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FastCompany: Why Start a Company in Houston

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November 15, 2010

Why You Should Start a Company in… Houston

It’s the U.S. energy capital. It was the home of Enron. And for the most part, those two facts reflect the scope of startups in Houston, Texas. Enron, before it began conducting massive accounting fraud, was innovative in its approach to energy. And thanks to Texas’ deregulated energy market, starting a business in oil, electricity or clean tech is a snap in the Lone Star state. With nearby Austin hoarding Internet startups [1], Houston strikes a more conventional profile, with big oil, big companies and big banks.

Andrew Clark [2], a venture adviser with DFJ Mercury [3], entrepreneur in residence at the Houston Technology Center [4] and chairman of the Houston Angel Network [5], talked about what makes Houston’s startup scene unique.

What makes Houston a great place for startups?

Well, Houston has always had a can-do business environment. It’s a city that doesn’t have a lot of natural beauty so people make it what it is. Back in the 19th century, two brothers called the Allen brothers plopped down here in the middle of a bayou and said, “we’re going to build a great port and a great city.” And who would’ve thought that would be the case because it’s a mosquito infested salt plain. But since then, more than 120 years later, Houston has become quite successful based on having a strong orientation support of business. I think what that means for entrepreneurs is it doesn’t matter who you are, it matters what you do, so people can come and start here from wherever and you’re given a lot of due respect as long as you roll up your sleeves and get to work. The other more practical aspect is that there’s a low cost of doing business here and a pretty strong and available labor pool.

Are there particular types of startups that do better there?

I’ll leave energy aside for a minute because I think that’s obvious. We have a world class medical center and the world’s largest concentration of medical institutions in a given proximity. And several of the institutions are world leaders. MD Anderson [6] in cancer treatment research. Baylor College of Medicine [7]. Also, the amount of medical grant money that finds its way to the medical center is probably the most significant spend of medical research dollars in the U.S. Or at least comparable to any of the other medical hotspots. So that being said, health care and life sciences, medical technology, all very strong opportunities here. We have a number of startups in that area.

The second area is nanotechnology. We have two research universities and Rice had a Nobel prize winner [8]that did a lot of fundamental work in nanotechnology. The University of Houston in the ’80s did a lot of fundamental work in high temperatures super connectivity. So there’s a lot of opportunity and materials and fundamental material work in the material sciences.

In the next area, Houston is strong in enterprise software. That’s probably because we’ve had a number of both Fortune 500 success stories like BMC Software [9] as well as startups that have become successful out of the BMC ecosystem. And then also Accenture Consulting [10] has always been very strong here and that gives you a strong base of what I call enterprise oriented IT folks. So if you’re doing enterprise software the other thing we have is one of the larger concentrations of Fortune 500 companies. A lot of the major oil companies and other Fortune 500 companies have large IT groups here so if you’re creating enterprise software, you need customers, prototype beta type customers, and they are very easy to find here in Houston, as opposed to when you were doing them in a locale that doesn’t have that concentration.

We have emerging success in social Web, too, and this is where it’s going to play to our strengths. A company called RecycleMatch [11], which is actually a Houston Technology Center client, was recently funded and received a nice round of funding. Essentially what they do is they have a Web 2.0 application that matches waste producers with waste users. So if you think of how most enterprises create waste of some sort and traditionally that waste just finds itself into a landfill or has to be disposed of as a cost for that company. RecycleMatch allows you to match potential users of that waste who can use that waste that feeds back into whatever business process they have. That builds on a couple of startups we’ve had here over the past decade that have worked in the same area of waste and waste management and large waste companies that are headquartered here. You don’t think of those kind of things, it’s less sexy. But it’s actually a very green startup. It’s Web, and it’s enterprise.

The other success story is a company called NutshellMail [12] that was acquired by Constant Contact [13] this year. They were actually selected as part of the Facebook fund [14] incubation effort last year summer of 2009 and they allow Facebook users and MySpace users, if they are still there of course, and other folks in the social Web to basically consolidate and manage their social interactions through an email process that makes it much more efficient than sitting on Facebook all day long. So that’s a success story because they were acquired by Constant Contact.

What’s happening in Houston’s entrepreneurial ecosystem that makes it sustainable?

What’s happening are some things that I’m involved with: The Houston Technology Center has been here for more than ten years. It has a physical presence of a building where budding entrepreneurs can take space on the cheap for short periods of time to get their deal working. And there’s a strong collaboration between the Houston Technology Center, Rice University—which has the Rice Venture Alliance [15]—and an entity called Bio Houston. So all of those organizations triangulate and help entrepreneurs with the basics. The second thing is the state of Texas has a fund called the Enterprise Technology Fund [16]. The ETF fund has been operating since 2005 and has put about $300 million into game-changing science-based companies here in the state, and Houston has it’s unfair share of those dollars because our group that helps companies secure that funding is very good.

The second part is any company needs a good network of service providers: Lawyers, accountants, human resources firms and so forth. And there’s a strong set of those people here that are willing to provide these services for special rates and on special terms for entrepreneurs.

The other thing I need to say is that all the New York investment banks have a major presence or there are energy banking headquarters here in Houston. So that means if you’re doing traditional oil and gas that’s well proven. But you can also feed off of that when you’re doing clean tech and alternative. So I see a lot of alternative energy deals. In fact when I get off this call I’m going to go work with some guys on a biomass deal for the rest of the afternoon. But their guys are working on biomass, algae, solar and wind.

So what is energy’s role in Houston’s startup scene?

The thing to keep in mind is that Texas has a fully deregulated energy market. We took a lot of arrows for that about seven or eight years ago because Enron was a motivator behind that, but that deregulation has actually created a whole set of entrepreneurs in the electricity and clean tech businesses. They have an opportunity to do some of their first biomass plants in other states in the country, but they decided to do it in Texas; one, because the regulatory environment is much more favorable—there are a lot of impediments to getting the plant done in a particular state. So they are going to do their first four or five plants here in Texas, in part because they can sell the energy into the deregulated electricity market and it’s a very fluid and able means of proving out their technology and then getting funding for it. So then because there’s investment banking in town they can just go around town to office tower A, B and C and find people that are willing to bankroll $50 million projects. So that’s very different from the social Web but it’s what entrepreneurs are doing here. So what characterizes the Houston entrepreneur? It’s still a little bit of that cowboy mystique. Except this time he’s building a biomass plant or an algae plant or a windmill, a wind turbine.

Laura Rich is a freelance writer and co-founder of Recessionwire [22].

[Photo by Pablo Costa [23]]

Links:
[1] http://www.fastcompany.com/article/why-you-should-start-company-austin
[2] http://www.dfjmercury.com/andrew-clark/
[3] http://www.dfjmercury.com/
[4] http://www.houstontech.org/
[5] http://houstonangelnetwork.angelgroups.net/
[6] http://www.mdanderson.org/
[7] http://www.bcm.edu/
[8] http://cnst.rice.edu/
[9] http://www.bmc.com/
[10] http://newsroom.accenture.com/fact+sheet/
[11] http://www.recyclematch.com/
[12] http://nutshellmail.com/
[13] http://www.constantcontact.com/index.jsp
[14] http://www.facebook.com/fbFund
[15] http://alliance.rice.edu/alliance/Default.asp
[16] http://governor.state.tx.us/ecodev/financial_resources/texas_enterprise_fund/
[17] http://www.fastcompany.com/article/why-you-should-start-company-austin
[18] http://www.fastcompany.com/blog/maccabee-montandon/upswing/why-you-should-start-company-new-york
[19] http://www.fastcompany.com/article/why-you-should-start-a-company-in-los-angeles
[20] http://www.fastcompany.com/article/why-you-should-start-a-company-in-chicago
[21] http://www.fastcompany.com/article/why-you-should-start-company-boston
[22] http://www.recessionwire.com/
[23] http://picasaweb.google.com/lh/photo/5sVkOBsj26-cHqo6gc-DzA

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