In A City Where Bigger Is Better, Can Houston Build A Startup Scene?

Houston Chronicle

Houston should have been able to hold on to Hamza Amir.

A Sugar Land native, he attended the University of Houston, and, with former classmate Timur Daudpota, created a set of tools for making viral videos. The young company, named Blurbiz, started gaining traction and attracting backers, but last year moved west to join a prestigious “accelerator” –an intensive training program for tech startups — in Mountain View, Calif., just down the road from Google.

“There’s no accelerator here that would’ve competed with anything based in Silicon Valley,” says Amir, 25, touting the access to capital, mentors and a culture that lives, eats and breathes innovation, entrepreneurship and deals.

The loss of Blurbiz is a reminder that Houston still lacks a vibrant startup scene that can bring buzz, energy and new engines of growth to a regional economies. Even Cincinnati, hardly known as hotbed of innovation, has had more success for its size in attracting venture capital to fuel early stage companies than Houston, which has seen that type of investment shrink 13 percent over the past decade when adjusted for inflation, according to PwC Moneytree.

The Startup Genome project, an international collaborative that evaluates entrepreneurial ecosystems, estimated the aggregate value of Houston’s startup companies at $635 million, less that one-sixth the median of $4.1 billion among 45 major cities.

Economists, city officials and business leader cite several reasons for Houston’s weakness, but the key factor holding back Houston’s startup scene might be an outlook that bigger is better. In other words, in a city with more than two dozen Fortune 500 companies, the world’s largest medical center and the national space agency, why bother to foster small tech companies like Blurbiz?

Startup boosters argue that those small fry can turn into big fish, becoming the next Google or Facebook. But even if they don’t, they say, new players can keep established industries sharp, both by introducing technologies that give local companies an edge or forcing larger players to compete.

In addition, as places like Boston, Austin and Silicon Valley show, a startup-friendly reputation can add to the pool of young talent needed to prosper in the 21st century economy.

In recent months, after years of relative complacency, local leaders have started to take notice. The Greater Houston Partnership and City Hall have both convened working groups to figure out what they can do to keep the companies like Blurbiz and entrepreneurs like Amir in Houston.

“Houston has been a cutting edge city,” says Ed Egan, director of the McNair Center at Rice University. “We don’t want to lose that edge. It’s had that history of being innovative, we just want it to get on to the next wave.”

Seeds need nurturing
The seeds of startup scene have already been planted in Houston. A number of coworking spaces have popped up to host small companies, and the Texas Medical Center has started an incubator to provide mentors and offices for medically-focused entrepreneurs.

But those seeds lack some key nutrients.

The first is density. Startups love density, both to reach large numbers of customers quickly and make it easier to run into the kinds of people — investors, employees, mentors — who can help their business grow. As a generalization, founders also tend to like places where they can walk to bars and coffee shops, which is not always easy in Houston’s sprawling, car-centric landscape.

The second missing nutrient is Houston’s rich doctors and oil executives aren’t used to putting money into tech startups — they’ve traditionally gotten a better return digging holes in West Texas.

The third is customers. Big companies in Silicon Valley, like Oracle, Cisco, and Google, are typically open to buying technology from small companies or acquiring outright, unlike Houston’s highly regulated, capital-intensive energy, health care, and aerospace industries, which tend to move more cautiously.

“They understand energy, they understand health care,” says Carolyn Rodz, who runs a Houston-based virtual accelerator for women called the Circular Board. “To get them to put money into things they don’t fully understand is really difficult.”
None of these problems are new.

Houston’s civic leaders noticed them at the end of the 1990s, when another tech boom was minting millionaires elsewhere.

In 1998, city and business leaders launched the Houston Technology Center, a nonprofit supported by government, corporate and foundation grants. HTC now claims 93 companies — predominantly serving the energy, life sciences, aerospace and manufacturing industries — that have completed programs designed to teach management skills and furnish introductions to mentors and potential investors.

The tech center, which has budget of about $3 million per year, boasts its alumni have attracted $2.8 billion in investment since its founding.

By the mid-2000s, however, a new model of accelerators emerged to focus on the earliest-stage startups. The biggest names in accelerators, Y Combinator in Silicon Valley and Techstars of Boulder, Colo. launched companies like Airbnb and Dropbox by pumping modest “seed” investments into hundreds of promising firms, taking small stakes in the startups, and funding operations with the returns generated when those startups are sold or go public.

The city’s first attempt to create such an accelerator failed. In 2010, aiming to build a Y Combinator with a Houston twist, local venture capitalists launched Surge. Focused on energy software, the accelerator quickly won sponsorships from the likes of Shell, Exxon Mobil and Schlumberger.

But Surge’s founders soon learned that energy technology takes longer to develop and requires more capital than creating an app to chat with friends or find a ride. They also found that oil and gas companies often preferred to develop their own technology, rather than buy it, and were not necessarily open to software solutions developed by Surge companies, said the accelerator’s former director, Kirk Coburn.

“When you’re trying to sell someone technology and they’ve never used technology, it becomes very difficult,” he said — the Facebook generation, in other words, hasn’t yet taken over the procurement process.

Surge struggled, particularly during the oil bust, to raise money to finance operations while it waited for its companies to deliver returns. A deal to become Techstars’ Houston branch fell apart. In early 2016, Coburn shuttered Surge. Since then, 20 out of its 43 companies have moved out of Houston.
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Missed opportunity
In the wake of the oil bust, which again added urgency to diversifying Houston’s economy, local leaders realized something was missing, especially as startup ecosystems began to flourish in cities outside traditional venture capital hubs.

“It’s probably the one piece of our economy that’s not as strong as the rest,” says John Nordby, vice president for innovation at the Greater Houston Partnership, the city’s largest business association. “It’s a missed opportunity.”

In the next few months, a group convened by the Greater Houston Partnership and task force led by City Council Member Amanda Edwards are expected to release recommendations to kick entrepreneurship up a notch, ranging from tax incentives for startups to funding a new center for startups focused on software.

Already, there are some encouraging signs. Investors from Texas’ biggest cities, including Houston, are talking about creating a new fund to invest in tech startups that would attract more capital by allowing high-net-worth individuals to invest alongside experienced venture capitalists and share in the returns.

Station Houston, an accelerator launched a year ago from Surge’s space on West Gray Street, has graduated to two floors of a downtown office tower with a commanding view of Midtown. Station has 196 member companies, 114 mentors, support from companies like Shell and Chevron, and a venture fund to provide follow-on investments to its companies. Co-founder and CEO John Reale, a former Wall Street analyst who’s been in Houston since 2000, said he has talked to local officials about designating a city-owned building to house startups — like the city did for HTC nearly two decades ago — and promoting a certain neighborhood, likely EaDo, as a destination for them.

“My vision is to build a district,” he said. “I want to build a tech district here in Houston, like the Texas Medical Center for medicine.”

That, however, could require government support. In Chicago, which a delegation from Houston visited last week, the 1871 startup hub received $4.8 million in state grants between 2012 and 2014 to build out its space. The accelerator now houses more than 400 young companies and organizations.

“It will not happen [for Houston] unless public organizations step up,” says Blair Garrou, co-founder and partner of Mercury Fund, a Houston-based venture capital firm. “Every other ecosystem has happened that way.”

That might be tough, considering the city’s budget challenges. And not everybody agrees that government should underwrite private companies.

“The city has a lot of priorities,” said Jeff Reichman, an active supporter of the startup scene whose Houston-based firm January Advisors helps local governments with tech projects. “Encouraging tech startups, personally, I don’t think should be high on their list.”

But the city can give assistance that doesn’t cost anything, Reichman says, like advocating with investors to support local entrepreneurs and helping bring attention to young, promising companies. None of these efforts have to transform Houston’s business culture into something it’s not. After all, that culture helped make Houston the energy capital of the world and one of the fastest growing metropolitan areas in the country.

“None of us want to create the next Silicon Valley,” says Hesam Panahi, who teaches entrepreneurship at Rice. “We just want to make Houston better at keeping startups.”