Can you tell us about your path to co-founding LiveOak?
I studied mechanical engineering in India before coming to the University of Texas to earn my master’s degree in operations research. After that, I went to work for Motorola for a few years before going to business school at Wharton. Then in 2000, I joined Austin Ventures, which at the time was one of the premier venture capital firms in the country and the largest in the Southwest. I spent the next decade there focused on early-stage venture investing.
Eventually, a colleague and I left to start a new fund. We launched LiveOak in 2010 at a time when, we believed, there was tremendous amount of technology and entrepreneurial talent in Texas but very little capital for early-stage businesses. We saw a once-in-a-generation opportunity to start a firm exclusively focused on early-stage companies and founders in Texas.
Can you tell us a little more about LiveOak?
As I mentioned, LiveOak is distinctive with its geographic focus strategy. We’re all-in on Texas-based founders and companies, and the Texas entrepreneurial community. Tactically speaking, we’re often the first institutional money for tech and tech-enabled businesses that are either based in or looking to have a critical mass of talent in Texas.
We initially write checks for between $1 million and $8 million, but often invest between $10 million and $15 million over the lifecycle of the business through follow-on rounds. We’re currently investing out of our third fund, which is $210 million, and also have separate opportunity funds for later-stage investing in our portfolio’s winners.
You clearly know the Texas market better than most investors. How has the landscape evolved there over the course of your career?
I’ve been investing in this market for nearly 24 years and have seen a lot of changes during that time. When I first started, many of the companies forming here were focused on hardware, semiconductors, computers, networking, and — to some extent — enterprise software. Today, as is typical in other markets, the landscape has skewed away from hardware toward software-driven businesses. Second, the local talent in Texas for building startups has exploded both because of the maturation of the local entrepreneurial ecosystem and because of a massive influx of talent.
For example, many founders here already have a successful exit or two under their belt and are starting new businesses. There’s also been a huge number of Texas-based companies like HomeAway, DISCO, and RetailMeNot that have gone public and large established tech companies like Dell, IBM, Facebook, and Google that have set up shop here. Texas is the second-largest employer of tech talent and has the second-biggest number of Fortune 500 companies in the US. That’s led to a huge migration of talent into the state. Of course, new company formation follows talent, so we’re seeing a lot of interesting companies being built.
What types of companies do you see forming in Texas most often?
Broadly speaking, they predominantly fall into three buckets, which the composition of our portfolio broadly mirrors. The first bucket is traditional enterprise application software, which could be either horizontal, such as HR, marketing, or legal software that can be sold to all kinds of enterprises, or vertical, such as software that solves comprehensive workflow problems in a particular industry like edtech or healthcare. Enterprise software is where Texas has historically had and continues to have exceptional talent.
The second bucket is technology-enabled services, which are simply traditional services, such as those needed in healthcare or real estate, being made much more efficient through technology. The last bucket is infrastructure software in general, which includes areas like cybersecurity, systems management, and network management.
And how has the local investment scene changed since you started?
On the surface, what’s changed is that there are a lot of investment firms based here. Big shops like Vista, Serent, Sapphire, and others have moved their headquarters here, as have plenty of other firms up and down the stack, some primarily for tax reasons and others perhaps because their partners prefer living here. However, when you dig deeper, the local investment scene has not changed too much as there’s only a small number of firms that are really focused on early-stage companies in Texas like we are. And doing that well takes both boots on the ground and a real commitment to the local entrepreneurial scene. You need specialized expertise for building companies in Texas which includes a deep understanding of the entrepreneurial networks, local service providers and access to local talent in this market.
And is the majority of the activity still concentrated in Austin? How do Texas’ other markets compare?
Austin continues to be the majority of where the action is, followed by Dallas and Houston. Austin is really diverse in terms of segments of entrepreneurial activity and has also been a tremendous magnet for all kinds of talent. Dallas, by contrast, is home to massive corporations spanning airlines, retail, logistics, and healthcare, so is attractive to the creation of business services companies. We are also definitely seeing a nice surge in entrepreneurial activity there.
It certainly feels like Houston ought to have a lot more activity, but it is a clear number three after Austin and Dallas, at least in terms of tech entrepreneurship. That may be because so many people are in and remain loyal to the energy sector there. There’s also a really vibrant medtech entrepreneurial scene there, but it’s not relevant to our investment focus. Beyond that, there’s a smattering of activity in San Antonio, which typically winds up being related to cybersecurity given the high concentration of defense companies in that market.
Can you tell us more about where LiveOak is investing?
We invest in all three areas I mentioned earlier: enterprise software, tech-enabled services, and infrastructure software. Enterprise software is likely the largest bucket, but I’ll drill down deeper into one area where we have been quite distinctive — proptech.
Proptech is an area where we’ve been pretty active, though in the residential single-family space rather than the commercial space. What makes proptech a hot area here is that there’s a tremendous amount of expert knowledge in this market. Keller Williams, the world’s largest broker, is headquartered here in Austin, for example. As a result, we have a lot of talented folks in this market who combine a deep understanding of real estate and the ecosystem around it (mortgage, title, etc.) with technology, and who have gone on to be terrific entrepreneurs that we have backed from their earliest stages.
Our first proptech investment was in a real estate lead generation platform called OpCity, which quickly exploded into a $100 million business and was acquired by NewsCorp. Some of our other investments in this area from the earliest of their stages include an AI-powered full-stack home-buying platform called OJO and a modern home finance company called Homeward that helps real estate agents and their clients with specialized financial products both when they sell or when they buy homes. We also invested in Backflip, a tech and financing platform targeted at flippers or real estate entrepreneurs.
All told, we’ve made about half a dozen investments in this space so far, all of which are focused on delivering solutions to consumers to facilitate things like home buying and selling, home flipping, and home equity extraction.
You’ve been in venture capital for almost a quarter of a century and have lived through multiple market cycles during that time. What’s your perspective on the current market, and do you have any advice for entrepreneurs?
When you compare this cycle to previous ones, although we’re once again faced with inflated valuations, at least we can take solace in the fact that they’re riding on the backs of real businesses. That wasn’t always the case. Back in 2000, for example, dotcom startups were commanding huge valuations based on little more than fanciful metrics like how many eyeballs they had and how much traffic they were driving.
Obviously, the calculus has changed, and private companies need to become much more capital efficient and focus on delaying their next capital raise. To succeed, they’ll have to be persistent and strike the right balance between fostering growth and managing expenses. It won’t be easy, but the ones that make it through will be well-positioned to thrive as the market recovers.
You recently climbed Mount Kilimanjaro with your family. What was that like? What moments stand out for you?
It was a magical experience being able to summit Kilimanjaro with my whole family. I had mentioned wanting to do it on a whim five years ago, and my kids held me to it. It was much harder than we all expected, but it also taught us a valuable lesson: With enough grit and determination, you can do anything.