Austin Was Destined to Replace Silicon Valley. Then the Pandemic Hit
What the hottest boomtown off the coasts will look like on the other side
Last summer, RigUp moved into a 24,000-foot, magazine-spread worthy office in the kind of location you’d expect for one of Austin’s most buzzed about venture-backed startups. The company — a hiring platform for energy-sector contract workers — had recently raised a $60 million Series C round. It wasted no time spending it, leasing a full floor of a 30-story story highrise on Congress Avenue, overlooking Lady Bird Lake, where hordes of youthful Austinites come to run, walk dogs, and do paddleboard yoga. The airy space, with its ample natural wood, LED boards, and chill-out corners stuffed with natural vegetation, was an ideal backdrop for the company’s co-founders, Xuan Yong and Mike Witte, to lure talent. Over the next nine months, they would hire over a hundred new employees, with no idea just how dramatically their business and the city of Austin would soon change.
Yong and Witte first met at Texas A&M, where Yong studied finance and economics and Witte studied engineering, before starting the company in 2014. The ascent of RigUp was, in many ways, emblematic of Austin’s rise in recent years as the next Silicon Valley — or at least, its closest approximation outside of the coasts. According to Crunchbase, in 2019 Austin ranked number 10 among all U.S. cities for VC funding — the only city in the top 10 outside the San Francisco Bay Area, Seattle, or the Northeast. Last year, Austin-based companies raised $1.73 billion in venture funding, the biggest haul since the height of the dot-com boom in 2000, according to PricewaterhouseCoopers/CB Insights.
Money from Houston, the corporate epicenter of the U.S. oil industry and just a two and a half hour drive, has also been instrumental in greasing Austin’s tech economy.
The year also capped nearly a decade of gravity-defying growth. Austin’s rare combination of cool affordability, youthful irreverence, year-long summer weather, low taxes, and tons of well-paying jobs helped make it America’s fastest-growing big city last year. Among the flood of recent new arrivals were Silicon Valley fixtures, including investor Tim Ferriss, who moved here in 2017. In 2019, four of the big five tech companies — Apple, Google, Facebook, and Amazon — all expanded their footprints in Austin, joining the ranks of the city’s mega-employers, including global brands like Samsung, Oracle, IBM, Intel, AMD as well as made-in-Austin companies such as Dell, the job site Indeed, and Whole Foods (now part of Amazon). Last year there were also 58 corporate relocations to the area, according to the Austin Chamber of Commerce, not including the dozens of companies that have opened satellite offices there, too.
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While cash was flowing in from Silicon Valley and other tech hubs, the oil fields of West Texas were also booming. Money from Houston, the corporate epicenter of the U.S. oil industry and just a two and a half hour drive, has also been instrumental in greasing Austin’s tech economy. Directly, the oil boom has attracted some 300 companies to Austin, working across oil investment and finance, surveying, drilling technology, and production. Houston-based VCs, such as Cottonwood Technology Fund, and the corporate venture arms of oil companies with Houston offices — notably Shell Ventures and Chevron Technology Ventures — had been key participants helping bankroll Austin-based startups like Novi Labs, Veros Systems, and Infinitum Electric.
RigUp was a beneficiary of all of these trends. Last October, just nine months after the company’s Series C, it raised more — a $300 million round led by Andreessen Horowitz, Founders Fund, and Houston-based Quantum Energy Partners. It was one of the biggest venture rounds ever for an Austin company, landing RigUp a $1.9 billion valuation. “The Christmas party in January was at the most expensive fine dining restaurant on Congress Street, and it was humongous,” says one former employee, a computer scientist who had recently been wooed from another tech company (they asked to remain anonymous, citing nondisclosure agreements). “No one would complain about the happy hours all the time for no reason, but you would notice.”
Then, in early March, as Covid-19 began tearing across the globe, a price war between Saudi Arabia and Russia sent oil prices plunging, sinking the price of U.S. benchmark crude — 41% of which is produced in Texas — to lows not seen since the last Great Recession. In West Texas, tens of thousands of roughnecks in the oil and gas industry were laid off as companies shut down drilling and fracking. At a RigUp town hall in mid-March, employees got a heads-up — there was trouble coming, but everything was under control. Then, 10 days later, on March 29, over 100 employees were laid off, about a quarter of the staff. (RigUp wouldn’t comment on the layoffs, but has pointed out that the two founders reduced their salaries to minimum wage.)
Now, still reeling with no clear end in sight, the city may serve as a crash test dummy to demonstrate what happens when a very fast-moving economy slams into the brick wall of a pandemic and a recession.
The RigUp layoffs were part of a larger surge that hit many of Austin’s most well-funded and well-known companies in March and April: Online shipping company uShip cut 65 employees, about 37% of its workforce. Freight brokerage firm Arrive Logistics terminated 75 and furloughed 35. OutboundEngine, which does small business marketing and customer engagement software, laid off more than 50. Hospitality startup the Guild let go of 38. Kazoo, an employee rewards and engagement platform, dropped 35% of its workforce. Legal software startup Disco, which moved from Houston to Austin in 2018 and has raised $135 million since its founding in 2012, cut an estimated 75 jobs. And Austin’s Capital Factory — the startup accelerator and local engine of entrepreneurship — furloughed more than 40, about half its staff.
All of this was on the heels of the cancellation of the city’s most important and prominent event, South by Southwest (SXSW). It’s hard to overestimate how much the 34-year-old tech-music-film schmooze-fest has done to boost Austin’s brand and its economy. Held over 10 days in March, “South By” has become the single most profitable event for Austin’s hospitality industry. In 2019, some 280,000 people attended, pumping an estimated $360 million into the local economy. The cancellation, following a March 6 order by Austin Mayor Steve Adler prohibiting large gatherings, was a devastating blow. And now, of course, Austin is battling a fierce resurgence of the novel coronavirus, which will inevitably inflict even more pain on local businesses.
In recent years Austin, with a metro area population of 2.2 million, has been held up as the model for other startup boomtowns, places like Salt Lake City, Denver, and Phoenix, combining a pleasant quality of life, strong academic institutions, local talent, noteworthy startup exits, and money to spin up a bustling entrepreneurial hub. Now, still reeling with no clear end in sight, the city may serve as a crash test dummy to demonstrate what happens when a very fast-moving economy slams into the brick wall of a pandemic and a recession. “We’re in for a little bit of a tough time,” says Amos Schwartzfarb, managing director of Techstars Austin, perhaps understating the city’s new reality. “One year. Two years. Not three months.”
In early March, Monica Landers was flying from Berlin to Austin when she found out that South By was being canceled for the first time in its more than three decades. Landers, the founder and CEO of StoryFit, an A.I. startup that uses machine learning to analyze stories for publishers, movie studios, and networks, was stunned. As with many Austin entrepreneurs, SXSW was her annual opportunity to pitch potential investors, customers, and partners on home turf. “It means we can host people from out of town in a way we can’t afford to do in Cannes, show them around, take them to barbecue,” she says.
In StoryFit’s four years of existence, South By had been instrumental in helping Landers raise its profile, land major Hollywood customers, and bring in $4.5 million in funding. This year, hundreds of people had preregistered for her panel, and she planned to spend the days holding court at the Driskill Hotel taking back-to-back meetings in the historic downtown digs. “This usually kicks off conversations that are followed by other conversations in L.A.,” says Landers.
While everyone saw it coming, the South By cancellation was an Exxon Valdez-scale disaster for the city, unfolding in sickening slow motion.
“South By should have been one of our busiest weeks ever,” says Sam Eder, co-founder of Techstars-backed startup Big Wheelbarrow, which provides SaaS supply-management software services for restaurants and food retailers. Instead, he was looking at $20,000 in canceled license fees and hundreds of thousands in lost revenues from killed contracts for upcoming distribution projects.
While everyone saw it coming, the South By cancellation was an Exxon Valdez-scale disaster for the city, unfolding in sickening slow motion. Immediately, SXSW LLC, which runs the festival, laid off a third of its 175 year-round employees. Then, on April 24, the company was hit with a class-action lawsuit on behalf of ticket buyers unhappy with the event’s decision not to issue refunds — its insurance did not cover cancellation caused by a pandemic. Instead, pass holders were offered free registration for a future event, plus half off an additional year. (Citing the lawsuit, representatives of SXSW declined interview requests for this story.)
For more than three decades, South By’s evolution has mirrored that of the city itself, from the indie-cool college town captured in Richard Linklater’s 1990 movie Slacker into the shiny tech mecca it is today. The event was hatched in 1987 as a music festival in a music town, where everyone from Willie and Janis to Stevie Ray Vaughan had honed their chops. But by then, Austin was already on its way to becoming a computer town, too. In 1966, IBM opened a typewriter factory in Northwest Austin (in the ’80s, they shifted to manufacturing PCs and microprocessors), while Texas Instruments started fabricating semiconductors there in 1969. In 1976, Tracor, a maker of advanced electronics for the military, became the first Austin-based company listed on the New York Stock Exchange.
But Austin’s modern tech era really began in 1984 when Michael Dell founded Dell Computer from his University of Texas dorm room. The company IPO’d on Nasdaq in 1988, and the stock quadrupled over the next four years, creating a crop of “Dellionaires” who would go on to seed dozens of Austin companies. (Today, Dell Technologies is Austin’s fourth-largest employer, and is the third-largest PC maker in the world.) Around the same time, in 1990, Stanford dropout Joe Liemandt founded enterprise software company Trilogy, which eventually became a 2,000-person company famous for wooing top computer science grads with fat signing bonuses, lavish perks, and raucous recruiting events. The company collapsed in the first dot-com bust, but its alumni, “the Trilogy Mafia,” went on to found or lead a new crop of Austin startups, including Indeed, WordPress hosting platform WP Engine, and the Capital Factory.
In 1992, Apple opened an Austin outpost, and four years later Samsung chose the city for its first U.S. manufacturing facility. In 1994, South by Southwest added film and multimedia components, and by late 2012, SXSW Interactive had nearly 25,000 attendees. Eventually, it became a launchpad for startups like Foursquare, Twitter, and Airbnb, and the annual corporate pilgrimage for Fortune 500 brands like Pepsi, McDonald’s, and Visa.
The 10 largest tech companies alone have grown their combined Austin real-estate portfolio from 1 million to 8 million square feet over the last 10 years, altering the landscape of the downtown business district.
Austin’s Tourism Commission is now predicting a roughly 20% drop in hotel tax receipts this year, resulting from South By and other cancellations. This, paired with a major drop in tax revenues from Big Oil fortunes, will also affect municipal and education budgets across the state with an outsized impact on Austin, the state capital and home of the University of Texas’s flagship campus. A portion of the wealth extracted from Texas oil fields helps support an endowment for the UT and Texas A&M University systems. With the fracking boom, the fund’s payouts had ballooned, helping UT become one of the richest educational institutions in the world, alongside schools like Harvard, Yale, and Stanford. This May, UT Austin announced it was considering furloughs and permanent layoffs in response to budget cuts and pandemic-related “uncertainty.”
The state budget woes come on top of a more basic issue that UT and every other college in America are grappling with: Will students come back this fall? “Austin is very much a college town,” says Andy Sernovitz, a serial entrepreneur who currently heads Gas Pedal, a digital services company that builds internal peer-to-peer communities for corporations. Students are part of Austin’s fabric, contributing to the city’s progressive vibe and the local economy. Alumni of UT — home to the McCombs School of Business and a consistently top-10-ranked graduate computer science program — provide a steady stream of local talent and founders, from Dell and Whole Foods founder John Mackey (philosophy and religion) to Tito’s Vodka founder Bert Beveridge (geology and geophysics).
In late June, UT announced plans for the fall semester that include a hybrid of online and in-person options for students, a shortened semester, and a flat tuition rate no matter the mode of instruction. UT Austin officials are “cautiously optimistic” about fall enrollment numbers — but many analysts are predicting an undergraduate enrollment decline of about 20% across the U.S., a loss that would further destabilize an already wobbly economic landscape.
In early May, Ryan Bohls, a director of the Austin branch of global commercial real estate firm NAI Partners, sat in a near-empty office downtown staring out at a ghostly skyline. Idle cranes and more than two dozen half-built high-rises stared back at Bohls, who was practically willing the phone to ring. “We’re probably the first commercial real estate firm back in the office,” he says. “It’s full speed ahead. But we can only move as fast as clients.”
Last September, the Urban Land Institute and PwC ranked Austin first among 80 U.S. markets for overall commercial real estate prospects in 2020, citing the city’s deep pool of talent, “unique and popular” lifestyle, and “ambitious commitment” to business and real estate expansion. Austin-Round Rock ranked number 10 among U.S. metropolitan areas for commercial and multifamily construction, in dollar volume, last year — well ahead of places like Nashville, Seattle, and San Francisco.
Austin’s commercial building boom has been driven by a combination of local business growth and an influx of out-of-town companies building second, or third, offices. The 10 largest tech companies alone have grown their combined Austin real-estate portfolio from 1 million to 8 million square feet over the last 10 years, altering the landscape of the downtown business district where there are currently 25-plus buildings over 25 stories under construction. “A substantial part of Austin’s tech growth is because Silicon Valley companies made this their default second-office location,” says Sernovitz. “That’s a self-reinforcing ecosystem. As long as the Bay Area is overpriced, Austin wins that game.”
As the overall market cools and corporate work-from-home arrangements get extended, these deep-pocketed giants may find themselves tenants of a lonely landscape for the next few years.
In 2018, San Francisco-based Dropbox expanded its Congress Avenue digs to accommodate its 200-strong Austin workforce. In 2019, Facebook took over 11 floors of a 29-story tower on West Third Street. Google, which already has some 1,500 employees in Texas, leased 28 floors of the Block 185 building in downtown Austin, with move-in planned for 2023 (plus another seven floors of a mixed-use project in East Austin).
As the overall market cools and corporate work-from-home arrangements get extended, these deep-pocketed giants may find themselves tenants of a lonely landscape for the next few years. “Executives have put their pens down,” now, says Bohls, with companies freezing headcounts and putting expansion plans on hold. Already-negotiated deals started falling through in April, when vacation rental company VRBO halted construction on new headquarters in the city’s Domain tech district, as its parent company Expedia put cost-cutting measures in place. Global law firm DLA Piper terminated its lease for the top four floors of a 25-story high-rise. And in May, publicly traded Parsley Energy, an Austin-based oil exploration company, paid $2.8 million to terminate a portion of its downtown Austin lease, citing bleak business conditions for the foreseeable future.
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In addition to shoring up real estate markets, the ongoing colonization of Austin by Big Tech behemoths — whose valuations have all returned to or surpassed pre-Covid levels — will also help buffer the shock of the thousands of local-company layoffs this spring, and those still to come. To be sure, there have been a few bright spots in Austin’s startup scene since March — particularly funding rounds for companies solving Covid-related pain. B-to-B emergency communications firm AlertMedia landed a $15 million series C in early April, and Everlywell, which makes the only FDA-approved home collection kit for Covid testing, raised $50 million later the same month. (And some more established local companies are doing very well — Tito’s has been selling over a million cases of vodka per week through the pandemic.)
But VCs like Mike Smerklo, co-founder and managing director of early-stage fund Next Coast Ventures, expect funding for Austin startups to be down in 2020 by at least a quarter compared to last year. “The world took a quarter off,” he told Marker in June. But later that month, as Covid cases here soared, Austin rolled into a second quarter of uncertainty, with another wave of shutdowns and layoffs affecting even seemingly “safe” businesses, like enterprise software. On June 23, one of Austin’s fastest-rising startups, Scale Factor, which offers automated accounting services for small business, announced that, after raising $90 million in venture funding last year, it would be laying off all its 100 employees and shutting down by summer’s end, citing the loss of nearly half its sales since the pandemic began.
As these workers flee the expensive coastal cities they’ve been golden-handcuffed to, Austin could find itself inheriting an entirely new class of workers who don’t actually work here.
Meanwhile, Amazon still plans to hire 800 people, primarily software and hardware engineers, when it completes construction of a new building at the Domain, a sprawling outdoor mall complex in Northwest Austin that’s already home to offices for Indeed and Facebook. Apple is charging ahead on its second-largest outpost, a new $1 billion, 133-acre campus, expected to open in 2022, which will initially house 5,000 employees — in addition to the 7,000 workers Apple already has in Austin.
But what could make the city even more resilient than others is the likely possibility that it becomes a big winner in the new work-from-home game. Twitter and Facebook led a series of announcements from tech companies releasing many employees from having to go into the office again for a long time, if ever. As these workers flee the expensive coastal cities they’ve been golden-handcuffed to, Austin could find itself inheriting an entirely new class of workers who don’t actually work here. In other words, people won’t necessarily be flocking to Austin for jobs, but for all the other reasons they’ve been coming here at a rate of 150 people per day since 2010 — including no state income tax and a median home price of $405,000, compared to $1.3 million in San Francisco. Now, they’re just bringing their jobs along with them. The only limit on Austin’s population growth now seems to be a temporary, Covid-related shortage of housing inventory. While total home sales are down, as everywhere, Austin continues to lead the nation in residential buyer activity, with pending sales in June up 41% over last year, and home prices hitting an all-time high.
The part of Austin best poised to survive, though, may not be the part that makes Austin, well, Austin. “There are really two Austins,” says Gas Pedal’s Sernovitz. “The newer, tech, and innovation business side, they’re pretty well set up to work remote and used to living in the cloud. Then there is older, creative Austin — the food scene, the entertainment business — all these fundamentally in-person businesses that have been hit so hard by the pandemic. We’re at a tipping point where the tech world is doing better than the traditional half.”
Economists predict that some 60% of Austin’s expected job losses this year will be in three industries — retail, accommodations, and food service. A June survey by the University of Houston’s Hobby School of Public Affairs suggests that up to 90% of Austin’s music venues won’t make it past October. Meanwhile, locals report that the Mercedes dealerships are having trouble keeping the $130,000 G wagons in stock. “It feels a little unsavory,” says Justin Siegel, founder of JNJ Mobile, a social gaming company, and a partner at Capital Factory, who moved here from New England five years ago. “Austin unemployment is going to be as high as 15%, but we’re not seeing it in the tech world. Not yet.”
But the city can’t really regain its momentum until the pandemic is contained. That’s proven to be both a public health challenge and a political one, pitting the Democratic mayor of Texas’s bluest city against the state’s very red governor.
During the last recession, “Austin was first out of it, and we’re hoping to do that again,” says Leigh Christie, senior vice president of Global Technology and Innovation at the Austin Chamber. Covid hasn’t stopped the incoming calls from big companies (whose names she can’t disclose) about moving here — “they have no hesitation that Austin is the right place.” But, Christie says, “no one knows what the future holds. The immediate response was that we’d come out V-shaped, then U-shaped. Now everyone is being honest and saying we don’t know.”
But the city can’t really regain its momentum until the pandemic is contained. That’s proven to be both a public health challenge and a political one, pitting the Democratic mayor of Texas’s bluest city against the state’s very red governor. Through May, as government officials across Texas debated the timing and strategy of reopening the economy, Austin’s Mayor Adler consistently urged caution, calling on citizens to wear face masks and practice social distancing. Along with mayors of several other Texas cities, Adler called on Texas Governor Greg Abbott, a Trump-supporting advocate of the go-fast approach, for more authority to enforce local public-health mandates.
Thanks to the city’s combination of youthful population and plentiful outdoor venues, Austin’s nightlife came roaring back here sooner than it probably should have. Bars on Sixth Street — the city’s honky-tonk district — were as sloppily crowded as ever Memorial Day Weekend, the first time they’d been open since mid-March. Daytime was worse. Techstars’ Schwartzfarb, who serves on a mayoral “opening up” committee, was spooked by a drive past an “embarrassingly packed” Zilker Park in late May. “We’re going to be locked down again,” he told me then.
Austin, which six weeks ago seemed cautiously moving toward recovery, is now back at Stage 4, the second-highest Covid alert level.
Sure enough, exactly two weeks after Memorial Day, Travis County’s new Covid cases jumped to new highs, and began an exponential rise. As daily new cases statewide soared from about 1,200 in mid-June to over 10,000 a month later, Governor Abbott frantically backpedaled, first giving mayors the authority they wanted to mandate the use of face masks locally, then issuing a statewide mask rule and shutting down bars again on July 2. (Even one-hit-wonder Vanilla Ice was shamed into canceling a planned July Fourth weekend concert that would have slipped through a public-gathering loophole.) Austin, which six weeks ago seemed cautiously moving toward recovery, is now back at Stage 4, the second-highest Covid alert level. “There is a real shift in mood down here,” says Siegel. “I would not say freaking out, but for sure a much more heightened level of concern.”
The odds of South by Southwest taking place as planned next spring seem to have worsened considerably. As of mid-July, organizers had no official announcement to make about next year’s event. “It’s hard to even imagine, logically, a world without South By twice,” says Big Wheelbarrow’s Eder.
If there’s one thing that unites Austin — a liberal outlier — with the rest of Texas, it’s the love of barbecue. More specifically, slow-smoked brisket. It’s deceptively hard to do right — in large part because of the patience required. Since Franklin’s Barbecue was founded out of a trailer here in 2009, Aaron Franklin has made some of the city’s best, selling out six days a week even during the Covid-19 shutdown with curbside service. Franklin, who moved to Austin at age 18 and studied with revered pitmasters, has become something of a guru, producing a series on the local PBS station and a MasterClass to share his insights about the tough cut of meat that could just as well serve as pep talk for the local business community post-Covid.
There’s a thing called “the stall,” he explains, where after you’ve spent hours steadily coaxing your meat along, the internal temperature hits 160°F or so and refuses to budge. The brisket tightens up and squeezes out moisture. The temperature won’t climb again until that moisture evaporates, and all you can really do is wait. “You gotta think of it like a train. If you’re going hot enough and fast enough, if your fires are steady, you’re going to hit the stall and plow through it,” says Franklin, as if talking about his city. “That being said, when the stall needs to happen, it’s going to be a while before it’s done.”