By Lydia DePillis
WWR Article Summary (tl;dr) This article takes a look at the institutions that host and nurture startups in the Houston area.
“Entrepreneurship is a very lonely activity,” says Hesam Panahi, a professor of entrepreneurship at Rice University. “And you need to be around that energy and that buzz.”
In Houston, those rock shelters have been unstable and overcrowded, with some falling apart altogether in recent years. But gradually, more are being constructed — and the long-term success of the startup ecosystem will depend in part on whether they succeed and thrive.
For the better part of two decades, all Houston had was the Houston Technology Center, a nonprofit organization that has housed, taught, and mentored hundreds of startups since its founding in 1998.
Launched with the help of a city-owned building and grants from the federal government, and funded on an ongoing basis by the city’s biggest corporations, it had stability that many other business incubators would envy.
But some venture capitalists who backed HTC originally wanted the group to look more like the accelerators popping up in Silicon Valley: More focused on the kind of super-high-growth software applications that benefit from equity investments early on in their development, as well as more open workspaces where people can share ideas and meet potential collaborators.
The economic development oriented, nonprofit model that the HTC uses comes straight from the 1990s, said Blair Garrou, managing director with the Houston-based venture capital house Mercury Fund. “This was brought to the HTC’s attention multiple times,” said Garrou, “and it did not want to change, it did not want to innovate.”
Walter Ulrich, who retired after a decade at the help of HTC in February, counters that many founders don’t want the centralized, open-floor-plan offices and constant networking events that modern accelerators usually offer.
While hosting many of those at its Midtown headquarters, HTC has also expanded by opening branches in the far reaches of metropolitan area — The Woodlands, the Energy Corridor, out by NASA — rather than seeking to build dense startup activity around a central hub.
“People in the outlying areas aren’t going to commute in,” Ulrich says. “Look at the really big entrepreneurs, the Steve Jobs of the world, they worked hard, they didn’t look for places where there are ‘collisions.’ They had a vision, they put their head down.”
Starting an accelerator that venture capitalists and software-focused entrepreneurs wanted, however, proved easier said than done. For reasons I described last week, an energy-focused accelerator called Surge grew and died between 2010 and 2016, unable to fund day-to-day operations while waiting for its member companies to go public or get acquired. Meanwhile, two co-working spaces that hosted small companies also came and went.
Finally, in 2015 the Texas Medical Center founded its TMCx accelerator, which puts classes of health care-related startups through a program that gives them access to a vast array of potential clients.
Last year, Johnson & Johnson founded JLabs, which houses another couple dozen early stage life science companies, and this year will start a new center focused on medical devices.
AT&T started Foundry, a similar operation focusing on digital health.
Now, the list runs even longer: TXRX is a non-profit “makerspace” that offers access to 3-D printers and other machining technologies for hardware entrepreneurs. Rice University and the University of Houston have startup incubators for students.
WeWork, the nationwide provider of co-working spaces, has announced it’s coming to Houston this year.
And then there’s Station Houston, founded with the help of some of some of the venture capitalists who became impatient with HTC’s resistance to change. Operating out of two floors of a downtown office building, it offers co-working space, a crowded schedule of events, access to mentors, a coding school, and soon, its own venture fund.
Everyone you’ll talk to in Houston’s startup ecosystem will say that this flowering of new support organizations is hugely beneficial to entrepreneurs and the city. The question for Station, however, will be whether it sustain itself without a steady source of institutional backing, which HTC and the TMC-based accelerators have, but Surge lacked. There’s no established business model for tech-focused business accelerators, and they usually need a variety of funding streams to make it over the long term.
Other institutions that Station’s backers have cited as models, including 1871 in Chicago and Cintrifuse in Cincinnati, have received grants from either the city or the state government to get started. If Houston does the same, either with real estate or funding, Station would have to balance the interests of investors — who are typically looking for the next Facebook, which is worth $400 billion but employs far fewer people than many other companies of its size — with the interests of the city, which wants to see many businesses survive to employ lots of people, even if they’re not the kind of companies that make venture capitalists rich.
“That’s where the whole concept of economic development and wealth creation start to diverge,” says Aruna Viswanathan, a former director of operations at HTC who now works at the RBR Group, a business consultancy. “Wealth creation is about how many dollars are returned for the investments that are done. A nonprofit is going to be able to pick up those companies that might not be unicorns, but grow to a good steady size.”
Meanwhile, the HTC, now led by former banker Lori Vetters, is thinking through that balance, too. They’ve participated in roundtables led by the Greater Houston Partnership and local government, looking at how other cities have tweaked their models, and trying to figure out their role in Houston’s new innovation landscape.
“The bottom line is going to be, how do we refresh ourselves in this very competitive marketplace?” says Maryanne Maldonado, HTC’s chief operating officer. “We don’t want to make one small change. We want to look at what is going to be needed five years down the line.”
Next up, we’ll look at what the government could do — and is more or less likely to do — to help.