Here’s Why Dallas is Primed For ‘Series A’ Funding
June 22, 2016 | By Kevin Vela
This blog was published in Dallas Innovates.
Before I get going on why, let’s talk about what “Series A” means.
“Series A” is likely the most defined undefined term in the venture world, if that makes sense. It’s like using the word “bespoke.” I don’t really know what it means, but I know that I want more bespoke stuff.
To put it another way, every new startup is aiming for a Series A round, and every investor wants to invest in a Series A round, but no one can really define what “Series A” means. Note that technically “Series A” refers to the round of preferred stock that investors get through the company offering, but it really has a much broader meaning.
I googled “Series A” when I started this post, and the results were pretty consistent with my definition of Series A. Which I’ll get to below. But let me frame your understanding of a Series A round by quoting venture capitalist David Rose:
“Series A rounds are therefore usually the first professional outside money that is invested in exchange for ownership in a company, and typically are in the range of single-digit millions of dollars.”
“Professional money” refers to venture capital investors, or guys who do this for a living. We usually call them “institutional investors.” I think this is an apt description. Capital in a Series A round is usually used for growth (hiring, marketing, office space) and to find the right product/market fit.
Companies are typically post-revenue, but are still losing money; however profitability is justifiably on the horizon, though not always. The size of a Series A round is usually in the $2 million to $20 million range, with that scale sliding a bit depending on the market.
For instance, for a while, here in Dallas, anything north of $1 million was likely to be considered a Series A round (in terms of who the investors were and the class of preferred stock being issued), while it’s not uncommon for angel rounds of a few million dollars in the valley today. Further, a few years ago the angel rounds I saw here in town were generally capped at $1 million, but today it’s not uncommon to have a large Series Seed “party round” of $1 million to $2 million (comprised of angel investors), and for a Series A round to be crossing $4 million. The rounds are definitely getting bigger at every stage.
Series A is coming in Dallas and here are three reasons why:
The companies are ready.
I only have empirical evidence from my firm, but I can tell you that VW is facilitating a handful of Series A rounds every month this year, a stark increase from previous years. I’m sure this trend is the same across other firms who work with venture companies.
Open up the Dallas Business Journal or Dallas Morning News, and you’ll read about another great startup, who has successfully completed a Series A round. Heck, there’s a great argument that it’s already here; in the past year alone Vinli raised $6.5 million, YourCause raised $4 million, MVPIndex raised $7 million, Mizzen & Main raised $4.2 million, EnTouch raised $6 million, RMG Networks raised $25 million, and the list goes on and on. Note that there have been a handful of very healthy Series B rounds as well (i.e. 5miles raised $30 million, DriverUp raised $50 million, and then another $20 million in a Series C round, and M-Files raised $36 million).
You can’t have Series A rounds without qualified Series-A-ready companies, and there are literally hundreds of them across the Dallas-Forth Worth area. I’ve written a lot about Series Seed rounds in the past and a Series A raise really starts when the ink dries on the Series Seed round.
The investors are ready.
Venture investing is risky business, and thus not typically part of the typical investment portfolio for individuals or institutional investors, but this is changing right in front of us.
Dallas had a huge appetite for venture investing in the early 2000s, but most of the old VC funds from the 16th floor (the constellation funds around Sevin Rosen), have wound down. New funds, however, are popping up in response to the opportunity here in town — Hangar Ventures, Aristos Ventures, OE Capital, and Deep Space Ventures have all launched in the past year and have been very active in the market.
Perot Jain is actively looking at venture deals. Trailblazer Capital is still making investments and runs a great industry-focused accelerator known as RevTech. The DAN Fund has invested twice locally, and continues to raise. Tech Wildcatters has expanded its offering with Health Wildcatters, and has brought a number of investors into the market. Mark Cuban has always been very active (on and off of Shark Tank), and so has Green Park and Golf Investors.
Moreover, the old money investors around town — who made their money in telecom, medtech, real estate, and oil and gas — are broadening their portfolios and jumping into more traditional tech companies. To wit, I regularly have conversations with principals at family offices who tell me that they are actively looking to get into traditional venture funding. I believe that this is because a) there is so much momentum surrounding startups in Dallas that people are taking note, and b) as a younger generation takes larger roles in those family offices, they are more tech savvy and have a stronger desire to be a part of venture financing.
For a while, we had a chicken or the egg paradox, where we didn’t know whether we needed companies who were ready for investment, or investors who were ready to invest. At this point in time, we have both.
We have the ecosystem in place to support it.
You can not get to a Series A round without having talent, resources, and support. Over the past five years, the startup scene in Dallas has shifted from a few measurable pillars (Tech Church (RIP), Trey Bowles, Startup Weekend, Tech Wildcatters, Trailblazer Capital), to an indiscernible yet concrete living organism, made up of so many pieces that just a few of them no longer support the entire ecosystem.
If I had all the time in the world I couldn’t participate in every meaningful startup event around town, there are simply too many. And that’s great news. Because this means that there are now dozens, if not hundreds, of startup influencers around town who are bringing new people, ideas, and resources into the ecosystem every day. There are media professionals dedicated to covering the industry, and there are ample educational opportunities for both investors and companies to help drive the growth.
Inputs into the ecosystem are popping up all over the place. For example, the commercial broker Altschuler & Company has a team dedicated to representing startups to find office space. Silicon Valley Bank, Comerica, and Chase have boots on the ground looking to open up banking relationships with startups. Universities are fostering startups through dedicated programming and classes. Talent is coming to Dallas to work with startups (I get an intro a week to someone with a well-decorated resume looking to work for a startup). Startups are a sector of the Dallas business and social community.
Now, this will only continue to grow. As we have more exits in town, that will flood the market with sophisticated capital (as founders, employees, and investors gain returns and experience), and spark another wave of opportunity and resources. Media coverage will increase and conversations between fund managers at cocktail parties will sing of venture investments.
I don’t have any direct experience to relate to, but I firmly believe that what is happening right now is reminiscent of Silicon Valley in the ’70s and ’80s, or Austin in the ’90s. Investors in Silicon Valley and Austin see venture as an asset class, much like publicly-traded stocks or real estate holdings. To them, the risk inherent in venture investing has moved from unacceptable, to understandable, to desirable, and that mindset is shifting here in Dallas. In a few years, we’ll be talking about Series B, and Series C, and even exits in the same way that we are talking about Series A rounds today.