of 2018 mirrored the overall weak activity statewide. 2019 is off to a more robust start, with investing on an upward trend.

At Dallas Innovates, we seek out varied opinions, so we asked some of the most prominent North Texas venture capitalists to talk about the state of VC in the area: Joe Beard, partner at Perot Jain; Chris Camillo, an early stage investor and YouTuber at DumbMoney.tv; Bryan Chambers, vice president of Capital Factory; and Aaron Pierce, managing director of JF2 Capital.

Here are their responses.

Joe Beard, Partner, Perot Jain

How do you view the current state of VC investment?

Overall, I think VC investment activity remains healthy in terms of dollars but deal volume continues to trend down. There is still significant capital flowing into late stage deals. Early stage investors seemed to be more selective resulting in more capital finding fewer deals. I expect this trend to continue.

Do you agree with the sentiment that VC funding is up with last year as high as it’s been since 2000?

I do agree with this trend. Anytime you have exceedingly high valuations, which has been the case in recent years, you will have investors seeking short term gain in late stage deals. The M&A and IPO markets will ultimately determine the amount of capital that flows into late stage deals. Less frothy M&A and IPO markets will result in large, late stage venture-backed companies having to raise significant capital at high valuations (staying independent and private longer) with diminished exit opportunities. This will have a negative impact on all stages of venture capital investment.

How about the idea that VC money is now going into areas that used to be post-IPO as the IPO window has grown in recent years from six to eight years, to 10-12 years making that pre-IPO window longer?

This is a very risky proposition in my opinion. There are benefits to remaining private in a market where capital is readily available and valuations remain high. The problem is when the IPO window closes and staying private is no longer a choice but a matter of circumstance. Valuations will become challenged, late-stage capital will be more cautious and pressure will mount for late-stage companies to scale and demonstrate operational excellence and strong financial performance. In my opinion, there will be some really solid companies that may die on the vine or get acquired at significantly reduced valuations.

What do you think about the idea that private capital can be separated into three distinct buckets: seed capital, venture capital and growth capital? Are any of these more interesting to you than others?

The interesting trend is that these buckets continue to shift to the right as rounds continue to get larger. Additionally, the lines are blurred between where one bucket ends and the next begins. We are very focused on the overlap between seed and venture capital as we are strictly early stage focused. We feel that our platform is well designed to help entrepreneurs get to Series A and B funding rounds. Most successful M&A exits are sub $100 million in size, so the likelihood of a good outcome increases significantly if we can push a high percentage of our portfolio through to Series A/B funding.

Do you feel technological advances — including what most insiders see as a game changer in the 5G rollout just now beginning — is contributing to how VCs view and calculate deal value?

Yes and no. We are at a very interesting point in time. Exponential technologies have the ability to unlock massive value creation in so many stagnant industries that have been historically slow to adopt new innovation. Massive problems that were once considered a “cost of doing business” are now able to be solved through new, cutting edge technology. I believe VCs (especially late stage VCs) are very focused on the scale and magnitude of the problem being solved as they think about deal valuation.

What technologies are most attractive to you as an investor? Which are having the greatest impact right now in affecting deals? How about which will become the most important over the next two to five years?

We spend a lot of time in healthcare and mobility (very broadly speaking) in terms of industries. The movement of data, people, services and products is critical in both areas. Consumers and enterprise expect to be able to transact and access services immediately and when they choose. Technologies such as AI, ML, augmented reality, blockchain, edge computing are pushing the boundaries in terms of what is possible. There are so many companies that possess unlocked value potential because they have yet learned to utilize the massive amounts of data their companies generate. For this reason, I think AI and machine learning will remain at the forefront of innovation for the next two to four years. 

Chris Camillo, early stage investor and YouTuber at DumbMoney.tv

How do you view the current state of VC investment?

Venture investment globally is as healthy as it’s ever been, but we can’t say the same for VC investment trends in Texas. This reality is dumbfounding given the talent pool our state possesses. Fortunately for Texas start-ups, we are starting to see signs that this trend will change if not reverse in coming years as west and east coast investors seek out opportunities in less saturated markets like ours.

Do you agree with the sentiment that VC funding is up with last year as high as it’s been since 2000?

There is no debating the recent shift from early to late stage investing and associated increase in deal sizes. Future political and economic uncertainty has forced early stage investors like myself to allocate a disproportionate percentage of our investing dollars to pre-IPO mega deals that are likely to become liquid inside of a 24-36-month time frame. There is just too much market uncertainty associated with the 5-7+ year outlook required for early stage investing.

How about the idea that VC money is now going into areas that used to be post-IPO as the IPO window has grown in recent years from six to eight years, to 10-12 years making that pre-IPO window longer?

This shift has been amazing for VC money and quite honestly terrible for everyone else.  Those of us who have access to pre-IPO investment channels are essentially stealing returns from every ordinary investor, retirement account and pension beneficiary in the country. This is a rarely discussed injustice on every day Americans and I don’t see it changing anytime soon.

What do you think about the idea that private capital can be separated into three distinct buckets: seed capital, venture capital and growth capital? Are any of these more interesting to you than others?

We don’t see many substantial seed stage investing groups in Texas, as lack of assessable capital at the venture stage eventually chokes all but the very strongest of our local start-ups. This phenomenon is unique to fly over states and adds additional risk to an already inherently risky market for seed stage investing. For this reason, we are prudent placing seed stage dollars, focusing most of our attention and dollars on Venture Capital ready companies with meaningful market traction. I’d rather lose money on a company whose business plan didn’t pan out than on one who after my investment became unable to fund its vison.

Do you feel technological advances – including what most insiders see as a game changer in the 5G rollout just now beginning – is contributing to how VCs view and calculate deal value?

Investors are forward looking and willing to place outsized bets at premium valuations on perceived beneficiaries of game changing technology. In the early 2010s it was the migration to mobile apps, today it is 5G.

What technologies are most attractive to you as an investor? Which are having the greatest impact in affecting deals? Which will become the most important over the next two to five years?

While still early – artificial intelligence, automation, and applied big data analytics are likely to drive a disproportionate percentage of VC dollars over the next decade.

Is there anything I haven’t asked that Dallas Innovates readers should know?

Due to the large number of quality Texas deals and deficiency of local early stage investment capital, us local investors tend to be more cooperative than competitive when sourcing and vetting deal flow. More often than not we pass on great companies due to our lack of confidence in the company’s ability to raise needed funding to achieve its goals.  Where a west coast tech start-up will have money knocking on its door via the network of its Stanford founders, our local start-ups might spend 50% of their first few years pitching investors and chasing down capital.

It’s inefficient at best and destructive at worst, which I have witnessed first-hand. Fortunately, now more than ever we are seeing substantial signs of interest in Texas start-ups from larger out of state VCs. Our state has ample talent and business infrastructure to compete with the top VC markets. The final horizon is the expansion of local early stage funding channels, which becomes more likely with every story of a local start-up success.  The future of our Texas start-up ecosystem if bright.

Bryan Chambers, VP of Accelerator and Investment Fund, Capital Factory

How do you view the current state of VC investment?

More funds are raising more money, and as a result I think we will continue to see the pace of venture capital continue for a few years. Investment activity is up across the board including corporate venture capital investments and the United States and China account for most of VC activity. While it’s a great time to be in VC or raising, it’s as competitive as ever. Emerging markets in the U.S. like Austin, Denver, Dallas, and Nashville are garnering more attention than ever and are becoming serious contenders and alternative destinations for founders. Not only are new communities of angels and new venture funds organizing but it also seems to me that larger institutional funds are exploring new geographies and things look good for Texas.

Do you agree with the sentiment that VC funding is up with last year as high as it’s been since 2000?

Yes. ‘mega funds’ support mega rounds. Established VC funds are getting larger, private equity funds are joining the party, and growing corporate venture initiatives are contributing factors. It’s definitely more common today to see $100 million-plus rounds than just a few years ago. The trend is real.

How about the idea that VC money is going into areas that used to be post-IPO as the IPO window has grown in recent years from six to eight years to 10-12 years, making that pre-IPO window longer?

I think this is also generally true. Larger VC’s and PE’s entering the space can support longer IPO cycles.

What do you think about the idea that private capital can be separated into three distinct buckets: seed capital, venture capital and growth capital? Are any of these more interesting to you than others?

I think this is an oversimplification but a logical way to think about categorizing private capital. The reality is that there are more options now than ever to finance a business. Risk/return profiles and deal structures help shape investment philosophies, but its new funding mechanisms like ICO’s are super interesting but still incredibly early and not well understood or regulated.

What technologies are most attractive to you as an investor? Which are having the greatest impact in affecting deals? Which will become the most important over the next two to five years?

There are many things that excite me but technology businesses that are applying AI in new ways to disrupt incumbents and value chains are at the top of the list. Global movements in like gaming and e-sports are incredibly exciting sectors.

Aaron Pierce, Managing Director, JF2 Capital

How do you view the current state of VC investment?

My view is that the state of VC investment is healthy both here locally in North Texas as well as throughout the state and the USA. That said, I remain cautiously optimistic and am focused on rising valuations as they continue to push higher, specifically in later stage investment opportunities.

On a granular level, the US data shows 2018 venture fundraising, venture investments, and venture exit values are all up relative to 2017. The primary drivers of the growth can be attributed to larger fund sizes, which lead to larger investments and larger sized round.

When it comes to Dallas and North Texas, I am much more optimistic on the venture landscape.  Every day new companies are moving to Texas and talented founders are seeking Dallas as a desired place to start and grow their business. We are seeing this trend thanks to a few tailwinds the region has it it’s favor, including vast amount of Fortune 500 companies located here, a lower cost of living relatively to West and East coast alternatives, and the high concentration of capital to fund and accelerate their company’s growth. As a local investor, it’s certainly an exciting time for Dallas as a city, and the State of Texas.

Do you agree with the sentiment that VC funding is up with last year as high as it’s been since 2000?

I would say, and the data supports, that venture capital funding is up — as are fund sizes, deal sizes and exit values. What’s interesting is that you have valuations at all stages increasing. I am particularly interested in this dynamic of early stage valuations rising and if it will continue for the coming years. For example, Pre-money valuations nationwide are near $7 million for angel/seed stage companies, $20 million for Series A, $56 million for Series B and up to $115 million at the Series C and $325 million at the Series D+ stage, according to Pitchbook data. This valuation data can look different based on your region, but it’s interesting data to analyze for both investors and founders.

Typically, when you see larger fund sizes, it means VC and PE funds need to invest larger amounts of capital, which leads to higher deal sizes and often higher valuations. The larger the deal size, the larger the exit value may need to be for early stage investors to meet their return expectations. Fortunately for private investors, companies are staying private for longer, which means the early investors can continue to invest in companies that are quickly growing, who traditionally may have gone public earlier in their life cycle.

How about the idea that VC money is now going into areas that used to be post-IPO as the IPO window has grown in recent years from six to eight years, to 10-12 years making that pre-IPO window longer?

One trend I’ve seen universally is that companies are staying private for longer. If you look at the dynamics in the private markets, you have more private capital looking for opportunities than you’ve had in recent memory, perhaps ever. Venture Capital funds and Private Equity funds are raising capital at rapid rate, and with that comes the expectation that it gets deployed. Further, you have Family Offices being formed at an incredible pace, as business owners have created vast amounts of wealth in the past two decades, and they are now looking for opportunities in the private market to re-invest and deploy their capital.

From a company’s perspective, staying private has seemingly been a desired route – as opposed to going public – as there is sufficient private capital to support further growth for their company and they aren’t burdened by the quarter to quarter wall street expectations that public companies have long endured. Family Offices have proven to be a preferred source of capital as they tend to be patient capital with long time horizons, who offer great advice and experience, in addition to their high-powered networks.

What do you think about the idea that private capital can be separated into three distinct buckets: seed capital, venture capital, and growth capital? Are any of these more interesting to you than others?

The idea of private capital being separated into three buckets is ‘spot on’ and I agree with this wholeheartedly. As an investor, any private investment opportunity automatically goes into one of these three buckets. Depending on if it is a pre-revenue company, a seed investment opportunity, or a later stage investment, there are different investment approaches and return expectations that go along with the company’s stage. Being an opportunistic investor investing at the earliest stages as well as growth equity investments, I begin each analysis of a company by asking myself, ‘What bucket does this sit in?’ and that guides my process regarding diligence and assessing the investment opportunity.

Do you feel technological advances — including what most insiders see as a game changer in the 5G rollout just now beginning — is contributing to how VCs view and calculate deal value?

It’s no secret 5G is going to be a game changer for a technological perspective. The use of AI and its application across every industry is something I am keenly interested in. You are already seeing the impact that AI and Machine Learning can have when you think about game changing innovation. It’s VCs job to stay at the forefront of innovation and be where the market is going, not where it has been, and 5G, artificial intelligence, machine learning and blockchain technology will all play a role in VCs success in the future.

What technologies are most attractive to you as an investor? Which are having the greatest impact right now in affecting deals? Which will become the most important over the next two to five years?

Artificial intelligence and machine learning are two areas that I find most attractive as I continue to see interesting applications for these technologies that are innovating industries ripe for disruption. From Real estate, to oil and gas to financial services and many other industries, the application of emerging technologies in these fields are a huge opportunity and it’s something I am keeping my eye on as an investor.  

Lance Murray contributed to this report.

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