Study casts costly doubts over Rice project
Houston has two better alternatives to the Innovation Corridor, ex-McNair director says
Moving startups into the Innovation Corridor, a four-mile stretch from downtown to the Texas Medical Center, rather than a denser, better established neighborhood could cost the
Houston innovation sector as much as $64 million in short-term venture capital funding and hundreds of millions of dollars in long-term economic loss, according to a new study.
The academic paper was released Monday by Ed Egan, who directed the McNair Center at
Rice University’s Baker Institute between August 2015 and August 2018 and argued for creating an innovation district in a concentrated, five-square block area that was already home to entrepreneurs, engineers, scientists and technical workers.
At that time, Egan wished there was data-driven research to support his recommendations on where an innovation district would most likely succeed, so his work in the past 18 months included developing an economic model to examine the benefits of bringing startups close together.
The model can be tailored to individual communities, but he used Houston as an example.
The Innovation Corridor, the paper finds, is too far from where most of Houston’s startup activity occurs and too spread out to encourage what Egan calls “serendipitous collisions” in which entrepreneurs, investors and tech workers run into each other in coffee shops, bars and restaurants and other locations where they share ideas and spawn new technologies and products.
In 2018, the four-mile corridor only housed 11 percent of Houston’s startups that had received venture capital within the past five years, according to the paper. And Rice University’s startup
hub, a $100 million project to renovate the former Midtown Sears in a less-thandesirable part of this corridor, has never had a venture-backed startup located within a square mile.
“We did not want a gentrification project,” said Egan, who left Rice as the university planned to change the focus of the McNair Center. “We wanted the best site that Houston had to offer.”
Rice Management Co., which manages the university’s $6.5 billion endowment, said the facility, called the Ion, is ideally located in an under-developed area near downtown, the Texas Medical Center and Houston’s major educational institutions. The Ion is part of a larger Riceled project that will cover 16 acres in Midtown and could ultimately include more commercial development, housing and public spaces.
“We’re confident it will become a centerpiece of Houston’s continued development into one of the nation’s leading technology hubs,” Rice Management said in a statement.
Egan’s paper chose two other locations for potential innonvation districts to compare with the four-mile Innovation Corridor. The first location, near the intersection of San Felipe Street and Sage Road, was selected as the point in the middle of where Houston’s 2018 venture-backed startups chose to group together. The second location, in the vicinity of Galleria WeWork, located at 2700 Post Oak Blvd., was the most popular place for startups between 1995 and 2019.
Egan then ran three separate simulations that relocated the 2018 startups, those that had received venture capital in the previous five years, to these three locations. Assuming between one-fourth and one-third of all startups were in these innovation districts, Egan’s economic model predicted that both the intersection of San Felipe Street and Sage Road and the Galleria WeWork area would increase the next year’s venture capital investment into the Houston ecosystem by $25 million to $50 million.
The increase, Egan said, comes because these locations are smaller, forcing startups to interact and share ideas, which builds successful companies that attract venture capital. In addition, he said choosing an area where startups have already located shows it has amenities that help startups thrive. It also allows the innovation district to build density without pulling startups from other areas of the city where they’ve chosen to cluster.
The Innovation Corridor would reduce Houston’s venture capital by $21 million in the next year, the economic model predicts. And when considering opportunity cost — in this case the additional venture capital that other locations might have attracted — the lost venture capital would increase to $64 million in the next year. The longterm economic loss for Houston could be more than $500 million, the paper said.
“Innovation districts are long lived,” Egan said, “and a dollar of venture funding creates many dollars of economic wealth. So the Innovation Corridor could cost Houston’s economy hundreds of millions of dollars.”
The Greater Houston Partnership, one of the supporters of the Innovation Corridor, disagreed with Egan’s assessment.
Susan Davenport, the business group’s chief economic development officer, said the corridor concept fits Houston and helps highlight its assets, a sprawling city with multiple successful business and cultural districts. Venture capital invested in Houston companies last year jumped 32 percent to nearly $606 million, up from $459 million in 2018, according to financial data and software company PitchBook and the National Venture Capital Association.
She also said the country’s fourth-largest city needs a robust startup landscape that supports companies regardless of their location or industry focus.
“We disagree with the notion that offering additional innovation options will somehow reduce venture capital for Houston companies or cost the city in terms of potential economic impact,” she said. “Rather we believe creating new opportunities for synergy between established industries, education institutions and startups will deliver an upsurge in innovation and investment.”
Egans said he hopes his paper encourages local government leaders nationwide to be more thoughtful about an innovation district’s location, size and amenities, including preexisting startups.
“If policymakers across these cities were to harness the power of agglomeration for startup firms, they could conceivably increase venture investment by a billion dollars or more,” Egan says in the paper. “But the contrary is also true. Without an understanding of agglomeration, municipalities may enact policies that cost the U.S. economy billions of dollars.”