Venture capital torrent slows
After a few years of astronomical investments amid a rush for good deals, the venture capital industry is coming to earth.
The amount of money bet on young companies — usually in exchange for an ownership stake — declined by 16 percent in 2016 from 2015, which saw the most money invested since the dot-com boom in 2001, according to data collected by Pricewaterhouse-Coopers and the venture capital analytics firm CB Insights.
Rock-bottom interest rates had pushed more investors into the higher-risk investments, and now that rates are rising, the venture sector may continue to deflate.
The shrinkage hit Texas as well. Venture investments in Texas companies fell to $1.3 billion in 2016 from $1.9 billion in 2015. Houston was also affected, with investments declining to $104.4 million in 2016 from $408.5 million in
2015 — although that number was skewed by a $300 million investment in the residential solar company Sunnova.
“Nationally, we actually think 2016 is a bit more normalized,” says Caroline Gagliardi, a Dallas-based partner at PwC. “It is important in Texas that you need to take the mega-deals out in order to compare apples to apples, because we don’t get so many of them.”
Indeed, Texas still gets a small fraction of the venture capital pie. Silicon Valley mopped up $3.9 billion of the $11.7 billion spent in the fourth quarter of 2016, according to CB Insights, followed by New York City at $1.9 billion; only $181 million flowed to the Lone Star State.
That’s a decrease from a decade ago, when Texas ranked third out of all states for the flow of venture capital. In real terms, the venture capital industry in Texas sank by 19 percent over that period, while it more than doubled nationally, according to calculations by scholars at Rice University’s Baker Institute who last year singled out Houston for having a poor environment for entrepreneurship.
Part of the problem may be that other industries have been crowded out by oil and gas, which has long dominated Houston’s economy. Much of the innovation in that sector happens inside large companies, rather than startups.
Although the venture capital slump coincided with the downturn in the oil and gas market, it’s likely that the two are separate phenomena. Nearly half of the cash invested in Texas and Houston goes into internet companies, with health care close behind.
Little goes into energyrelated companies, despite what some investors and entrepreneurs say are good opportunities that coastal VCs don’t understand. Cutting-edge manufacturing technologies and new efficiencies in oil field services are two examples. For the past couple of years, that has prompted local management firms to look overseas for new interest, especially China, though those efforts have yet to bear much fruit.
Meanwhile, more traditional and diversified investment companies continue largely unperturbed. One of Houston’s largest, Main Street Capital, does a mix of private equity and venture capital focused on established industrial companies, and saw no decrease in the number of deals it was able to complete in 2016.
“Despite the oil and gas downturn, the economy as a whole — and the other industries — have been pretty resilient,” says Dwayne Hyzak, Main Street’s president. “Our expectation is more of the same.”