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Overheard: Houston venture capital experts weigh in on the city's investment future

Is the venture capital model broken? Are lower middle-of-the-country startup valuations a benefit or a hindrance? And what will the impact of the coronavirus be on startup investing? Getty Images

Last week's Houston Tech Rodeo celebrated Houston's development as an innovation ecosystem. One major component of the Bayou City's innovation growth is the amount of venture capital activity happening in Houston.

At a panel on Monday, InnovationMap hosted a discussion between three local investors about whether or not the VC model is broke, if Houston is too far behind the coasts, and even the effect of coronavirus on investment.

If you missed the event, here are some overheards from the panel.

“We weren’t sure whether [Houston] would be the best place or the easiest place to raise money in, but it’s been incredibly welcoming."

— Leslie Goldman, general partner at The Artemis Fund. The female-founded, female-focused fund launched last year and has made two investments so far — with three more to announce in the next few weeks.

“We have a lot of experience and expertise, and a lot of money and deep pockets. But how do we make sure we are taking advantage of everything going on in Houston outside of just investing in other funds?”

— Samantha Lewis, director of Goose, explains that Goose's model is a network of high net worth investors who share deal flow and diligence duties. The organization invests $10 million annually.

“We have a much more operator and business fundamental mindset. When we look at companies at Goose, we ask, ‘what’s the path to profitability?” — not just what the growth rate is.”

— Lewis says, adding that Houston has a different psychology of success than coastal innovation ecosystems, and that's apparent in her investors at Goose.

“As an entrepreneur in Houston you have to understand one thing, and that one thing is that companies in the middle of the country generally get a discount to companies on the coast."

— Blair Garrou, managing director at Mercury Fund says on the discrepencies between valuations of Houston companies versus coastal companies. Garrou explains that, "companies in the middle of the country grow at lower rates than their coastal counterparts not because of their company but because of the amount of capital that you put to work." Coastal VCs want to go all in on the startups with technology that's going to disrupt and take over an entire market.

“I think the question now is can Houston get caught up in the somewhat irrational exuberance so that you as entrepreneurs don’t have to get diluted as much in your investment. My thought is probably not, if I’m being honest.”

Garrou says of this big-money, all-in approach to venture capital you see on the coasts.

“When you talk about all-female-founded companies, the average valuation is $12 million, and all-male-founded companies, $25.5 million is the average. That’s a female discount.”

— Goldman says, acknowledging that while Houston companies are discounted compared to the coasts, companies with all female founders are also discounted despite making up 17 percent of exits last year.

“VCs have raised larger, and larger funds. With more funds, they have to deploy more money. A lot of them are competing with each other and that drives up valuations.”

— Goldman says, adding that she's heard the VC model being referred to as "broken" on the coasts, and it all comes down to valuations and growing VC funds with too much money.

“Whether or not coronavirus becomes the epidemic that everyone things it will be, what’s happening is it’s correcting the market.”

— Garrou says, comparing the pandemic to the 2008 recession. "I think we have an opportunity. If you look at every single downturn in the market, the greatest companies have come from those downturns," he adds.

“So many people are interested in Houston because they do believe Houston has great deals at more reasonable valuations. It should be really good for founders — it’s just a matter of not comparing yourself to what the coastal companies are getting.”

— Garrou says, adding that what's missing is a sophisticated angel investment foundation. While organizations like the Houston Angel Network and Goose exist, Houston is too big for just what exists now.

“I think one of the important things to do as we are growing the ecosystem is remember that we are not going to be a copy and paste model. We need to do it in our own way.”

— Lewis says about Houston's innovation ecosystem. "What we need to think about and embrace is different models of deploying capital," she says citing Goose as an example. "We need to get creative about that."

Black Girl Ventures has launched in Houston. Photo courtesy of Black Girl Ventures

Everyone knows the statistics. Female-founded startups receive around 2 percent of the venture capital funding, according to some reports, and when you break that down into women of color receiving funding, it's even less.

A Washington D.C.-based organization is looking to give these women seats at the table with the launch of Black Girl Ventures in Houston. BGV is based in The Cannon locally, and is looking to partner with other Houston organizations to grow its presence.

"Black Girl Ventures is here — not just in Houston but across the country and the globe — to be able to help create social and financial capital for black and brown women," says Sharita M. Humphrey, a Houston financial adviser and team lead for BGV in town.

The organization launched its local chapters — including Houston, Miami, Durham, Philadelphia, and Birmingham —right around the same time this spring to create a huge splash across the country. The organization, which is made up of 31 employees and leaders across the country, focuses on events and programing for female founders of color to prepare them for financial growth — including the networks and know how needed for that process.

"Being an African-American women founder I did see that there was a need for more social and financial capital," Humphrey says. "We have access — especially living here in Texas — to financial capital, but we don't understand how important that social capital is to be able to obtain that financial capital."

The cornerstone event for Houston's BGV is set to be in August. It's a pitch event with a live crowdfunding campaign. The event, which uses SheRaise online to fundraise, has been done for a few years coinciding with SXSW — this year's was done digitally. Now, with the launch of the five markets, each of the new chapters will get to fo their on versions locally.

The event requires the eight companies that will pitch to: be revenue earning, have a black or brown female founder, and be based in the Houston area. The first, second, and third place startups will win prizes, and each of the startups will be able to raise money online through SheRaise. Companies can apply online for the event.

Humphrey says she has big plans for her BGV chapter, including raising $1 million for her Houston members — something she is determined to make happen with the right amount of social capital help and financial coaching.

"When they get to the table with venture capitalists, they'll be ready," she says.