Powering a tech hub

Inside the accelerators that fuel Austin's startup scene

Capital Factory staff members welcome people to an event at the tech hub that introduced plans for the U.S. Army's new Futures Command tech center in Austin, on July 18, 2018. As the most recognized accelerator in town, Capital Factory has grown with the help of corporate partners. (Ana Ramirez / American-Statesman)

Dec. 12, 2018

Three years ago, Chris Hample faced a challenge.

Company executives at IT consulting firm Booz Allen Hamilton, where Hample works, directed him to identify markets around the U.S. where the Virginia-based company could uncover new, innovative ideas for its clients. Booz Allen Hamilton wanted to make sure it maintained a competitive advantage in its industry.

It didn’t take long for Hample and his team to zero in on Austin.

The city had become an important place for startups with cutting-edge ideas, so an Austin address would fit well with Booz Allen Hamilton’s other high-tech locations that include Seattle, San Francisco and Boston.

Hample, who had grown up in Austin, knew who to call first. He dialed Josh Baer, the founder and CEO of Capital Factory, Austin’s most high-profile tech hub.

“We needed to be part of those communities, so we know how to shape our company and where to invest in the future,” Hample said. “Capital Factory was very supportive from the start.”

About three years later, both partners say their relationship is among the closest and most fruitful they have.

Booz Allen Hamilton has pumped thousands of dollars into Capital Factory. In return, the consulting firm has a space at the facility, where roughly 30 of its employees work, and it has also been a sponsor at various events there.

Most importantly, however, the partnership has allowed Booz Allen Hamilton to connect its clients to the numerous tech startups that call Capital Factory home. Such relationships have kept Booz Allen Hamilton and its clients attuned to the latest innovations, Hample said. It’s helped them compete with other leading consulting firms like Ireland-based Accenture and provided a beachhead in the state’s tech industry.

But Booz Allen Hamilton’s story is not unique. In fact, it has become the norm in Austin’s startup world.

For years, accelerators -- programs that are aimed at helping startups get bigger faster -- have been a key part of Austin’s entrepreneurial tech culture, providing networks, mentors and visibility that often can be the difference between success and failure. Alumnae from some of the numerous accelerators around town include local brands such as SpareFoot, WP Engine, Texas Texas salsa and many other companies.

But while the public spotlight on Austin’s tech scene is often focused on identifying the next breakout company, awareness of the accelerators themselves is much lower -- including their growing dependence on corporate money to fund every aspect of their operations.

As long-established companies attempt to stay relevant, they’re pouring cash into accelerators to try to associate themselves with the trendy high-tech world. They also want to identify promising startups worthy of investment and form relationships within Austin’s business scene.

Accelerators -- many of which have been created in the past 15 years -- have welcomed the corporate embrace, and the relationships are increasingly driving their bottom lines. Big accelerators -- such as Capital Factory -- are part of the trend, as are much smaller efforts at university-led programs.

Both sides say they’re getting a lot out of the symbiotic relationship.

“When we first came to Austin, nobody knew who Booz Allen Hamilton was,” Hample said. “But (being in Capital Factory) means we are a tech company.”

Chris Hample, left, chief technologist at Booz Allen Hamilton, and Art Director Trevor Grimshaw review a virtual reality training application for the U.S. Air Force at Capital Factory, on Nov. 19, 2018. Booz Allen Hamilton is one of many companies that have poured money into Capital Factory in exchange for access to startups and their partners. (Jay Janner / American-Statesman)
Capital Factory founder and CEO Josh Baer talks during an event hosted by the tech hub that introduced plans for the U.S. Army's new Futures Command tech center in Austin, on July 18, 2018. Baer said 30 percent of Capital Factory's operating revenue last year came from corporate partners. (Ana Ramirez / American-Statesman)

'Afraid of Amazon, Google'

Austin has several prominent accelerators in town, from locally-owned programs to branch locations of outside firms.

While accelerators differ in size, services and finances, all work toward a common goal -- bolstering startups.

They choose nascent companies that typically join months-long programs designed to connect them to networks of entrepreneurs, potential investors and mentors. In some cases, startups get to work out of accelerators free of charge before becoming paying members. Depending on the accelerator, entrepreneurs trade small ownership stakes in their new companies in exchange for the office space, mentorship and other services.

Such is the case at Capital Factory, which in addition to its six month-long accelerator program is home to 81,000 square feet of co-working space shared by startups and other firms. Founded in 2009, Capital Factory calls itself the “center of gravity” for entrepreneurs in Texas.

Corporate money has become a leading revenue stream at the hub, which is headquartered in downtown Austin and this year opened a branch in Dallas.

Baer, the accelerator’s CEO, said roughly 30 percent of Capital Factory's operating revenue last year came from corporate partners. Including rent that some corporations pay to maintain a presence at Capital Factory, the percentage is even larger, he said.

Baer declined to disclose Capital Factory’s budget, but he said revenue from its dozens of corporate sponsorship agreements can reach the upper six figures annually or even seven figures.

Typical monthly rent at the hub is $300 to $500, Baer said, but corporate partners usually pay double. In the next few years, Baer expects corporate partners to account for half of Capital Factory’s operating revenue.

Corporate partners generally have specific goals in mind when they invest in such programs. They want to find a startup or entrepreneur worthy of investment, hope young companies can be persuaded to use their services or are angling to remain competitive in their industries.

The upshot is that an accelerator like Capital Factory can be a vetting system for potential startup partners.

“Every other big company in the world that is afraid of Amazon, Google, etc., because they all are very innovative,” Baer said. “They know the only way they can be competitive is to work with startups.”

Along with paying Capital Factory rent to work alongside startups, corporate investment usually manifests itself in the hub’s hundreds of tech-focused events per year. Corporations pay for exposure to startups and other people within Capital Factory’s networks, and to have their representatives take part in panels and other programs.

Mercedes-Benz, Walmart, H-E-B, Oracle, the U.S. Army and others currently have or have had relationships with Capital Factory, in addition to Booz Allen Hamilton.

'Money has to come from somewhere'

The reliance on corporate partners is a model followed by accelerators throughout the U.S., said Genevieve Gilbreath, managing director at SKU, an Austin-based consumer products accelerator that's helped brands such as Texas Texas salsa and Austin Eastsiders grow. Some prominent examples, Gilbreath said, include California’s Plug and Play Tech Center and Wisconsin’s Gener8tor.

At SKU, which was founded in 2011 and runs one accelerator program per year for seven to eight companies, a third of revenue streams in from corporate partners. The rest comes mainly from fees that are charged to investors who want to access its network and serve as mentors to the accelerator’s startups.

Gilbreath said she expects corporations to eventually fund the majority of the accelerator’s budget.

When SKU facilitates corporate-sponsored events or engagements, it can raise anywhere from a few thousand to hundreds of thousands of dollars, Gilbreath said. Recently, for instance, the accelerator hosted a sponsored panel by Colombian food processor Grupo Nutresa, which wanted to understand the U.S market better and connect with potential buyers. It raised between $15,000 to $30,000, according to Gilbreath.

“Money has to come from somewhere,” Gilbreath said. “The main benefit for corporations has been to have exposure to our brands and to see what is trending.”

Evan Worley, right, a Bose demo specialist, shows an attendee augmented reality technology during a Bose AR event at the Capital Factory in Austin, Texas, on Oct. 19, 2018. Corporate sponsored events at accelerators like Capital Factory can raise anywhere from thousands of dollars to hundreds of thousands of dollars. (Nick Wagner / American-Statesman)

Established companies say they are investing in the high-tech sector more than ever.

One example is Dallas-based Southwest Airlines, which two years ago created a division to focus solely on innovation and entrepreneurship.

Soon after, the airline chose to invest in MassChallenge, a Boston headquartered not-for-profit accelerator that began a four-month program in Austin this year. The 84 startups selected for the program received a combined $500,000 in cash grants, as well as access to mentors, workshops and other events.

Southwest’s investment in the accelerator this year was in the six-figure range, said Heather Figallo, director of the airline’s innovation and entrepreneurship division. The company plans to extend the partnership into 2019, she said.

The money has been a major boost for MassChallenge, which this year attributes half of its Austin operation’s revenue to corporate partners. In exchange, Southwest is participating in events and getting its employees involved in the accelerator’s program.

“Our goal is to accelerate our ability to stay relevant,” Figallo said. “If we only thought about ourselves, that would be extremely short-sighted. Exposure to next-generation (tech) is taking us forward.”

Staying relevant is considered important even at the highest corporate levels. It’s why companies such as Walmart and H-E-B, two massive grocery chains that compete against each other, have both been partners with Capital Factory.

The two companies’ investments into local innovation are so deep that after initially having space at the hub, they decided to open their own innovation facilities

Walmart’s operation opened earlier this year just blocks away from Capital Factory, with a goal of developing emerging technologies such as artificial intelligence and blockchain. The trendy facility is decorated with bike racks, collaboration tables, murals and sofas. H-E-B plans to follow suit by opening a tech center east of downtown next year that will host the company’s digital teams.

Col. David Robinson of the U.S. Army plays with Google Earth using virtual reality technology from Capital Factory, on July 18, 2018. (Ana Ramirez / American-Statesman)

'Fostering relationships'

Before accelerator programs began popping up in recent years, corporate leaders say their focus on the startup world was less aligned.

Software giant Oracle, which this year expanded into a state-of-the-art corporate office near downtown Austin, recently opened a new accelerator program inside Capital Factory that the company said will create cutting-edge technology around its products worldwide.

Besides paying Capital Factory rent, Oracle plans to host events for its partner companies and the community, said JD Weinstein, who heads the accelerator program.

He’s said Oracle’s brand will benefit since the company has not typically been linked with the startup scene.

“Fostering relationships with local startup ecosystems gives Oracle clear insights to help us offer the right resources and maximum value for startups in specific communities,” Weinstein said in an emailed response. “Oracle and our customers benefit from being part of early stages of invention led by these startups.”

At Southwest Airlines, the effort to tap into fresh ideas also was handled differently before the company created its innovation division and began connecting with partners like MassChallenge.

Responsibility for staying abreast of tech trends used to be much more diffuse throughout the corporation, Figallo said. But despite the significant resources big companies can bring to bear, it’s difficult for them to duplicate the ecosystems of fleet-footed ingenuity that exists at places like Capital Factory and MassChallenge, she and other industry leaders say.

Likewise, entrepreneurs who have worked with accelerators often lean on the corporate partnerships to provide welcome roadmaps for growth and the difficult route to commercialization.

Take the case of 21-year-old Austin resident David Zakariaie, who started a software company named Senseye that is building a type of brain sensor to measure cognitive function when people are under various types of stress.

“Assuming we would be able to figure out who to reach out to, we would have to pitch (companies) one by one,” if it weren’t for Capital Factory’s network of partnerships, Zakariaie said.

Instead, Senseye began a relationship with the U.S. Air Force after participating in the accelerator program at Capital Factory last year. Through the introduction at the accelerator, Senseye now is licensing its software to the Air Force and working on a prototype training program at the military branch’s innovation hub inside Capital Factory.

To date, Zakariaie said he has raised almost $2.5 million to develop Senseye’s technology, which is aimed at measuring people’s cognitive function during situations such as flight training or rides in autonomous vehicles, among others, as a means of making those industries safer.

Senseye CEO David Zakariaie, left, shows the company's flagship product to Microsoft CEO Satya Nadella. Senseye, which is building a type of brain sensor to measure cognitive function when people are under various types of stress, passed through Capital Factory's accelerator program and is now licensing ts software to the U.S. Air Force. (Provided by Capital Factory)
Apple CEO Tim Cook, right, gets a tour of Capital Factory from Capital Factory founder and CEO Josh Baer, on Aug. 25, 2017. (Jay Janner / American-Statesman)

An entrepreneurial ecosystem

It’s not only the largest accelerators that are tapping corporate coffers and connecting startups with big companies, however.

The University of Texas’ Austin Technology Incubator has a strategy that differs from the average accelerator in that it accepts startups one by one. But director Mitch Jacobson, who was named to his post in October 2017, said one of his main goals is to wrangle more corporate money.

Created in 1989 as a pioneer in the local accelerator scene, ATI recently rebranded to focus on clean energy, biological and health sciences, business and intellectual property from UT. The incubator’s operating income can range from $3 to $10 million, with roughly 20 percent coming from corporations.

ATI receives funding from public entities like Austin Energy but also has worked with Shell Oil, National Grid, IBM, Dell Technologies and others that have paid ATI to sponsor events or to participate in specific projects. ATI’s latest big partner, oil giant BP, has sought ideas from the incubator and its startups for clean energy breakthroughs.

Like leaders from the other accelerators, Jacobson praised corporate relationships and discussed how beneficial more would be to his program.

If he gets his way, corporations will one day account for at least half of the incubator’s income, he said.

“I don't think it's a long shot," Jacobson said in an email. "Most Fortune 1000 companies want and need to continue to innovate both internally within their own company but also realize that they need to work in partnership with the external entrepreneurial ecosystem.

“We are a conduit to that ecosystem.”

Entrepreneurs work at a Capital Factory co-working space in downtown Austin, on Oct. 26, 2018. (Lynda M. Gonzalez / American-Statesman)