Alyssa H. Kang

Capital Factory, the largest startup incubator and co-working space in Austin, has become a leading player in the city’s entrepreneurial culture in just six years since its founding in 2008. The company achieved success by riding the wave of Austin’s growing technological environment and its rich resources of young talent, experienced mentors and eager investors.

Its achievements brought President Barack Obama to the hub during his six-hour technology-focused tour of the city last May. Giant windows frame the 50,000 square foot workspace at the top floors of the Omni building, providing an all-around view of the bustling Austin downtown. Here, under the vision of CEO Joshua Baer, dozens of promising technology-based startup companies are being fostered.

“We call ourselves an incubator because this is where startup companies are nurtured like chickens before they are full-grown and ready to go out,” said Michael Trafton, Capital Factory Director of Education. Companies accepted into Capital Factory have already succeeded in the first steps of taking their product to market. They come for expert help on what they need to do in order to continue being successful in the long term. Startup 'chicks' are educated on how to hire the right talent, receive funding, connect with investors, and become familiar with marketing, sales and team management.

The biggest success story out of Capital Factory to date is a company called SpareFoot. Founded in 2008, headed by two then-UCLA students, the startup has created one of the world’s largest and most efficient self-storage marketplaces. This February, SpareFoot completed a $10 million round of financing from Insight Venture Partners, adding to the $12 million it secured last year.

Capital Factory acknowledges that today, it is possible to start a business with less than $1 million in funding and turn it into a company that achieves a profit of $1 million per year.

Startup companies that manage to rise over the competition to be let in the incubator’s door gain the possibility of receiving $150,000 in initial funding. Capital Factory introduces startup teams to its more than 60 private investors through diverse opportunities like Demo Day, South by Southwest (SXSW), Startup Week and other private meetings that happen weekly. When a startup gains enough trust from two private investors, they receive $25,000 from each, which Capital Factory matches. Starting this year, two venture capital firms, Silverton Partners and Floodgate Fund LP, has offered to fill in $25,000 each.

Being backed by two top-tiered venture capital firms give startups the mark of credibility and value. This mark of approval is a big advantage when they go up to other investors in the future. It is expected that as many as 20 to 30 startups will benefit from the system this year.

Typically, venture capital firms invest in startups after extensive background checking, called due diligence. After all the calculations, firms back out 90 percent of the time, deciding that the startups are not worth the investment.

“What these two venture capital firms have essentially done is say, ‘we trust Capital Factory so much that if they invest, we will invest,’” said Trafton.

In the entrepreneurial world, it is not unusual to see nine out of ten new businesses to never make enough money to go forward even if their products are successful in market. Endless cycles of fundraising and chasing investors’ tails turn businesses into non-profit models. At Capital Factory, startups maximize their time focusing on developing the best product while the incubator takes care of the rest.

Geneva Castellanos, Capital Factory Communications Manager, said, “Capital Factory is waiting for you there, waiting for the next startup to come in to help and be a part of the journey. They give you the resources and wait for you to be at the right stage to throw money at you and say, ‘let’s make this happen.’”

Capital Factory proudly calls Austin home. The Southern city has been dubbed “The Best Place to Launch a Startup in 2014” by Forbes and named one of “The 25 Best U.S Cities for Tech Startups” in 2013 by Entrepreneur Media. With a low unemployment rate of 5.2 percent, the city is tech-strong with more than 4,000 companies employing over 100,000 people, according to 2013 U.S Censor Records. Anticipated job growth in Austin is at 36 percent while the national estimate is at 32 percent.

“There is a ton of talent in Austin and more people move here everyday,” said Trafton. The city has become a massive vat of savvy individuals, which is a huge resource for entrepreneurs. According to Trafton, Austin is where the possibilities are.

Low cost of living and office space, a well-connected technology industry, nearby universities with young talent and plenty of wealthy residents all in a fast-growing city are important ingredients for budding companies.

Mainly, the University of Texas’ Longhorn Startup Program provides the vital resource of young talent. Capital Factory’s own Baer heads this program that brings up young creatives to be entrepreneurs. Longhorn Startup introduces students to numerous successful entrepreneur CEO’s and teaches them to effectively develop an idea and pitch it to investors. Lecturers include Bob Metcalfe, the inventor of Ethernet and 3Com, as well as Ben Dyer, Entrepreneur in Residence at the Cockrell School of Engineering and founder of Peach Tree Software.

“Almost every university with a business or technical curriculum teaches entrepreneurship,” said Dyer. “But they are not doing what we are doing – which is trying to pump live companies out the other end of the conveyor belt.”

Longhorn Startup, according to Dyer, is conveniently smack in the middle of a community with abounding connections and people interested to invest in the next big thing.

“We invite Austin tech communities and investors,” said Dyer talking about the program’s annual Demo Day. “They may not be coming to that with checkbook in hand and trying to catch a deal early but they have that in the back of their minds.”

The three-year-old program has so far given birth to Lynx Laboratories, Burpy and MSpaces, as well as unleashed numerous talented individuals into the Austin workforce. 

“We see Longhorn Startup as a great feeder for companies to get established,” said Trafton. “Hopefully, the best ones will join Capital Factory.”

Freeput is the only Longhorn Startup-born company at Capital Factory. Composed of exceptional UT students and young alumni, Freeput has a vision deemed promising enough that it has gained mentorship and workspace access even though it is still in its product prototyping stage. Freeput represents Austin’s next tech generation.

Communications Manager, Castellanos, is the CEO of the year-old startup company developing an affordable, hands-free computer interface for people with mobility impairments.

The team is challenging the assistive technology industry. Currently, assistive technology equipment cost five to ten thousand dollars and fail to function according to each user’s needs. The equipment still manages to sell for medical sales profit and hasn’t changed in twenty years for the 6.5 million Americans with severe upper mobility impairment, according to Castellanos.

So far, Freeput has successfully built a small device that uses electrical signals on the skin from muscle movement to control an interface. Unlike Google Glass, the most advanced hands-free wearable tech in the market, this device differentiates between a subconscious and intentional blink. Two iterations of the prototype cost Freeput only $300 to build.

 “We want to revolutionize the industry,” said Castellanos. “We know that there is simple, affordable technology out there that could potentially allow people to use computers without their hands.”

At Capital Factory, private investors also act as mentors. Startup incubators have a great resource of mentorship from founders of Webmail, Front Gate Tickets, MONKEY Media, Tocquigny, and more. Trafton himself is CEO of Fire Ant Software and Blue Fish Development Group.

“Most of our investors are experienced entrepreneurs who have been successful,” he said. “When they started they got help from somebody who took a risk on them and they want to do the same.”

In exchange for all provided resources, the mother ship owns 2 percent of the startup company. If the startup is exceptional, Capital Factory might make further investments. Only when the startup is acquired by another company or if it goes public does Capital Factory get the money from the 2 percent investment. So far no startups have gone public and there have only been small acquisitions.

“The bottom line is this is a long-term strategy,” said Trafton. “It’s going to take another five to ten years and we know it just takes a long time for these companies to become mature and established.”

Altogether, this flowing cycle of entrepreneurship resources in Austin is the fuel for Capital Factory’s organic, yet sustainable, functioning system. CEO Baer’s vision was to have multiple startup companies working together in a space where they can toss ideas around, rubbing elbows with experienced mentors and eager investors, in a city that is entrepreneur-friendly. The goal was not to make money but to build valuable, self-sustaining businesses that will endure to create long-term jobs and products that customers want.

“Our success is not measured by revenue,” said Trafton, “but by how much our incubator companies grow and what kind of companies they turn out to be.”