Overheard: Houston venture capital experts weigh in on the city's investment future
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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."
Wind turbines would be repurposed into seawalls and more. Courtesy rendering