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

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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."

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GOOSE has invested in a logistics automation startup that has just emerged from stealth-mode operations. Photo courtesy of Outrider

Houston investor group backs growing logistics automation startup emerging from stealth

Money moves

A Golden, Colorado-based logistics technology startup has emerged from stealth-mode operation aft two years of development to collect its recent $53 million investment that a Houston investor group contributed to.

Houston-based GOOSE has announced its participation in Outrider's recent raise, which included both a seed and series A round. The startup has created an autonomous yard operations tool for logistics purposes. The company also received investment from the likes of NEA, 8VC, Koch Disruptive Technologies, Fraser McCombs Capital, Prologis, Inc., Schematic Ventures, Loup Ventures, and more, according to a news release.

The goal of distribution yards is to keep semi-trailers full of freight moving quickly in the space between the warehouse doors and public roads. However, many of the processes that make up yard operations are manual, inefficient, and hazardous.

The current situation in logistics hubs is not optimized, and yard operations are ineffective and even hazardous.

"Logistics yards offer a confined, private-property environment and a set of discrete, repetitive tasks that make the ideal use case for autonomous technology," says Andrew Smith, founder and CEO of Outrider, in the release. "But today's yards are also complex, often chaotic settings, with lots of work that's performed manually. This is why an overarching systems approach – with an autonomous truck at its center – is key to automating every major operation in the yard."

Outrider's technology can automate repetitive and manual tasks, like moving trailers around, hitching and unhitching them, connecting and disconnecting trailer brake lines, and monitoring trailer locations, per the release.

"Outrider represents the type of company we at GOOSE want to fund," says Samantha Lewis, director of GOOSE, in a news release. "It is innovative, disruptive, and led by an all-star CEO that has a proven track record in recruiting top talent and top tier investors. GOOSE has been with Andrew from the beginning of his entrepreneurial pursuits and, still, he continues to impress us everyday."

Outrider, which has 75 employees — including 50 engineers focused on the automation technology — has launched pilots with Georgia-Pacific and four Fortune 200 companies. Smith says his relationship with GOOSE has had a positive effect on his career and his startup.

"The experience of GOOSE membership is unmatched. GOOSE, it's founder Jack Gill, and initial members, Art Ciocca and Rod Canion, played major roles in my entrepreneurial career by funding my first successful clean startup and then becoming seed investors in Outrider," says Smith in the release. "I am fortunate to have the team at GOOSE by our side again as we officially emerge from stealth and continue to scale the business."

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UH lands $11.8M for first-of-its-kind early language development study

speech funding

Researchers at the University of Houston have secured an $11.8 million grant from the National Institutes of Health to conduct a first-of-its-kind study of early language development.

Led by Elena Grigorenko, the Hugh Roy and Lillie Cranz Cullen Distinguished Professor of Psychology, and research professor Jack Fletcher, the study will follow 3,600 children aged 18 to 24 months to uncover how language skills develop at this critical stage and why some children experience delays that can influence later growth.

The NIH funding will also support the development of the new national Clinical Research Center on Developmental Language Disorders at UH, which aims to bring experts from psychology, education, health and measurement sciences to study how children learn language.

“This will be the first national study to estimate how common late talking is using a large, representative sample of Houston toddlers,” Grigorenko said in a news release. “By following these children as they grow, we hope to better understand the developmental pathways that can lead to conditions such as developmental language disorder and autism.”

UH’s team will partner with the pediatric clinic network at Texas Children’s Hospital, where children will be screened for early language development, allowing researchers to identify those who show signs of delayed speech. Next, researchers will follow the cohort through early childhood to examine how language abilities evolve and how early delays may lead to later challenges.

The Clinical Research Center on Developmental Language Disorders will be the 14th national research center established at UH, and will include researchers from multiple UH departments, as well as partners at Baylor College of Medicine and the Texas Center for Learning Disorders.

“This level of investment from the National Institutes of Health reflects the significance of this work to address a complex challenge affecting children, families and communities,” Claudia Neuhauser, vice president for research at UH, said in a news release. “By bringing together experts from multiple disciplines and partnering with major health systems across the region, the project reflects our commitment to advancing discoveries that impact our community.”

Rice Alliance names Houston healthtech exec as first head of platform

new hire

The Rice Alliance for Technology and Entrepreneurship has named its first head of platform.

Houston entrepreneur Laura Neder stepped into the newly created role last month, according to an email from Rice Alliance. Neder will focus on building and growing Houston’s Venture Advantage Platform.

The emerging platform, which is being promoted by Rice Alliance and the Ion, aims to connect founders with the "people, capital and expertise they need to scale."

"I’ve spent a lot of time thinking about what it takes to make an innovation ecosystem more navigable, more connected, and more useful for founders," Neder said in a LinkedIn post. "I’m grateful for the opportunity to do that work at Rice Alliance, alongside a team with a long history of supporting entrepreneurship and innovation."

"Houston has the talent, institutions, and industry base to create real advantage for founders," she added. "I’m looking forward to listening, learning, and building stronger pathways across the ecosystem."

Neder most recently served as CEO of Houston-based Careset, where she helped bring the Medicare data startup to commercialization. Prior to that, Neder served as COO of Houston-based telemedicine startup 2nd.MD, which was acquired for $460 million by Accolade in 2021.

"Laura brings a rare combination of founder empathy, operational experience and ecosystem leadership," Rice Alliance shared.

Neder and Rice Alliance also shared that the organization is hiring developers to design the new Venture Advantage Platform. Learn more here.

Elon Musk's SpaceX files initial paperwork to sell shares to the public

Incoming IPO

Elon Musk's space exploration company has filed preliminary paperwork to sell shares to the public, according to two sources familiar with the filing, a blockbuster offering that would likely rank as the biggest ever and could make its founder the world's first trillionaire.

A SpaceX IPO promises to be one of the biggest Wall Street events of the year, with several investment banks lining up to help raise tens of billions to fund Musk's ambitions to set up a base on the moon, put datacenters the size of several football fields in orbit and possibly one day send a man to Mars.

The sources spoke on condition of anonymity because they were not authorized to talk publicly about the confidential registration with the Securities and Exchange Commission.

SpaceX did not respond immediately to a request for comment.

Exactly how much SpaceX plans to raise has not been disclosed but the figure is reportedly as much as $75 billion. At that level, the offering would easily eclipse the $29 billion that Saudi Aramco raised in its IPO in 2019.

The offering, coming possibly in June, could value all the shares of SpaceX at $1.5 trillion, nearly double what the company was valued in December when some minority owners sold their stakes, according to research firm Pitchbook, before an acquisition that increased its size.

Musk owns 42% of the SpaceX now, according to Pitchbook, though that figure will change with the IPO when new owners are issued shares. In any case, he is likely to pierce the trillion dollar mark because he is already close. Forbes magazine estimates Musk's net worth at roughly $823 billion.

In addition to making reusable rockets to hurl astronauts and hardware into orbit, SpaceX owns Starlink, the world’s largest satellite communications company. The company also recently brought under its roof two other Musk businesses, social media platform X, formerly Twitter, and artificial intelligence business, xAI, in a controversial transaction because both the seller and the buyer were controlled by him.

SpaceX has become the biggest commercial launch company in its industry, responsible for sending payloads into orbit for customers across the globe, but has also benefited from big taxpayer spending. That has raised conflicts of interest issues given that Musk was the biggest donor to President Donald Trump's campaign and is still a big backer.

In the past five years, SpaceX won $6 billion in contracts from NASA, the Defense Department and other U.S. government agencies, according to USAspending.gov.

Among current SpaceX owners is Donald Trump Jr, the president's oldest son. He owns a shares through 1789 Capital. That venture capital firm made him a partner shortly after his father won the presidency for a second time and has been buying up federal contractors seeking to win taxpayer money ever since.

The White House and Trump himself have repeatedly denied there are any conflicts of interest between his role as president and his family's businesses.

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