Houston startup community hopes to avoid past mistakes
Many fear politics, bad policies will waste recent gains
First of two parts
Fresh from attracting a $200 million investment, the Houston software company Onit proceeded to get it backward last month. Instead of pulling up stakes and heading west, or selling out to a California tech company, the startup stayed put and bought a Silicon Valley rival.
That milestone, for both Onit and Houston’s nascent tech sector, follows others that have included the opening of a Houston branch of the Boston startup accelerator MassChallenge and the selection of Houston by digital payments company Bill.com as its first location outside the San Francisco Bay Area.
These successes have fueled optimism within the city’s small yet earnest startup community, but they have not eased anxieties that Houston could again squander the momentum as it tries to build a technology sector. Those concerns came through in more than 30 interviews with entrepreneurs, investors, analysts and academics, many worried the city is repeating the mistakes of the past as it pursues policies mired in top
down approaches and politics, often overlooking the startup community and accepted economic development practices.
For example, economic development specialists say the key to a thriving tech sector is density, a concentrated cluster of companies, people and amenities — from coffeehouses and restaurants to gyms — where ideas, talent and money can mix, connect and cross-pollinate. But instead of neighborhoods such as Montrose or Uptown that offer this type of density, Rice University is spending $100 million to renovate the former Sears located in a desolate part of Midtown where Jack in the Box is the choice dining opportunity.
Houston and other cities have become “seduced by the notion that if we just create a building and we allow people who we think are talented to occupy the building then we’re on the road to economic riches,” said Jon Roberts, managing director of the Austin consulting firm Tip Strategies. “And the reality is so far from that.”
The stakes for getting it right this time are higher than ever as climate concerns drive a shift to electric cars and renewable energy, threatening the oil and gas industry on which Houston has long relied. The tech sector, meanwhile, has become one of the nation’s leading engines of economic growth, generating about $1.4 trillion in products in 2017 and expanding four times faster than the economy as whole for most of the last 20 years.
Ultimately, Houston needs to follow an entrepreneurial model that identifies a need in the market, finds a solution and brings it to commercial scale, said Ed Egan, former director of the McNair Center at Rice University’s Baker Institute. It’s a long and difficult process that requires extensive research, persistence and determination. It demands learning from failures, pivoting to new ideas and conducting unvarnished assessments of strengths, weaknesses and competition.
“Everybody is chasing headlines,” Egan said, “rather than doing the hard work.”
How we got here
Houston’s previous technology push began about 20 years ago, when a building owned by the Midtown Redevelopment Authority was remodeled to create the Houston Technology Center. Sixty percent of the project was financed by a federal grant and 40 percent by the redevelopment authority, an independent city agency that gets a share of local taxes to fund economic development, affordable housing and other things.
The nonprofit Houston Technology Center was designed to support, incubate and accelerate high-tech startups. HTC started with high hopes and good intentions, and had successes. It coached more than 1,000 companies, including 277 client companies that created some 6,000 direct jobs and raised some $3.5 billion over nearly two decades, according to a study by the consulting firm Accenture.
But the tech incubator and accelerator began to lose momentum in its later years. It became more focused on corporate fundraising than helping new companies get off the ground, said Eric Elfman, once an HTC mentor and now CEO of Onit, which creates software to automate processes for legal and business teams. It didn’t quite get the startup culture, either. Events were scheduled for early mornings to accommodate corporate sponsors needing to be at their offices by 9 a.m., rather than entrepreneurs coding late into the night and waking up midmorning.
“The startups, in a lot of ways, were treated almost as a petting zoo,” said Marc Nathan, who spent July 2007 through January 2010 as managing director of IT startups at HTC and now works with startups in Austin. “They were nice and cute and fun to play with for the corporates, but they really had zero invested interest in seeing the startups grow.”
Déjà vu all over again
By 2016, the Houston Technology Center had competition from a new startup hub, Station Houston, which initially moved into Midtown. Station Houston grew quickly, charging membership fees to startups and matchmaking fees to corporations seeking new technologies. It later moved into a downtown high-rise. Its companies have raised more than $270 million in venture capital.
Meanwhile, the city’s establishment got involved. Greater Houston Partnership, the business-financed economic development group, launched a technology innovation roundtable. The administration of Mayor Sylvester Turner created the Mayor’s Technology and Innovation Task Force.
In October 2016, the Greater Houston Partnership commissioned Accenture to create a road map for nurturing and enticing tech startups with a potential to grow quickly. A centerpiece of the strategy was a new organization called Houston Exponential, or HX, that would market the city’s innovation sector and serve as a clearinghouse to connect startups to accelerator programs and investors. It absorbed the Houston Technology Center, the Greater Houston Partnership’s tech roundtable and the mayor’s task force.
HX launched at the end of 2017. In January 2018, Houston suffered the humiliation of being the only of the nation’s four biggest cities not to make the list of 20 finalists for Amazon.com’s second corporate headquarters — a list that included Indianapolis, Columbus, Ohio, and Newark, N.J.
“After Amazon, we were all rowing together,” said Gaby Rowe, CEO of Station Houston and an HX board member. “We didn’t ever not want to make the short list again.”
But more than 18 months after HX was launched, local entrepreneurs say it’s hard to think of many notable programs or initiatives undertaken by HX, save the layoffs of 11 of the 19 full-time employees brought over from the Houston Technology Center, and the recent ouster of its first executive director, who lasted just over a year. They described HX as slow moving and bureaucratic, with as many as 14 committees involved in running the organization at one time.
The board of directors has 22 members, many with political and corporate connections, but few with experience founding a tech startup, critics say. The chair of the HX board is Gina Luna, a former chair of the Greater Houston Partnership who had a 22-year career in banking.
“This is formal Houston politics, not on-the-ground startup activity,” said Nathan. “I have no idea what they’re doing outside of having meetings.”
Houston Exponential said its board, which includes four entrepreneurs, is large to represent diverse interests. Other members come from startup development organizations, venture capital or angel investment groups, academic and research institutions, civic and community organizations and corporations.
In an interview, Luna said HX has cut the number of committees to four and boosted awareness of the city’s tech sector. It has raised $30 million of a planned $50 million fund to attract venture capital to Houston, launched HTX Talent as a one-stop shop for technology job openings and helped spur the creation of the Tech Sales Academy, set to launch in September as part of the Stephen Stagner Sales Excellence Institute at the University of Houston.
“We can point to so many tangible things that are in motion or have happened,” Luna said, “that are clear evidence that we are moving in the right direction.”
The city of Houston is pinning much of its hope on developing an innovation corridor stretching along the light-rail route from downtown to the Texas Medical Center. The corridor, the centerpiece of Houston’s Amazon bid, includes the former Sears building in Midtown and 16 surrounding acres. The owner, Rice University, plans to invest $100 million to renovate the 80-year-old building into the Ion, a hub for startups, venture capital firms, angel investors and accelerator programs. It’s scheduled to open late next year.
A big gamble
But such “build it and they will come” strategies can have lackluster results. In Newport News, Va., for example, economic development officials tried to capitalize on research from the Thomas Jefferson National Accelerator Facility, a Department of Energy laboratory.
In 1996, Newport News developed a 122,000-square-foot applied research center with office and co-working space with the goal of spurring private investment in other areas, including an adjacent 44-acre parcel controlled by the real estate arm of the College of William and Mary. The sites lay fallow for years, through the dot-com boom of the late 1990s and into the beginning of this decade, when the William and Mary parcel was sold, rezoned and developed into a shopping center, apartment complex and technology park, according to a 2016 report by NAIOP, a commercial real estate association, and the Virginia Tech Program in Real Estate. The shopping center and apartment building are up and running, but just one building is open in the research park.
The technology park faced several challenges, the 2016 real estate study found. Perhaps the most daunting was the lack of a strong entrepreneurial culture in a region historically dependent on heavy manufacturing and federal contracting, with few tech firms. Houston is a much bigger city than Newport News, but the Ion must overcome similar cultural hurdles in a Houston economy long dominated by energy, health care and big business.
The Ion’s location was selected to be near universities that provide not only cutting-edge ideas and research that can feed a tech ecosystem but also talent pools. Think Stanford in Silicon Valley, Harvard and MIT in Boston, or, closer by, the University of Texas in Austin.
But Egan said an innovation district should already have startups, investors, and research and development facilities. It should be in a neighborhood of bars, restaurants and coffee shops to foster the types of interactions through which ideas incubate and deals and money flow.
“Do you think people are going to be doing $10 million venture capital deals in the Jack in the Box?” he asked.
The location isn’t ideal for energy startups, in particular, as most customers are out west in the energy corridor, said Amy Henry, cofounder and CEO of Eunike Ventures, which aids startups in testing their technology with exploration and production companies. Proximity to the energy corridor is one reason the startup Data Gumbo, which uses blockchain to automate business transactions in the oil field, works from the Cannon startup hub near the intersection of Interstate 10 and Beltway 8, said Data Gumbo CEO Andrew Bruce.
Allison Thacker, president of Rice Management Co., which manages Rice University’s $6.3 billion endowment, said the university did not undertake the Ion project on a whim. It studied successful innovation districts and hired consultants.
“We could have simply sold the land off to developers and made a good return for the endowment,” Thacker said, “but our view was it’s very rare to have such a large position of undeveloped land in an urban, growing city surrounded by great neighborhoods.”
Jump-starting innovation
Thacker views the innovation district as part of a broader innovation community that includes the Cannon startup hub and Founders District entrepreneurial community in west Houston, the collaborative manufacturing workspace TXRX Labs east of downtown, and the Texas Medical Center’s Innovation Institute in the Medical Center area.
The Ion is attracting tenants, including GOOSE Society of Texas, a group of 25 ultra-high-net-worth individuals who invest into venture deals. Station Houston, which will oversee programming, and the Ion Smart Cities Accelerator program, whose partners include Microsoft and Intel, will be tenants, too.
Station Houston last year reincorporated as a nonprofit, arguing that would better align with Rice’s mission and allow it to attract funding from grants and foundations. But critics of the move worry Station Houston could lose its edge if its financial interests aren’t tied to the success of startups, risking the fate of the Houston Technology Center, which lost momentum as its focus shifted toward raising money.
Elfman, the CEO of Onit and a serial entrepreneur, has broader concerns, questioning whether Houston can shift enough of its focus from oil and gas.
“I wonder if we’re fighting against the inevitable here in Bayou City,” he said. “If this is just never going to be a technology or innovation center. It’s hard to change your nature as a city.”