Mar 8, 2013 · 6 minutes

On paper, it seems obvious that Austin should be included in the “best startup cities in America” list. For starters, the city hogs the tech industry’s attention for a week every year during South By Southwest, now hyped and mocked in equal measure. Then there are the heavy-hitter tech residents. Some of the biggest and most important tech companies have a presence here: Google, Apple, Facebook, Evernote, Cisco, IBM, Dell, AMD, National Instruments, and Texas Instruments, just to name a few. The local economy is booming, the state is business-friendly, and the cost of living is relatively low, compared to the coasts.

But the key words in the graph above are "on paper," "for a week" and "a presence." The reality is despite the best intentions and endless buzz, Austin has never lived up to its much talked about potential as a startup hub.

The optimist's case is one of a small community that is only beginning to stand on its own two feet. While the city has had a few stand-out tech exits – SolarWinds ($4.45 billion market cap), Home Away ($2.52 billion), and BazaarVoice ($480 million) – insiders refer to it as a “blue-collar tech town” characterized by tech workers who favor good lifestyles over grand dreams of changing the world. And for as much as it holds the allure of a burgeoning economy, a business-friendly climate, and some of the best barbecue in America, it also suffers from some small-town problems.

While the tech giants loom on Austin’s periphery – most are based outside the city, or even in suburban Round Rock – they rarely have anything to do with the startups that are typically based in the middle of the city, and they're mostly aging companies laden with legacy baggage of "old tech." In fact, they exist in an almost entirely separate universe.

Even as Dell, the longtime giant of Austin, faces its post-PC blues and sheds staff, those high-tech workers are more likely to join GM’s new technology center than filter into the startup community. And while some “Dellionaires” have in the past started investment groups in the state – Daylight Partners, Eyes of Texas Partners, Sentient Ventures, and Coursa Ventures among them – the company’s overall impact on the startup ecosystem is widely considered as almost negligible.

A common refrain here is that Dell is more of a supply chain company than a tech company. A former Dell executive who now works in a startup told me that his former colleagues just don’t have the mindset for startup life.

On the flip side of the equation, the startup community is attempting to capitalize on last year’s IPO of BazaarVoice, a social commerce company that figures in any local discussion of Austin’s ecosystem. BazaarVoice, backed by the one dominant venture firm in town, Austin Ventures, has had some spin-off effect, most prominently with its former CMO going on to head up Mass Relevance, one of the city’s hottest startups. Meanwhile, Capital Factory has set up an accelerator in the middle of the city and is behind a SXSW competition to move a startup to Austin, which comes with $100,000 worth of benefits for the winner. The City of Austin, the Austin Chamber of Commerce, and other incubators such as the University of Texas-affiliated Austin Technology Incubator are also well coordinated and eager to support the startup community.

The city also boasts a handful of other promising startups, including Spredfast, SpareFoot, Bloomfire, Subtle Data, and Jutera Labs, which have all raised more than $1 million. (Disclosure: PandoDaily is working out of Jutera Labs during SXSW, and it is co-hosting a SXSW happy hour with the startup.) Coupons giant WhaleShark, meanwhile, has raised $300 million in venture backing, and is expected to go public in the not-too-distant future.

Most of those companies have an enterprise bent. That’s no coincidence. The seeds of Austin’s startup ecosystem were planted in the 1980s, with the advent of MCC, a computing research consortium, and Sematech, a semiconductor consortium. They led to first-generation tech startups Tivoli, Trilogy, Motiv, and Vignette in the 1990s, all of which bore strong enterprise tech chops. Then there was Dell and AMD, which added to the area’s enterprise cachet.

However, Austin -- like most aspirational tech hubs in America -- has proven to be difficult territory for consumer-focused companies. Gowalla, a Foursquare competitor, was once its greatest hope, and startup people here still speak fondly of it. But Gowalla ultimately failed, sold to Facebook as part of an acqui-hire, reportedly for less than it even raised in venture capital.

The city’s startup ecosystem faces several other challenges, the most important of which is a lack of options for capital. Austin Ventures is the big dog in town, and for the most part it focuses on growth equity, in many cases favoring a “roll up” strategy in which it helps companies grow big by embarking on acquiring sprees. HomeAway, for instance, is a conglomeration of several vacation rental sites, just as WhaleShark is a mish-mash of online discounts operations. Meanwhile, startups that have their pleas for funding turned down by Austin Ventures can find it difficult to raise from elsewhere in the city. One of the first questions from investors for such companies is, “Why did Austin Ventures say no?”

Entrepreneurs often claim it can be difficult to get buzz in Austin, too, because it is so far removed from the Silicon Valley echo chamber and doesn’t have the prestige of New York City. And finding high-level executives for top roles as the companies scale can also be a tough ask.

But Austin has a trump card that is likely largely responsible for keeping it on the tech map, even if it finds it difficult to live up to the media hype and the associated buzz from SXSW. And that is that Austin is a great place to live. That not only helps attract talent to the city, but it also makes it hard for them to leave.

Compared to San Francisco, it’s affordable – rent for a two-bedroom apartment in the middle of the city clocks in at around $1,700 a month, houses a mile from the city center go for as low as $200,000, and a pint of beer at a good bar is infrequently more than $4. It has a big lake running right through the middle of the city, around which a hike-and-bike trail wends its way. The famous Barton Springs swimming spot provides the perfect chill-out zone, and it is close to the enormous Zilker Park, one of many excellent parks in the city. There’s the live music of course (Austin bills itself as “live music capital of the world”) and dozens of festivals running throughout the year (including a hot-sauce festival in the middle of summer; approach with caution). And thanks the University of Texas and the State government, there’s plenty of intellectual capital around. So, the population is young, energized, and often out and about.

That line about Austin being a “blue-collar tech town,” then, is no insult. In fact, the guy who came up with that line explained it to me as a point of pride. “We work for wages, we have great lifestyles,” Dave Rupert, an Austin-based Web designer and tech-show podcast host, said. “We just want to work, make cool shit, and then go home to our families, to our lives, to our dogs, to our backyards.” There are many people in Austin who are interested in “building the Internet” who don’t care about the fame and glory that comes with being part of a startup scene, Rupert said.

That attitude represents both boon and bane. It means you are unlikely to find in Austin the world’s most ambitious entrepreneurs bent on building the next killer tech company. But you are going to find a city of content people who can see life beyond the Internet’s fences.

Sometimes what's great for building a balanced life can be bad for building the next Facebook.