When Dell went public in 1988 the company put its home in Austin, Texas, on the map. Spawning a generation of ‘Dellionaires’, the IPO flooded the city with newly rich techies who would go on to start their own companies, invest in others and make Austin a hotbed for start-ups.
“You had thousands of employees who suddenly became millionaires and investors,” says Spencer Hayes, executive managing director and managing principal at Cushman & Wakefield’s Austin office. “There was a noticeable disruption in where people worked and in what companies were started.”
But Austin’s growth didn’t happen in a vacuum. Texas – particularly its metropolitan areas in Austin and Dallas – has set itself up to be serious competition for places like Silicon Valley that dominate tech. Between zero state income tax, low regulation and a continuous influx of Fortune 500 HQs into the Lone Star State, Texas is reaping the benefits of being a laissez-faire affordable alternative to the coasts.
It comes as little surprise that Austin is the fastest growing metropolitan region in the US last year – for eight years running – and Dallas suburbs like Frisco and McKinney are among the 10 fastest growing cities in the country. Combine this with an education system, led by the University of Texas, that has pumped out more than 30,000 tech degrees in the last five years and you get a perfect storm of tech opportunity waiting to be tapped.
Austin is building on a solid foundation. There are more than 161,000 tech jobs, according to the Austin Chamber of Commerce, totalling 15.8% of the entire job market – compared to just 7% nationally. There are about 6,500 high tech companies in the city, and more start up “all the time, every day”, says Hayes.
Apple last year announced plans to invest $1bn in Austin to build a new campus. It already employs 6,200 people in the city – its second largest base after Cupertino, California – and the campus is expected to grow to a capacity of 15,000.
If you ask anyone in Austin why that is, they’ll undoubtedly talk about the “vibe”. They will gush about the city’s mantra to “Keep Austin Weird”, pointing to the ludicrously popular South by Southwest festival/conference and that walking around the city sometimes feels like being on a college campus. Another answer is more straightforward.
“Relative to the coasts, labour is cheaper, and quality of life is higher,” says Austin Trees, senior associate at JLL. “The ace in the hole is that you’re seeing much higher retention rates in human capital.” Where employees might stay in a firm in Silicon Valley for a couple of years, they’re more likely to settle down in Austin, especially if they want to start families and buy property – which would be prohibitively expensive on the west coast.
Capital grows with talent
Investment from the city is the backbone for Austin’s growth. Launched 15 years ago, the Opportunity Austin fund has raised $35m from private donations to recruit companies in all industries including tech, creating more than 400,000 jobs in that time. The local government actively gives incentives to tech companies eyeing the city, including to Apple, which is to receive a combined $41m in incentives from Austin and the state-run Texas Enterprise Fund.
“When we have critical tech recruits, we roll out the cheque book,” says Hayes. “Those [incentives] are just sweeteners, but we do it and we do it happily because it adds a lot of value to our metropolitan area.”
But private capital is also growing, and it’s grown beyond the Dellionaires. “Investors from the coasts are starting direct investments – in some cases being the first investment before a local VC comes in,” says Eric Engineer, venture partner at Austin-based firm S3 Ventures.
These include the likes of Battery Ventures and Bessemer Venture Partners, with the latter investing $13.5m in Austin-based software engineering start-up Pinpoint in February. Others, like Vista Equity Partners – which is, at the time of writing, on the cusp of raising the largest private equity tech fund ever – have headquartered in Austin.
“Part of that is driven by Austin as a brand growing nationally. People are recognising that it’s a pond worth fishing in,” says Engineer. “We’ve almost hit escape velocity. We’re halfway through 2019 and we’ve already matched the amount of venture capital investment that’s gone into the state in 2017.”
Although Austin has a history of launching enterprise, software and infrastructure firms, there has been a recent surge in successful consumer tech firms, such as Indeed, RetailMeNot and VRBO, that have grown from a local to a national or global presence. It is companies with that kind of potential to grow globally that attract venture capitalists like himself, says Engineer.
“Half of venture capital investments fail, so the ones that succeed have to really succeed in a big way. Their ambitions have to be very large, decades in the making.”
Dealing with Dallas
For some investors, Dallas is becoming a more attractive alternative to Austin, drawing more than $2.7bn of venture capital investment over the last three years, according to JLL.
Much of what makes Austin attractive – being a relatively affordable, highly educated, pro-business melting pot of a city – is also true of Dallas. But Clay Vaughan, senior vice president at CBRE, says: “People think Austin is the tech capital of Texas, but the reality is that Dallas is a much bigger market.”
While Engineer argues that Austin is the place to go from a “pure tech, software developer start-up ethos”, Dallas has been the most successful Texan market for drawing in Fortune 500 businesses. Suburbs like Frisco and Plano – which regularly spawn tech start-ups – are among the fastest growing cities in the country, and the build-up of people and businesses will likely lead to “some really interesting companies” in years to come in much the same way it has in Austin.
A CBRE report on tech talent pools also found that Dallas/Fort Worth had the sharpest five-year rise in 20-somethings living in the metropolitan area among the 50 largest US tech markets. At 14.7% growth from 2012-17, the city eclipsed the US average (2.5%), Houston (4.4%) and Austin (2.4%).
Meanwhile, estimated one-year costs for businesses are lower in Dallas/Fort Worth than they are in Austin, and the potential for the metropolitan area to grow is vast. “We’re not geographically locked in and can continue to grow in any direction,” says Cribb Altman, senior director at Cushman & Wakefield in Dallas.
“A lot of the new developments that are going up in the north are actually closer to the Oklahoma border than to downtown Dallas.”
By contrast, anyone in Austin will caveat the desire to grow with a warning that infrastructure is notoriously bad. While Dallas has developed its road networks alongside its expansion, Austin’s networks have not kept up with its population growth, leading to the worst congestion in Texas and the 14th worst in the US last year, according to navigation tech firm TomTom.
All this creates opportunities for start-ups in Dallas, such as remote patient monitoring start-up Vivify Health, which got its start in Plano with investments from east coast firms like Envision Healthcare and LabCorp.
Can Texas compete with Silicon Valley?
In many ways, the future looks bright for tech in Texas. With strong educational credentials led by the University of Texas, Dallas and Austin had a combined 35,325 tech graduates between 2012-17 but added just 31,040 tech jobs in the last five years according to CBRE. That meant a net loss in new tech talent, which can either be interpreted as the coasts still being more attractive or, as CBRE argues, as an opportunity for the tech market to grow in Texas.
After all, Engineer estimates Texas gets as little as one-thirtieth of the venture capital that California does despite being two-thirds the size in terms of GDP and population.
But whether Texas wants to compete with Silicon Valley is another story. “I don’t think we’re going to get – in my lifetime – to a place where we’re looked at on a par with Silicon Valley for start-ups and tech business. But that’s not our goal at all. The business plan here is to be the best Austin we can be,” says Hayes.
The worry is that while Texas offers an affordable alternative to Silicon Valley now, it might lose that edge in years to come. Median house prices have risen 6.2% in Austin and 9.9% in Dallas in the last year, according to US real estate database Zillow. Although it is an issue particularly on the lower end, Hayes argues that Austin’s affordability (and infrastructure) are unlikely to affect prospects, calling them an “annoyance” rather than an “impediment” to growth.
CBRE is similarly unfazed by office costs in Dallas. Asking rents in Q1 2019 were $68.88 in the Bay Area (up 40% in the last five years) compared to $25.01 in Dallas/Ft Worth (up 25%). With constant expansion and the highest office vacancy rates among the 50 tech markets, Dallas is likely to never fall below a 15% vacancy rate, Vaughan says.
Meanwhile, fledgling markets such as Houston are starting to push for a digital transformation, particularly in areas like the Texas Medical Center – the largest medical complex in the world. Its hub houses healthtech innovators like BrainCheck, which has raised close to $7m from investors including S3 Ventures.
Regardless of whether Texas will bridge the gap with Silicon Valley or stick to cultivating its niches, investors are itching to find the state’s next Dell Computers. “We are due, as a city or a state, to find that next $100bn – or at least $10bn – type business. It’s been a while,” says Engineer. “That would be the next level of growth for the region: if a company of that scale is founded again. “We’re looking for it. That’s our goal.”
WiredScore rates Dallas
WiredScore launched in Dallas last November, complete with an official endorsement from mayor Mike Rawlings.
Tom Redmayne, senior director, corporate development in North America at WiredScore (right), explains why they chose Dallas as their southwest hub.
Q: What makes Dallas interesting?
A: In the last five or 10 years we’ve seen a real move towards innovation and technology really coming to the forefront.
Dallas is extraordinary in the sense that not only are they building beautiful new buildings, they’re building whole new districts from the ground upwards. You’ve got a huge amount of companies that are looking to base their whole entire innovation hubs in that area.
We love working on all types of buildings, but having the opportunity to work from the ground upwards with people who want to design what they think the office of the future looks like is really exciting.
Q: Why didn’t you choose Austin?
Austin’s an amazing place. It’s a really cool city. You’ve got a great creative hub and an amazing music scene and a young population.
But Dallas is a much bigger hub. Whilst you have a lot of real emerging technology and start-up companies in Austin, most of the major innovation centres for all the big companies that are looking to push technology are based around Dallas.
It’s an opportunity, given the amount of development that’s going on in Dallas, to influence how new districts are created from the ground upwards.
Q: Why is Austin arguably getting more attention than Dallas?
I think Austin has done a much better job so far than Dallas of positioning itself publicly as a tech-focused area. When you go to Dallas, you’re blown away by the amount of innovation that’s happening there, but potentially there’s not the same global understanding of that – yet.
