startups

Comment: For startup ecosystem, perpetual death by a thousand headlines – Houston Chronicle


There’s always a lot of news about tech startup policy in Houston.

Most recently, the Houston Technology Center (HTC) was reborn as a pure policy organization called Houston Exponential, with the backing of the Greater Houston Partnership and local philanthropists. Rice University announced an innovation corridor from below the Texas Medical Center to above downtown, anchored by the Sears’ building in Midtown. Station Houston, the city’s local entrepreneurship hub, became a nonprofit and did a real-estate deal with Rice. Houston Exponential, also known as HX, set a goal for the city to get $2 billion of annual venture capital invested by 2024. And the new HX Venture Fund, born out of a Mayor’s task force, announced that it had closed on its first $25 million and made its first investment.

But wait, what are these organizations and what are their announcements really about?

Simply put, these organizations are nonprofits that have appointed themselves as Houston’s startup “regulators.” They have the tacit endorsement of the city government to run entrepreneurship policy in Houston. They are announcing their roles or describing their efforts to influence the market.

Why does it matter that nonprofits are setting policy as long as they have the ecosystem’s best interests at heart?

On HoustonChronicle.com: Can Houston avoid mistakes of the past as it tries to build a tech scene?

It matters because there’s good policy and bad policy.

Houston’s tech startup ecosystem is small and struggling. It received just under $80 million of growth VC and did six new deals in 2017. 2018 was slightly better, with the improvement driven in part by Station Houston before it became a nonprofit, as well as by some good life science deals associated with the TMC.

Good policy could catalyze Houston’s tech startups, helping them to eventually grow into an industry that creates high-paying jobs and diversifies Houston’s economy. Twenty years of bad policy is one reason this hasn’t happened so far.

What kind of policy you get is a matter of incentives.

Nonprofits have an incentive to make announcements that drive donations.

In just one day of January 2019, Dateline Rice featured 12 Rice related entrepreneurship policy articles, three of which were syndicated more than 25 times. Their current top story is “Turner highlights Houston, innovation, entrepreneurship power.” During the three years I was in Houston, Rice raised at least $24 million from entrepreneurship donors, not counting the millions raised by the Rice Alliance.

And before it closed its doors, the HTC had 435 promotional stories about its influence posted on its website and likely tens of thousands of media mentions. It was raising around $2 million a year from donors, excluding the $4 million it raised for a side-car fund.

Doing entrepreneurship policy gets big money!

But Houston’s entrepreneurship non-profits aren’t incentivized to do data-driven, evidence-based policy.

Coming up with good policy is expensive and difficult. Economics PhDs have to assemble data on the entrepreneurship ecosystem, build models of its activities, and simulate what would happen if various policies are introduced.

Besides, these nonprofits don’t need Houston’s startups to be successful. None of their headlines above are about that. So any policy will do, as long as it creates news.

Are the policies really that bad?

On HoustonChronicle.com: Is time running out for Houston to build a startup culture?

They mostly just perpetuate a bad status quo.

HX’s impossible goal of growing venture investment 25 fold in half a fund cycle might make Houston a laughing stock from coast to coast, and it doesn’t enhance deal flow. Likewise, there’s at least $1.3 billion of venture capital under management in Houston, which makes an additional $25 million fund-of-funds immaterial.

Creating an innovation district could be a blessing for Houston’s tech startups. They are spread out along the city’s roadways with maybe four small clusters. Unfortunately, the costs outweigh the benefits for the area around the Sears’ building. It doesn’t have the right characteristics. And scattering Houston’s startups over a 4-mile -long and 1-mile-wide innovation corridor would be even worse.

How do we break out of this trap?

Donors should demand process not sound bites. Readers should demand data and analysis. Voters should demand accountability.

Until then, it’s likely Houston’s tech startup ecosystem will remain condemned to death by a thousand headlines.

Ed Egan is a visiting professor at Georgetown University’s McDonough School of Business. A former serial entrepreneur and venture capitalist, he spent three years in Houston as the director of the McNair Center at Rice University’s Baker Institute.



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