Wealthy locals learn about funding startups
Wealthy locals learn how to fund tech companies
Local investors with the TMCx startup incubator and Station Houston are trying to persuade other wealthy people to take a chance on the region’s health technology startups as they try to spur innovation and to develop a Silicon Valley-like scene.
FOUNDERS delivering pitches to investors usually occupy the low dais at Houston’s TMCx startup incubator, a 3-year-old outgrowth of the Texas Medical Center that houses new health technology companies.
But on one recent evening, investors were the ones making the pitch. Their target: other investors.
TMCx and the local accelerator Station Houston are trying to persuade wealthy people looking for investments to take a chance on the region’s startups as they try to spur innovation and to develop a Silicon Valley-like scene.
“We need you to join us in investing in these companies,” said SnapStream Media founder Rakesh Agrawal, who himself has made small seed investments in dozens of young businesses. Building a strong startup culture, he said, is a “group sport.”
Recent studies have shown that key missing ingredients in Houston’s entrepreneurial ecosystem are early-stage funding for startups and later on venture capital to help businesses grow long-term. It’s a problem that’s common outside tech hubs like Austin, Boston and Silicon Valley.
For Houston, Agrawal and others working to build a startup scene say the solution is redirecting some to the wealth that abounds here. The goal: persuade people with money to put it to work locally.
An audience of well-groomed businesspeople munching on catered hors d’oeuvres listened raptly as successful early-stage investors made the case for putting money into local startups. It was the first in what will become a series of programs on how to invest in very early-stage companies.
A report issued this month by Ed Egan, director of the McNair Center for Entrepreneurship and Innovation at Rice University, found that startups coming through existing incubators and accelerators in Houston raise venture capital at substantially lower rates than successful institutions in Silicon Valley. Part of the problem is, wealthy people in Houston interested in tech deals are perfectly capable of finding them on the East and West coasts. Marty Goossen, market manager for JPMorgan Private Bank in Houston, said his clients are used to taking risks — wherever it seems the rewards are largest.
“I have clients who take risk in the tech industry, but it doesn’t necessarily need to be locally,” Goossen said. “We know that the tech industry is based out of places like Palo Alto,
Boston, and increasingly Austin. And why? Because that’s where the thinkers are, that’s where the innovators are, that’s where the opportunities seem to be presenting themselves more frequently.”
The people trying to make a startup scene happen in Houston are hoping to change that perception — both by showcasing promising companies and by telling the story of investors who have made money by funding them.
At TMCx’s most recent Demo Day last week, the incubator’s member companies made five-minute pitches to more than 650 attendees and 2,300 people who watched via livestream — more than double the numbers from their last event in November.
Anthony DeToto, senior vice president at the wealth management firm Sentinel Trust, where he oversees about $3.5 billion on behalf of 36 families, was among those at the Demo Day.
Listening to the pitches, DeToto said he could see his clients getting interested in local tech companies as the city builds momentum behind the sector.
“What’s interesting to me is the mayor’s office, the county, the Greater Houston Partnership are all working together now,” DeToto said. “This is in our backyard. We can’t ignore it.”
Accenture released a report several weeks ago that outlined what the city, the business community and local academic institutions ought to do to nurture young tech businesses.
The investor education series, meanwhile, is aimed at showing local wealthy people why and how to get involved — and how to avoid mistakes. A panel of experienced hands discussed what makes a promising company and which red flags to avoid.
The remedy for failed investments, the speakers on the dais said, is more investments — only about a third will ever deliver significant returns. And success comes with experience.
Larry Lawson, who made millions by both starting and investing in medical device companies, rehearsed a long list of successful deals. His secret?
“My gut instinct leads me as much as anything else,” he told the audience at TMCx’s investor evening. “If I have a gut instinct about a company and how many lives it may save, I latch on to that first, and then I look at the details.”
Station and TMCx are planning to help wellheeled Houstonians participate in deals alongside more experienced investors, so they can learn the ropes and perhaps join a group like the Houston Angel Network down the line. And as much as Houston’s civic leaders make the case that investing locally is good for Houston, that’s not the main selling point.
“There’s a lot more money being made in life science investments than people realize,” Agrawal said. “The moneymaking is crucial. This is not for peace and free love.”