Changes

=Report=

Houston, the largest city in a state with little venture capital, stands in a position to change the narrative of Texan entrepreneurship. Through an analysis of the major entrepreneurship institutions located in Houston, the McNair Center has compiled a report for startup entrepreneurs, academics, and policy makers to help navigate and better understand the options, successes and failures of the Houston entrepreneurship ecosystem. For this qualitative and quantitative analysis, each institution must provide a "program" for entrepreneurs and their start-ups to enroll in and go through. The qualitative analysis consists of few key parts, namely what the institution considers itself, the services provided by the institution and the entrepreneurship experience level of the institution's directors. The quantitative analysis investigates how many start-ups that participated in an institution's program received venture capital, were acquired, or exited in an initial public offering (IPO). Other considerations such as repeat dealings with venture capital firms, founding date of institution, non-profit status, and quality of venture capital firms dealt with were noted in the data.

Every city in the world from Hong Kong to Lima and from Barcelona to Houston possesses a delicate and potent entrepreneurship ecosystem. Not all cities’ systems stand equal however. While some cities such as Berlin and Chicago have greatly improved their entrepreneurship ecosystems over the past few years, becoming attractive headquarters for global start-ups, other cities, such as Houston have fallen behind.

Only a mere $4.1 billion has been invested in Houston start-ups since 2006, which means Houston entrepreneurship has received less funding across 10 years than New York City entrepreneurship receives in one[1]. This report aims to examine and describe the Houston entrepreneurship ecosystem through the lense of its entrepreneurship institutions. Through an examination of these institutions, broad diagnoses may be formulated and general policy recommendations made.

Entrepreneurship ecosystems consist of innovative thinkers, ambitious business owners, market forces and entrepreneurship institutions. They are the fertile economic hot springs in which nascent businesses find life. The study, protection and support of these ecosystems should be critical goals for policymakers and citizens hoping to foster entrepreneurship and innovation in their cities, and the fostering of these two engines of growth should be a priority.

Entrepreneurship and innovation are the drivers of economies, responsible for essentially all new businesses and technologies, the vast majority of new jobs and are a key force for economic growth and development. Unfortunately, these powerhouses of economic growth appear to be faltering in the state of Texas broadly and in the city of Houston specifically.

The NBER study lends caution to broad-sweeping policies while highlighting the importance of entrepreneurship institutions. These institutions need to remain competitive, growing and successful in order to maximize their efficacy in promoting entrepreneurship.

Entrepreneurship institutions, ranging from accelerators and incubators to hubs and co-working spaces, provide key services to aspiring entrepreneurs. After founding a start-up, entrepreneurs require every possible edge they can get in order to maximize their idea's potential. Entrepreneurship institutions help entrepreneurs crystalize their products, network with other start-ups, secure venture capital and receive guidance from successful captains of industry.

Within the city of Houston, 10 major entrepreneurship institutions representing six different types of institutions were identified and studied. In order for an entity to be considered an institution for this project, it needed to be located in Houston, provide some kind of "program" for enrollment by start-ups and entrepreneurs, and had to have an easily accessible and published list of all companies which have participated in this "program." The selected institutions were then studied both qualitatively and quantitatively. The qualitative analysis consists of a few key parts, namely what the institution considers itself, the services provided by the institution and the entrepreneurship experience level of the institution's directors.

Institutions outside of the Houston area with significant reputation and success were also analyzed as comparative benchmarks for Houston's progress. While Houston's institutions cannot be expected to perform at the exact same standards as these pinnacles of the entrepreneurship industry, these institutions represent the potential for Houston's institutions and as a target for growth.

An accelerator is a “fixed-term, cohort-based program including mentorship and educational components, that culminates in a public pitch event, often referred to as ‘demo-day’[3].” The mission of an accelerator, often a non-profit entity, is to provide early stage start-ups with resources, mentorship, and networking needed to gain access to venture capital funding. On average, cohorts stay with an accelerator for 3 months cumulating with a pitch to several venture capital investors[4].

Accelerators targeting the youngest of companies and guide them through mentorship and education to a position where they may successfully appeal for venture capital funding. These services are critical for getting start-ups off the ground and accelerating their growth towards success. Within Houston there are three major accelerator programs to be examined.

Focused on healthcare IT and medical devices start-ups, Houston Health Ventures’, or HHV’s, NextHIT accelerator program is an “intensive” eight-week program designed to guide nascent start-ups in these fields to success. Founded in 2014, HHV’s NextHIT for-profit program advertises a wide array of services, including direct funding, access to industry experts, educational programs, mentorship, and office space at the University of Houston. While HHV’s NextHIT is a relatively new program, it has so far underperformed in its role as an accelerator. Of the seven companies which have enrolled in the NextHIT program, not a single one has received venture capital from an outside firm, been acquired, or exited in an IPO.

While the program has yet to prove it can attract investment to its companies, its directory board and market niche show promise. Of the NextHIT program's five directors, two have direct entrepreneurship experience as founders of successful companies and one director has peripheral experience as a repeat start-up investor. This relatively robust directory board, combined with HHV’s position as a healthcare institution in a healthcare hub suggest that with the right support the NextHIT program could become a major player in the Houston entrepreneurship ecosystem.

Founded in 2011 but closed down in 2016, SURGE Ventures was located in the fourth ward neighborhood of Houston just west of Downtown. Positing itself to invest in energy start-ups, SURGE Ventures’ for-profit program advertised services in direct funding, access to industry experts, educational programs and mentorship. The program had only a single director, but one who was well-versed in entrepreneurship, having founded multiple tech start-ups throughout their career.

During its short lifespan the SURGE accelerator program was relatively successful, with 32 startups enrolling in its program and four of these startups receiving venture capital investments from outside firms. Three of these investments came from top 100 venture capital firms, implying that the companies enrolled in the SURGE program were very promising and graduating at a high caliber. One of the four companies enrolled was acquired.

SURGE Ventures represented the potential for success within the Houston entrepreneurship ecosystem. While short lived, it was rather successful at a funding rate of 12.5%, one of the highest rates of any institution in Houston. The cited reasons for closing down were a lack of industry support and a feeling that the mission of SURGE was not being achieved. While SURGE exists as an example of accelerator success in Houston, it also serves as a warning, that without proper support, elements of the entrepreneurship ecosystem will fail, dragging the overall potential of Houston’s start-ups down with them.

Located in the Texas Medical Center’s Innovation Institute on the eastern edge of the Center, the Texas Medical Center Accelerator, also known as TMCx, was founded in 2014 to help accelerate early-stage digital health and medical device companies. The for-profit program advertises direct funding, access to industry experts, educational programs, office space in the TMC, mentorship and industry networking opportunities.

TMCx has three directors, only one of whom has experience in entrepreneurship, albeit as the founder of a telemedicine company. In its three years of operation, 53 start-ups have enrolled in the TMCx program, five of which have received funding from outside venture capital firms. While none of these venture capital firms are in the top 100, TMCx still boasts an investment rate of 9.43%, the fifth highest of studied institutions in Houston. No companies which have enrolled in the TMCx program have been acquired or have exited in an IPO.

While TMCx is performing better than these two direct competitors, there is still much room to improve. TMCx’s investment rates are still lower than many other institutions of different kinds throughout Houston and substantially lower than comparative benchmark institutions outside of Houston, such as the nationwide accelerator TechStars, to be analyzed more in depth later, which boasts an impressive 19.68% investment rate.

University accelerators, like standard accelerators combine mentorship and education in a fixed-term cohort program. Rather than being run by a purely entrepreneurship-focused entity, university accelerators are powered and run through universities. Generally the advising is provided by entrepreneurship and business academics. While entrance costs and expectations are comparatively low, enrollment is generally restricted to those affiliated with the university.

The cohort size, time of program and total funding of university accelerators tend to be smaller than than their non-academic counterparts. University accelerators are almost exclusively non-profit entities. University accelerators blend the educational and funding traits of traditional accelerators with the resources and innovation culture of major universities. Due to this unique blend, university accelerators serve as an important bridge in the entrepreneurship ecosystem between aspiring entrepreneurs and cutting-edge research. Houston has two major university accelerators.

Based at Rice University, just across Main Street from the Texas Medical Center, OwlSpark aims to “ignite a passion for entrepreneurship within the Rice community,” and “build an ecosystem for entrepreneurs to connect and startup teams to launch.” Founded in 2012, OwlSpark advertises direct funding, access to industry and academic experts, office space on Rice’s campus and mentorship.

OwlSpark has five directors, all of whom are academics in the broad fields of economics and business, but none of whom have much experience as either entrepreneurs or investors of start-ups. Of the 33 companies which have enrolled in the OwlSpark program, none have received venture capital funding, been acquired or exited in an IPO.

The second university accelerator in Houston, RED Labs, was founded in 2013 and is housed at the University of Houston in the Greater Third Ward neighborhood. With a mission to promote entrepreneurship within both the University of Houston and greater Houston communities, RED Labs advertises access to industry and academic experts, office space at the University of Houston and mentorship.

The accelerator has one director, who has direct experience as the founder of a successful company. Across its four years of existence, only 18 companies have enrolled in the RED Labs program, none of which have received venture capital investments from an outside firm, been acquired, or exited in an IPO.

While university accelerators cannot be expected to perform at the same standards as for-profit industry accelerators, some, such as the New Venture Challenge accelerator of the University of Chicago which will be analyzed more in depth later, have investment rates of 5.12%, demonstrating that university-model accelerators can, and do, work. University accelerators are critical components of entrepreneurship ecosystems, helping to transfer innovative ideas from the lab to the market, and investment into Houston’s university accelerators should be considered to help revitalize the ecosystem as a whole.

Incubators “shelter vulnerable nascent businesses, allowing them to be stronger to become independent[5].” Incubators serve as a temporary space for start-ups to develop in their early stages. Unlike accelerators, there is no formal curriculum, cohorts, or duration of stay. Residents of incubators pay fees for both rent and services, and are not offered the breadth of resources found in an accelerator[4].

By focusing less on accelerating a small business through a strict educational program and more on offering cheap housing, services and protection from market fluctuations, incubators can be an attractive option for start-ups and entrepreneurs in all stages of growth. There are two major incubators in Houston.

Founded in 2011, Redhouse Associates is one of the oldest entrepreneurship institutions in Houston. Located between the Montrose and Midtown neighborhoods, the for-profit incubator runs a relatively exclusive institution, with only four companies having ever utilized its resources over an eight year period. Of these four companies however, two have received venture capital from outside firms, leading to an investment rate of 50%. While the small sample size does inflate this number, this is still the highest investment rate in Houston, and suggests that while Redhouse may be very selective, the companies that they do select perform well.

Redhouse associates advertise the services of direct funding, office space at their location, and mentorship. The incubator has five directors, three of whom are experienced entrepreneurs and founders of their own companies, and one of whom has peripheral experience as a repeat investor. While half of the companies to utilize Redhouse have received venture capital, none have been acquired or exited in an IPO. None of the outside firms which have invested in Redhouse companies are listed as top 100 venture capital firms.