Training organizations benefit Houston entrepreneurs

Baker Institute study outlines state of the city’s pipeline for business startups 

New entrepreneurs need many things to start out: ideas, talent, money and a support system to guide them through the rigors of launching a business. A Rice University study maintains that public and private entities can and should help Houston realize its potential as a prime launch pad.

Researchers at Rice’s Baker Institute for Public Policy discuss the city’s entrepreneurial climate in a recently released white paper, “A Pipeline for Houston’s Startups.”

Illustration by Julia Wang, courtesy of the McNair Center for Entrepreneurship and Innovation/Rice University

Lead author Edward Egan, a fellow at the Baker Institute and director of the McNair Center for Entrepreneurship and Innovation, and Rice undergraduates Benjamin Baldazo and Dylan Dickens analyze the state of the startup community and outline steps to enhance its “deal flow,” a measure of investment opportunities available to the community.

In recent years, startups and investors have increasingly found each other through accelerators, incubators and hubs that offer varying degrees of support to new companies. Accelerators are akin to boot camps that train management teams in aspects of high-growth, technology-oriented entrepreneurship. Incubators are similar but do not have a fixed program or timetable for their startups.

Hubs are flexible, co-working spaces for startups that may also include accelerators and host offices for venture funds, angel investors and startup service companies. The Rice researchers noted more than 30 have set up shop in the United States, with one of the best-known, The Capital Factory in Austin, hosting more than 500 companies.

All three branches of the pipeline now exist in Houston. One of the most recent is a hub, Station Houston, established in 2016. It already supports more than 100 client companies in various stages of development as it attempts to emulate the model established by The Capital Factory and others, and Egan said such for-profit companies should be encouraged.

“The success of for-profits is going to be dictated by market forces, but the city of Houston can work with them to create catalysts that fast-track their growth,” he said. The nonprofit Houston Technology Center and the Texas Medical Center Innovation Institute are also places where policymakers and industry leaders can have an effect. “Nonprofits play an important role in Houston’s entrepreneurship ecosystem. They can be immune to the market forces around them while still affecting the deal flow of for-profit firms,” Egan noted.

Ultimately, most high-tech entrepreneurs want to get venture capital investment. The McNair Center researchers calculated “raise rates” – the percentage of an accelerator’s or incubator’s clients that go on to raise venture capital – for accelerators and incubators across the U.S. Houston’s accelerators and incubators do not perform at the level of benchmark institutions, they said.

The report finds that last year just one Houston-based, incubated startup raised venture capital. “It is equally telling,” they wrote, “that five outstanding venture capitalists … have invested in Houston-based firms over the last decade, but none of their portfolio companies went through a Houston-based accelerator or incubator.”

But they also maintain that if Houston’s accelerators and incubators can increase their quality, the city should be able to double its deal flow. The researchers noted Houston’s current training pipeline graduates about 70 companies per year, almost half through the Texas Medical Center-based TMCx and JLABS@TMC.  “Houston’s accelerators and incubators could add six new deals each year to the city’s startup ecosystem,” they wrote.

“Houston’s potential for growth is the single biggest takeaway from our study,” Egan said. “The biggest caution is that the market for startups in Houston remains really fragile, and we’ve got to make sure any intervention in that market is a catalyst that won’t change its structure and influences the market in a positive way.”