Houston’s entrepreneurial ecosystem: what it has, what it still needs

By Maddy Scannell
Research Intern, McNair Center for Entrepreneurship and Economic Growth

As evidenced by ongoing construction in Houston’s Midtown innovation district, researchers and policymakers are clamoring to create local ecosystems that will stimulate and sustain entrepreneurship. An entrepreneurial ecosystem can be thought of as the interconnections between entrepreneurs, institutions and economic processes that mediate the performance of the local entrepreneurial environment. The elements of an entrepreneurial ecosystem are dynamic, and there is no consensus on what makes a complete ecosystem. Nonetheless, a few broad elements are generally recognized: a core of large established businesses, universities, and service providers; availability of capital; and entrepreneurial recycling.

The city of Houston faces a unique set of circumstances for entrepreneurs, with a large population, a low cost of living and a growing economy. Where does Houston stand in meeting the needs of entrepreneurs, and how can local policymakers and stakeholders improve the emerging ecosystem?

Established Institutions

Established institutions such as businesses and universities are important for entrepreneurship because they act as talent magnets, provide managerial training, stimulate the economy and put the ecosystem on the map. Houston boasts the fourth largest concentration of Fortune 500 companies in America and is home to 58 top medical institutions. The city is also an education powerhouse, with Rice University, the University of Houston and many other undergraduate and graduate institutions drawing students, educators and researchers to the city. These institutions already provide one important pillar of an entrepreneurial ecosystem.

Venture Capital

A key component for entrepreneurship is the availability of funding. Though Houston has seen growing availability of venture capital funding in recent years, it still lags behind other major cities. For example, in 2018, Austin entrepreneurs raised $1.9 billion in venture capital (and Silicon Valley raised over $65 billion dollars), dwarfing Houston’s $360 million. Moreover, investors in Houston tend to invest in established industries (such as energy) more than start-ups. On the other hand, research has found that venture capital may be more of a result than a cause of entrepreneurial activity — as illustrated by Ottawa’s emergence as a hub for entrepreneurship despite a relative dearth of capital. This means that Houston policymakers need not solely focus on attracting billions of venture capital dollars away from other cities; rather, building an ecosystem conducive to entrepreneurship can attract needed capital. Relatedly, research has also found that the most important support entrepreneurs require is relational, not transactional. In other words, creating the ability to connect with other entrepreneurs is more important for an entrepreneurial ecosystem than flooding a region with capital.

Entrepreneurial Recycling

Another feature of entrepreneurial ecosystems is “entrepreneurial recycling,” which refers to successful entrepreneurs staying in the ecosystem to reinvest time and money. The vast footprint of the greater Houston region results in an ecosystem of comparatively low geographic density, with talent and resources spread across the metropolitan area. Recent efforts, both public and private, have attempted to address this challenge and improve Houston’s entrepreneurial ecosystems. The development of co-working spaces such as Station Houston, a technology park in Houston’s central business district, and the new innovation district in Midtown are important efforts to increase productive “collisions” between ecosystem members. Houston’s size means that online solutions should also be pursued. Overall, strategies that bring together entrepreneurs offer promise in creating a culture conducive to entrepreneurship and in encouraging individuals and businesses to remain and reinvest in Houston.

Conclusion

While Houston already has certain critical elements of a healthy entrepreneurial ecosystem, policymakers should primarily focus on facilitating more relational support for entrepreneurial firms. With a healthy network of entrepreneurs, research suggests that capital will follow. Though small-scale efforts to encourage innovative start-ups have begun, ongoing public-private partnerships could further improve Houston’s ecosystem. One such example is Houston Exponential, a non-profit organization dedicated to encouraging networking, mapping resources and attracting capital. These efforts are relatively recent, but an uptick in venture capital funding and start-up activity in the Houston area indicate promise for the city’s entrepreneurial ecosystem.