Houston Voices

Houston isn't Silicon Valley — and that's a good thing, according to these experts

While everyone always looks to Silicon Valley as the model of the ideal startup ecosystem, Houston is forging its own path. Getty Images

As WeWork's fall from grace continues to dominate the headlines and we monitor the slew of layoffs and dipping share prices afflicting this year's Silicon Valley darlings, we reflect on Houston's own startup ecosystem. How are Houston startups and investors similar to and different from Silicon Valley early-stage deals? What are the drivers and factors that may be unique to Houston and how do they influence outcomes?

Jamie Jones, executive director of Lilie, sat down with early stage investor and Rice Business alum, Dougal Cameron of Golden Section Technology Venture Capital (GSTVC), to discuss the Houston startup and funding ecosystem. From that discussion, a number of key features emerged:

From Cameron's experience, Houston investors have historically focused on unit economics and profitability, in addition to top line growth, as their key performance measures. As an enterprise software investor, he notes that an indicator of a healthy venture that warrants early stage investment is one where profitability can be achieved as the venture reaches the $1 million revenue mark. Cameron, like other early stage investors in Houston, are interested in ventures that produce sustainable growth not only growth for growth's sake.

While early stage investment capital in Houston does flow, it does not do so at the same check sizes and the same velocity that you may see in Silicon Valley. Analysis of Pitchbook data indicates that Houston firms raised $28.1M in seed and early-stage funding in Q3 2019 versus $2.86B for Silicon Valley based ventures. The belief is that the density of the capital network in Silicon Valley means that if you get one $500,000 check then you will very likely to get others. Cameron noted that he believes the effects of loss aversion are on full display — no firm wants to be the one that passes on the next Google.

However, in Houston, entrepreneurs must be scrappy to pull together funding and ensuring they hit milestones along the way in order to drive scarcer investment into their ventures. From Cameron's perspective, Houston entrepreneurs own their cash balance and strive to keep their overhead low by working out of cheaper spaces, leveraging friends and family to contribute to the venture in its early days, etc.

With fewer investment dollars flowing in Houston, the use of Simple Agreements for Future Equity (SAFEs), which are common in Silicon Valley, are rarely used in Houston. Why? Cameron believes that using unpriced and loosely binding agreements may work in an ecosystem where startups are pushed for rapid top-line growth and may be burning through tens-of-thousands of dollars per month and will need to raise capital quickly, which will drive a pricing event. However, in Houston, investors may prefer arrangements that provide some downside risk.

Examples include convertible notes that include a lien on assets, which would be virtually unheard of in Silicon Valley, or through priced fundraising rounds. Without broad and deep capital networks and the pressure of rapid top-line growth, near term pricing events are not guaranteed, pushing Houston investors to prefer other deal structures.

While everyone agrees that Houston and the robust startup ecosystem that is growing across the city needs more cash to catalyze growth, Cameron firmly believes that new capital coming into the city must be the right type of capital. Capital that will not negatively distort the ecosystem by driving early-stage entrepreneurs to strive for top-line growth that is not sustainable through a profitable business model. This type of capital will not offer exorbitantly-sized seed rounds removing the entrepreneur's need to be scrappy and cost conscious.

We must understand that many Houston entrepreneurs seek to build businesses that have lasting impact and are not only "growing to close," the model Silicon Valley seems to have embraced over the past 7 to 10 years. Cameron is nervous that first big checks that come from outside Houston will push unprofitable businesses forward and will sour the market for local investors that are starting to engage in startup-investing.

While everyone always looks to Silicon Valley as the model of the ideal startup ecosystem, Houston may offer a look into the model of the future — one that is focused on building durable, profitable businesses by right-sizing growth over the venture's life-cycle. For Houston-based entrepreneurs, this means the opportunity to access capital that emphasizes sustainable, smart growth.

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Jamie Jones, executive director of the Liu Idea Lab for Innovation & Entrepreneurship at Rice University, and Dougal Cameron, managing director of Gold Section Technology Ventures and 2013 Rice Business alum, wrote this article for LILIE.

This article originally appeared on Liu Idea Lab for Innovation & Entrepreneurship's blog.

It's possible to predict some violent public protests by tracking social media posts on moral outrage over a triggering event. Tracy Le Blanc/Pexels

Every grade school teacher knows that student conduct can get out of hand, fast, when a group of kids eggs on one individual. Time-outs are a testimony to the power of isolating one 10-year-old from a choir of buddies.

Social media plays a role similar to a gang of hyped-up grade schoolers, providing a community that can express collective disapproval of people or events. When this disapproval has a moral cast ⁠— for example, after a police shooting or the removal of a statue ⁠— the social network's particular characteristics are key predictors about whether that disapproval will turn violent.

There is a word for the way group support of a belief system makes it seem worth fighting for: moralization. Tracking social network activity now makes it possible to measure the chances for an individual belief to become moralized by a group ⁠— a phenomenon known as moral convergence.

In a recent study in Nature, Rice Business professor Marlon Mooijman, then at the Kellogg School of Management, joined a team that analyzed when and how violence erupts in protests. In a series of observation and behavior experiments that mixed psychology, organizational theory and computer science, they accurately predicted how violence is influenced by group discussion of moral views on social media.

The researchers started by studying the number and content of tweets linked to the Baltimore riots in 2015, after the death of Freddie Gray in police custody. The researchers then compared these tweets with the number of arrests in a given time frame, using a methodology developed by Marlon Mooijman and Joe Hoover from the Brain and Creativity Institute at the University of Southern California.

To analyze the tweets responding to Gray's death, they first separated them into two sets: Those with moral commentary and those without moral judgments.

Next, the researchers tracked whether tweets with moral content increased on days with violent protests. Violence was measured using the number of police arrests, which the researchers compared with the specific time frames of moral tweets.

There was no major difference in the overall tweet traffic discussing Freddie Gray's death on days with violent protests and on peaceful days. The number of moralizing tweets, however, clearly correlated with episodes of violent protests, rising to nearly double the moralizing tweets on days with no violence.

This raised a provocative question. Were morally ⁠— based tweets a response to the events of the day ⁠— or were they somehow driving the violence?

To find out, Mooijman and Hoover worked with computer scientists Ying Lin and Jeng Ji of Rensselaer Polytechnic Institute and Morteza Dehghani of the University of Southern California to develop algorithms that could establish mathematical probabilities for the results.

For every single-unit increase in moral tweets over a 4-hour period, the researchers found, there was a .25 corresponding increase in arrests.

The researchers then tried to measure the effect similar moral views ⁠— such as a social media page with self-selected members of a similar political affiliation ⁠— had on violence during protests.

To do so, they set up a second study, which measured participant reactions to the protestors of a far-right rally in Charlottesville, Virginia in 2017. Participants ranked their level of agreement over the morality of protesting the rally.

There was a direct relationship between believing a protest action was moral, the researchers found, and finding violence at that protest acceptable. This relationship held true throughout the study, regardless of political orientation.

The researchers' next goal was to identify the impact of exposure to people of like beliefs. To do this, participants rated their feelings when they were told that most people in the U.S. shared their views. While the intensity of participants' moral views created the potential for violence, the researchers found, violence resulted when only actively validated by others with similar views.

Having one's moral outrage supported by others on social media, the professors concluded, may explain the spike in violence in recent protests.

While respect for privacy remains critical, governments and law enforcement can use the social media trend to pinpoint the moments when moral outrage can turn deadly. Perhaps most importantly, however, the research also suggests practical tactics for calming violent tendencies before they get out of control. To reduce real-life protest violence, they wrote, it's critical that social media sites include a variety of voices. It's another reason, if any were needed, that a bit of judicious exposure to other views is healthy for everyone.

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This story originally ran on Rice Business Wisdom.

Marlon Mooijman is an assistant professor of Organizational Behavior. He teaches in the undergraduate business minor program and MBA full-time program.