From starting up to starting over
Houston’s nascent tech startup scene struggles as pandemic sucks away necessary seed funding
Amanda Ducach’s Houston-based startup SocialMama was awaiting its next batch of seed money when the stock market plummeted in March. Then came the bad news from a key investor: The money to fund a promised $100,000 just wasn’t available.
“That’s how it is with funding,” Ducach said. “Supposedly it’s still coming. But until it’s in your bank, it doesn’t exist. Our runway went from months to, well, not months.”
SocialMama – built around a smartphone app that helps mothers find each other for support – doesn’t yet make money from operations. It’s at the stage where it is trying to grow a user base before it tries to make money, and for now, investors’ cash is its lifeline. Ducach is seeking new backers.
The novel coronavirus crisis gripping the country and the world is putting stress on Houston’s nascent tech scene. Sector leaders and those who help startups get off the ground said companies are scrambling to make their businesses and their interactions more virtual even as they seek emergency capital to keep going.
Some, like Ducach, have seen sources of funding vanish. Others are trying to turn the crisis to their advantage, providing products and services related to the pandemic.
And surprisingly it’s the smaller, newer startups with fewer expenses, smaller staffs and less to lose that may survive best, tech leaders said.
“If you have not yet brought on any staff or signed any agreements, you are actually not all that vulnerable,” said Harvin Moore, president of Houston Exponential, a nonprofit that works to grow the city’s tech community. “The vulnerable companies are the ones that have grown, added staff and obligations, but they have no funding runway.”
In Ducach’s case, she had to furlough two of her nine employees. And SocialMama has launched a new feature that originally wasn’t set to roll out for another four months. The Expert Program, which was first envisioned as part of a subscription tier but is free for now, brings medical and social-care professionals to the app so its members can draw on their expertise.
“Moms are incredibly overwhelmed right now,” Ducach said. “They’re working from home, doing home schooling, trying to keep their families healthy. We felt like we needed to make this available to moms now. It’s not easy to get a therapist to talk to you for three minutes for free.”
Topl is another Houston startup that has had to cut staff. CEO and co-founder Kim Raath said her company, which applies blockchain technology to providing a tamper-proof log for supply chains, had two people in an office in the Netherlands that were let go.
“It was part of a restructuring we would have done anyway, but we did it sooner because of the coronavirus,” Raath said.
Topl had planned to seek more funding this year, and Raath said the company will proceed, but she expects it will take “six months rather than eight to 10 weeks” to raise it.
Blair Garrou, Houston managing director at the Mercury Fund, a startup venture capital firm, said there remains investment money to be found, but the
pandemic has backers thinking differently about companies.
“We are leaving an environment where it’s growth and growth alone that investors want,” he said. “Investors want to know the basics of the company are stable. They want to see a startup offering solutions needed beyond the current crisis.”
Garrou said most Houston startups “are in pretty good shape” because many were already lean. That’s not the case everywhere.
“On the East and West coasts, you have a lot of unicorns (startups with billion-dollar valuations) that have very high burn rates,” he said. “They are going to be having to do some serious layoffs and payroll reductions.”
Responding to stumbles
Helping startups adapt and innovate during the coronavirus crisis, leaders in the startup scene said, are two events that were catalysts for the current emphasis on building the tech ecosystem: The failure of Houston to make the short list for online retail giant Amazon’s second headquarters, and Hurricane Harvey.
With Amazon, Houston was dinged for, among other things, the lack of a strong startup culture and an educational system wasn’t producing the kind of employees the company needed. With Harvey, tech startups responded in ways that answered pressing needs in the community.
Gabrielle Rowe, chief executive of Ion, which is charged with building out the city’s innovation district, said Houston may have found its niche in resiliency.
“Houston has gotten close to this with Harvey. We were shut down economically as a city for weeks,” she said. “On a scale standpoint, this is so much bigger, but we have the muscle memory to help us get there.”
Tech leaders give the example of TX/RX Labs, a prototyping startup in Houston’s East End that used its equipment and expertise in a partnership with Memorial Hermann Health System to build protective gear for medical personnel as a shortage grew.
Another example is Luminare, a startup founded by Dr. Sarma Velamuri, a former internist who specialized in transplant medicine. When a friend’s daughter died from septic shock in a Houston intensive care unit, he vowed to do something to prevent such deaths.
“I came home, mortgaged the house and started the company,” Velamuri said.
Luminare developed software that automates the gathering of information from a variety of inputs during a patient’s stay in the hospital. Artificial intelligence then warns doctors and nurses if the patient is in danger of going into septic shock, which happens when an internal infection runs out of control. Velamuri said it is the No. 1 cause of death in hospitals.
The system is now in five hospitals.
The Centers for Disease Control and Prevention, while working with Luminare for a trade show display that was ultimately canceled due to the pandemic, suggested its software could also be used to create a screening tool for COVID-19.
It took Luminare’s programmers a short time to morph its existing technology, testing it first at an Arkansas hospital. Harris County Public Health now uses it, as does Fort Bend County, Houston Health Care for the Homeless, and Corpus Christi’s public health office just signed up. It’s available to explore at CheckForCorona.com.
“We aren’t selling it, we aren’t gaining anything from having more people on it,” he said. However, Luminare believes it is gathering enough epidemiological data that it could be used to predict where outbreaks are likely to occur.
Change in approach
Startup culture thrives on getting its members together. Networking sessions, happyhour meetups, panel discussions and pitch nights are all designed to generate a critical mass.
That’s why incubators and accelerators, where budding companies sign up to get access to mentors and each other, are so popular.
But socializing has given way to social distancing in the pandemic, and Houston’s startup development organizations are shut down and empty. Instead, being technologically astute, they’ve moved much of their activities online.
Houston Exponential has built a calendar on its website at houstonexponential.org/events where organizations and accelerators can list their online events, and there are dozens. From career tips to “office hours” with experts and investors to roundtables and panel discussions, the events looks like one you’d see in any thriving startup community, except that they are all conducted via video conferencing.
The Cannon, a tech incubator with three locations in the area, is one of those that has “shifted into virtual mode,” said CEO Jon Lambert, and its online sessions have been well-attended.
“The audiences seem to be about the same size, but one thing I can’t tell you is if it’s the same audience” as those who frequented the Cannon’s live events, Lambert said.
Both Lambert and Moore, of Houston Exponential, said they have noticed the frequency of meetings has increased.
“It could be the nature of the work-at-home order. People will get onto a virtual meeting if it gets them away from their dog barking,” Lambert said.
Focus on staying viable
In most cases, what drives people to seek online connections now is figuring out how to keep their businesses going.
Carolyn Rodz, the founder of Alice, a small business hub that focuses on companies owned by women and minorities, said founders right now are focused on finding money to help them survive. The businesses she works with are looking for help filling out forms for emergency grants and loans, and much of the chatter on the community forums on Alice has to do with this.
Alice has partnered with Verizon, Silicon Valley Bank and the U.S. Chamber of Commerce to offer $10,000 grants in a program called Business for All. It was something Rodz planned to do anyway this year, but now the program has taken on more urgency.
The site has 100,000 registered members, but another 100,000 users separately have visited its COVID-19 Business Resource Center at covid19businesscenter.com to fill out the application and explore other resources.
A report it issued last week included results of a survey conducted among Alice’s membership – which includes small businesses other than tech – on how much money they would need to survive. Thirty-four percent estimated they’d need $10,000-$25,000, while 25 percent said they’d only need $5,000-$10,000. And 56 percent said they need help “immediately”.
“Everything right now is centered on, ‘How do I get my hands on funding?’” Rodz said.
Asked if they thought the growth of Houston’s nascent tech scene could be stunted by the pandemic and the resulting economic lockdown, all those queried said that likely wouldn’t happen. Lawson Gow, the founder of The Cannon accelerator, was the most adamant.
“I refuse to even think along that path,” Gow said. “We can’t lose the momentum we have. That is not an option.”