In honor of Small Business Week, Inc. reporters deployed to several cities where they spent one day talking to owners and entrepreneurs in a particular sector about their challenges.

Joah Spearman meets me for coffee a few blocks from his home in East Austin, which is also the headquarters of his company, Localeur. Spearman, a former director of operations at Bazaarvoice, an Austin enterprise software business that went public in 2012, started Localeur in early 2013. The company publishes user-generated restaurant and shopping recommendations geared toward travelers--Spearman calls it "a Millennial TripAdvisor." Localeur launched at SXSW and got a lot of media attention, ending up on numerous best-startup and best-travel-app lists from the likes of the Today show and Time. Spearman, a rarity in Austin as a black tech entrepreneur, became a familiar media presence in the local startup scene.

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Yet fundraising for Localeur has been a painful grind. Not one of the local venture capital firms has invested, and Spearman has instead raised $3 million in mostly small increments. He has 47 angel investors, including a couple of early Facebook leaders and several former Bazaarvoice executives. He's given away some 40 percent of the company's equity in the process.

"We got through the first three years averaging two months' worth of runway," Spearman says. "So I was raising money pretty much every month"--$25,000 here, $50,000 there, and the occasional $250,000. The team grew to six people, but by late 2015 Spearman had laid two of them off and moved the company into his house. He sold his car and replaced it with a scooter.

Talk of the tech industry conjures images of world-eaters like Facebook and Amazon or scrappy 20-somethings in hoodies who raise scads of venture capital in pursuit of the next unicorn. In fact, only a small fraction of startups--even tech startups, those most dynamic of small businesses--attract professional money, a preponderance of them in Northern California. In the rest of the country, VC money is scarcer and more scattered. Consequently, a large majority of tech entrepreneurs lead lives very different from the denizens of HBO's Silicon Valley, who ride a roller coaster of feast and famine.

The funding gap is obvious in Austin, which has at times been called, somewhat cynically, the land of the bootstrapped tech company. Two years ago, David Altounian, a professor of entrepreneurship at St. Edward's University, a small liberal-arts school close to downtown, took a hard look at the investment environment here. Altounian, who is also a former Dell executive and tech entrepreneur, explains that five years ago the number of tech startups in Austin started to explode. The industry was always prominent here: first centered around large IBM and Motorola outposts, and then Dell, and then a few big software companies in the late '90s. By the late aughts, when SXSW became the world's biggest geek party, the crunchy college town had become a shiny new startup hub.

But the money invested in the city's startups never seemed to measure up to the hype. "You had a lot more people fighting for the same pool of capital," Altounian says.


What Altounian found stunned the city's tech industry. While, according to the Kauffman Foundation, Austin has the nation's highest level of startup activity (essentially the rate of new company creation), it ranks 12th for VC funding. In 2014, the city's startups raised $620 million in venture capital, while their peers in the Boston area raised $4 billion and the Bay Area almost $24 billion. What's more, while the average deal in most metro areas is around $10 million, it's $5.4 million in Austin.

With the appearance of Altounian's research, the long-simmering discontent with Austin's funding scene boiled over. Questions and blame drove Twitter fights, Medium manifestos, and live debates. Austin investors play it too safe, some said. Austin entrepreneurs don't chase big enough ideas, said others. Texans just don't invest in tech. Coastal VCs don't bother with the flyover states. And on and on.

Some things most everyone agrees on. Austin investors prefer business-to-business companies over the sexy consumer plays associated with San Francisco. Bringing in actual revenue early is important: Good luck if you plan to grow users first, develop a business model later. And getting funding for a highly speculative "moon shot" company is itself something of a moon shot. "That all worked fine for years, as the startup scene grew up around the chipmakers and other earlier infrastructure," Altounian says. "But suddenly we had this influx of new entrepreneurs who were thinking about startups more broadly."

While the specifics of Austin's funding gap are unique to this city, the underlying reality is not. Last year, nearly 80 percent of venture capital in the U.S. went to entrepreneurs in just three states: California, New York, and Massachusetts. Forty percent went to the Bay Area alone. To understand the less-glamorous norm of small tech businesses nationwide, Austin is a good place to start.

The long slog

Joah Spearman of Localeur says the main reason he has struggled to raise funding is that Austin's venture capital community lacks an appetite for consumer internet companies. "There are two ways we could approach this," Spearman says. "We can focus on user growth first, which would be the Silicon Valley way. Or we can focus on revenue first, which is what the Austin guys want. We spent two years going back and forth, hearing the opposite" from investors and potential investors.

Where Spearman erred was not committing to either approach, By mid-2016, the company's persistent limbo state had evolved into a financial and existential crisis. Spearman published a heartfelt Medium post simultaneously declaring his love for Austin (the main image was his wrist tattoo of the city's crest) and announcing that he would likely move Localeur to California.

Soon after, Localeur's business got a shot of adrenaline. The company signed a content-syndication deal with JetBlue, and the pace of geographic expansion increased. (Localeur now serves 40 cities in the U.S. and Canada.) In October, Spearman raised another $1 million from some of his existing investors and started fielding calls from online travel companies interested in buying Localeur.

Spearman acknowledges that getting acquired soon would probably be the best outcome, although he expects the price would likely be low. "If we were to take it to Silicon Valley now, we'd look like we're limping in after getting beat up in Austin," he says. That was not a good look as he shopped for a Series A.

Of course, it is entirely possible that Localeur simply wasn't the right idea. But Spearman feels he's never had the chance to make it work. His experience speaks to what kinds of companies do and don't make it in secondary tech markets. It also speaks to a point made by Altounian: That even when early-stage money in a city is adequate, startups splutter without funds to reach escape velocity.

Going it alone

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Square Root is the model of a bootstrapped tech company. The business, which helps big chains manage multiple retail locations, launched 11 years ago and has never raised outside money. It employs 85 people--most of them working out of five repurposed Craftsman bungalows at the western edge of downtown--and expects to bring in about $12 million this year. Square Root has landed on the Inc. 5000 twice (highest rank: 508 in 2013), as well as on Fortune's Best Places to Work. Growth has been fueled entirely by cash flow.

As founder Chris Taylor sees it, he had no choice but to self-fund his company--because he could. "I knew the area I wanted to address but didn't know right away what the product would be," he says. "So rather than raise a ton of money, I was able to leverage some relationships and get some cash flow going early while we figured out the big idea. Once we had cash flow, it just made sense to keep going on our own steam."

Every couple of years, Square Root faces an inflection point at which Taylor considers raising money to get to the next level. "Every time, the answer ends up being no."

The benefits of bootstrapping come down to what Taylor calls "optionality." VC investors, he fears, might prioritize their return on investment over what's good for the company and consequently limit his options. "You end up going down these 10 percent success paths instead of a 60 percent success path, because the possible value of the 10 percent path is higher," he says. Also higher, Taylor points out, is the chance that that path could kill the company.

It's not that Taylor is simply building a smaller, more conservative business than most VC-backed companies. "We're creating an entirely new category--store relationship management--and we have customers spending millions of dollars with us," he says. But "bootstrapping allows us to build a culture we want and a product and team we want."

Now Square Root is facing its biggest-ever inflection point: one that will test the limits of bootstrapping. The company traditionally targeted the auto industry, but Taylor is expanding into retail. That raises the prospect of more huge customers, which means more doors for sales reps to knock on and more client needs to be met. Both will require an outsize investment.

"For the first time, I'm thinking I could actually spend money faster than I could make it," Taylor says. It's probably time to polish up a pitch deck for investors, in other words, and face the funding gap.

It's all relative

Not everyone finds the Austin scene inhospitable.

Autumn Manning, co-founder and CEO of YouEarnedIt, says growing her company here has been "better than I ever imagined." Manning moved to Austin in 2012 after incubating her startup out of a digital ad agency headquartered in Arkansas, where she had lived since she was 14. She's raised about $8 million for YouEarnedIt, including $6.5 million in January from a local VC firm called Silverton Partners, as well as San Francisco's IDG Ventures.

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"I know there are a lot of people saying you can't get a good deal in Austin or that they're getting penalized for being in Austin," says Manning. "If you're saying that, I would really turn the mirror on yourself and ask why you think you're getting penalized. What is it that you're not doing or could do different?"

Manning acknowledges that secondary tech markets are a tougher fundraising challenge, but she believes it's manageable. "You have to be more thoughtful, and your proof better be there," she says. "But you can get a good deal here."

YouEarnedIt makes software for HR departments to offer flexible rewards and recognition programs. Customers include Whole Foods, Dell, Sony, and Condé Nast. Its first customers were two Austin-based companies Manning met with at SXSW, even before YouEarnedIt raised its seed round. By the time she raised her Series A this year, the company had more than 300 customers--making it a much easier sell than Spearman's. "We had a business model that could survive with or without funding, and there's no doubt that made a difference," she says.

Manning is a first-time founder, so pitching VCs was new to her. From that experience, she gained two insights. First, she noticed that local investors like to argue that there's plenty of funding in Austin, but "once you get in a room one-on-one with them, they say, 'Look, if you could get more than we're offering, you would get more," she says. "So they're actively acknowledging that they're low-balling you because you're staying local." Manning called their bluff and shopped for deals around the country. She got offers from firms on both coasts. "They're challenging you to bring competition to the table," she says. "So you better have the confidence to get on an airplane and go do that."

Manning also realized that, while she wanted the local support she'd get from Austin investors, those firms likely wouldn't have enough money to lead a later-stage round if YouEarnedIt needed that for growth. So it was important to find an investor with solid connections in other markets. When Silverton introduced her to IDG and offered to partner with the California company, the deal closed.