Is Houston a startup city?
Houston’s startup ecosystem has had an astronomical rise in recent years, jumping from 54th on my rankings of startup cities in 2016 to 22nd in 2020. So why am I still reluctant to describe Houston as a startup city?
Because Houston is the fourth largest metro area by population, the seventh largest by gross domestic product and boasts that it is home to 4,600 energyrelated firms. It contributes just under a halftrillion dollars to the U.S. economy each year.
In 2020, H-town added 13 new startups to its venture ecosystem, bringing its total headcount of actively financed firms to 71. These firms collectively received a little over $650 million. So, until someone works out how high-growth high-tech and oil and gas go together, Houston will remain just the Energy Capital of the World.
A historic fall
Houston realized it had a problem with creating and retaining new high-growth high-tech firms in the late 1990s. The city’s “solution,” announced in 1998 and launched in 1999, was the Houston Technology Center. The HTC then led Houston to the largest and fastest ranking decline of any former top 20 startup city.
Fortunately, starting around 2011 and picking up pace in 2014, some new initiatives took hold in Houston. These were a mix of private firms and nonprofits that were (mostly) unaffiliated with the HTC. Then, in 2016 a group of venture capitalists and serial entrepreneurs with ties to the city started Station Houston, the city’s first startup hub.
Policy takes time
It takes a couple of years for a new initiative to take effect. On average, a startup is just under 1½ years old when it receives its first seed round, and 2½ if its first round is a Series A, the first early-stage round. So the effects of policy in 2018 are just now starting to be felt. 2018 was a big year for bad startup policy in Houston:
The city of Houston dissolved its technology and innovation task force. The HTC was repurposed and rebranded as Houston Exponential, and then took over control of the city’s startup policy process.
Rice University announced that it was (unilaterally) creating an innovation district around one of its properties in Midtown. (I estimated the long-term economic cost as more than $600 million.) It was later renamed the Ion.
Station Houston’s board voted out their serial entrepreneur CEO, voted in a high principal as their new CEO, turned Station into a nonprofit, and announced Station was moving into the Ion and outsourcing its operations.
Market forces
Of course, many other things were going on in Houston’s startup ecosystem in or around 2018, and some of them were positive. So, on balance, it looks like Houston’s prognosis is fair to good, despite its abysmal policy history.
First, deal flow surged to record highs in 2018. Houston was getting around six new deals each year from 2010 to 2016. In 2017, Houston got nine first-time venture investments, and in 2018, it got 17, before falling back to 13 new deals each year in 2019 and 2020. The two drivers of this boom were Station’s efforts before its takeover and Houston’s biotech scene, which finally found some legs.
Liongard and Arundo Analytics were both Station residents that secured a firstround of venture capital in 2018 (and went on to raise almost $50 million combined), and life science startups Vivante Health, Wellnicity, and Trilliant Surgical all got their first rounds that year. (Data Gumbo, a client of The Cannon, also got its first round in 2018.)
Second, many for-profits, nonprofits, academics and policymakers across the state were working hard to build high-growth high-tech expertise and capabilities in Houston in 2018. This effort has translated into a wealth of new initiatives, programs and ecosystem support organizations in 2020.
Edward J. Egan, Ph.D, is an applied micro-economist who specializes in business economics, finance and public policy. He directed the McNair Center for Entrepreneurship and Innovation at Rice University from 2015 to 2018.