Three non-Houston investors discussed the strengths and weaknesses of Houston's innovation ecosystem. Getty Images

3 observations about Houston's innovation ecosystem from out-of-town venture capitalists

Zooming out

You'll go cross-eyed looking at the same puzzle for too long, and sometimes it's better to take a step back and introduce some fresh perspectives and ideas from someone not so connected to the matter at hand.

At the second annual HX Capital Summit hosted by Houston Exponential at Rice University, HX gathered three out-of-town venture capital experts to discuss Houston's innovation ecosystem with Sandy Wallis, managing director at the HX Venture Fund. The fund-of-funds focuses on connecting non-local investors to Houston in order to bring new venture opportunities to town. On the panel, the experts discussed their observations about the Bayou City, which can be summed up as follows.

Community engagement and corporate interest are good signs for Houston 

Right off the bat, the panelists agreed that its much more encouraging visiting Houston nowadays than it was in the recent past. Clint Korver, managing director at San Francisco-based Ulu Ventures, has only recently played witness to the city, thanks to his firm's work with HX and the fund of funds.

"I'm just getting to know the Houston community," Korver says. "I'm really intrigued by how much community support there is."

Korver says that, not unlike Houston startups, Bay Area companies find it a challenge getting a foot in the door at major corporations. However, he's observed that Houston-based corporates want a seat at the table of Houston innovation.

"All the corporate attention that's being integrated here is super intriguing," Korver says. "That's our startups' hardest problems."

The other panelists, who are much closer to Houston, echoed Kover's interest in the role corporations play. Venu Shamapant, founding partner at Austin-based LiveOak Venture Partners, and Thomas Ball, founder and managing director at Austin-based Next Coast Ventures, have witnessed Houston evolve into what it is today over the past decade or so.

"We've both been coming to Houston over the past 20 years and been investing in startups, and it's been a dramatically different scene even in just the past five years," Shamapant says.

Houston's ecosystem is going to take time

While the panelists remarked on the evolution the city has and the support that large corporations seem to be willing to provide, Houston has other assets that's setting it up for success. The panelists mention a solid pool for talent, impressive educational institutions, and more.

"When I look at Houston, I think it has every ingredient for success, which is why I want to spend time here," Ball says.

Sure, as Ball says, Houston has the ingredients, but what it now needs is the time to cook.

"To me, it's more of just time that it's going to take. We can't bake this Houston cake by turning the thermostat up to 900 degrees in an hour. It's going to take three hours at 300," Ball says, adding that he doesn't know very much about baking. "It will take time. This won't be an overnight success. We're here for the long haul."

Houston has some challenges yet to overcome 

Wrapping up the panel, an audience member asked about the changes Houston still needs to make to really get to the point it needs to be at.

For Korver, the answer was pretty simple. Houston needs a big exit.

"There's this incredible amount of momentum that comes along with a successful company that takes a hold of everyone — the rising tide floats all boats thing," Korver says.

For Ball, particularly comparing Houston to other major innovation-focused cities, the issue is that Houston is so spread out.

"To me the one thing I struggle with in Houston is what I would call a density problem," Ball says. "I think you need density here and you need to concentrate your resources in certain places in this city."

For large companies, it's not just about the money. There's more they can offer startups. Getty Images

Here’s how big companies are looking to invest in Houston startups

B2B

As times and technologies change, large companies need to be able to adopt innovative techniques now more than ever. For some companies, that means making a strategic hire, investing in startups, or making acquisitions.

Three panelists with experience in corporate ventures took the stage at the inaugural HX Capital Summit to discuss their best advice for startups looking for investment from large companies.

The panel consisted of Roy Johnston, partner at The League of Worthwhile Ventures; Tom Luby, head of Jlabs; Andrea Course, venture principal at Schlumberger Technical Investments; and moderator Rashad Kurbanov, CEO of Houston-based iownit capital and markets.

The topic of conversation was how corporations work with startups. For Schlumberger, Course says, it's less about acquiring companies and more about investing in technologies those startups are working on.

"When Schlumberger does invest, we like to have a pilot and invest in properties we can grow," Course says. "Our intent is not to go out and buy a startup company, but to grow the technology and then become customers."

Schlumberger has a lot to offer a budding company, namely resources, infrastructure, assets, and a global footprint, Course says.

Previous to his position at The League, Johnston was the director in the venture capital arm of Waste Management, Inc. He says he saw a similar resources-based investment strategy.

"Waste Management might have been more hesitant to write a check, but they were very generous with their assets," Johnston says.

The company could make connections for the startups and provide other support for entrepreneurs in the early stages of starting a company. However, when it came to monetary investments, Johnston says, it was a different story.

"Where I think Waste Management comes in is later on — more of an acquirer than an investor," Johnston says.

When it comes to the types of startups big companies are looking to work with, industry isn't a big issue. Johnson & Johnson, for instance, has an open mind, Luby says.

"It's not an easy fit to say a specific area where J&J fits — if you look at the profile of things we do, we have a no-strings-attached incubation hub next door," he says.

Schlumberger similarly looks outward to spark innovation inward — mostly, Course says, because it's so challenging to think outside the box when you're working everyday inside the box.

"We mostly invest in companies outside of oil and gas, but that we see the potential of bringing used in our industry," Course says.

Houston, has a surplus of diversity — both industry and population, Johnston says. This will be a huge asset of the city, he says, since Houston is on the edge of another revolution for digitization.

"The businesses that are going to be built are going to need people who have a diverse understanding of problems," Johnston says. "That's where I think Houston's diversity is an enormous benefit to us."

Venture capital panelists discussed Houston's venture funding future — both the good and the bad. Houston Exponential/Twitter

Leading venture capitalists forecast the future of funding in Houston

Follow the money

Despite Houston being known for its money, venture capital has struggled to hit its stride until recently. Now, as Houston has attracted more money for its startups — even coming close to Austin, according to recent data — the Bayou City faces a challenge ahead.

"We will go through a massive tech correction — period. End of story," says Blair Garrou, managing partner of Houston-based Mercury Fund, at the inaugural HX Capital Summit.

The correction, Garrou says, would have happened a few years ago, but Middle Eastern and Chinese investments have been holding down the fort, so to speak.

"Whenever this correction happens, whether it's a year, two years, or three years, [my hope is] that the capital here invests through the cycle," Garrou says. "Anyone who invests through the cycle will win."

Garrou was joined by a few other venture capitalists on the panel hosted by Houston Exponential at the TMC Innovation Institute on December 4: Tim Kopra, partner at Houston-based Blue Bear Capital; Mark Friday, associate at Houston-based Cathexis; Joe Milam, CEO of Austin-based Angelspan; Jay Zeidman, managing partner of Houston-based Altitude Ventures Texas; and moderator Rashad Kurbanov, CEO of Houston-based iownit capital and markets.

While the tech correction looms, Houston's current venture ecosystem blooms, thanks to a rise in high net worth personal and family investments.

"There's a real hunger from a lot of ultra-high net worth families to get into this sector, and it'd be really interesting if we can cultivate that here in Houston," says Kopra.

People have gotten more comfortable investing in tech, says Garrou, so the investment opportunities have grown.

"There's a greed component to it that people don't like to talk about," Garrou says. "When people see people making money in a certain sector, they say, 'why not me.'"

However, there are a few things holding back some investors. One being that companies from earlier venture funds have yet to reach their full potential, says Garrou, and he and other venture capitals need to move the needle on that to demonstrate success. He says, once that happens, more capital will flow.

Another hesitation Zeidman says he's seen is within investing in funds, rather than directly into startups.

"There's a difference in investing in companies and investing in funds," Zeidman. "I think a lot of folks are skeptical about investing in funds. I want to be in a deal — I don't just want to give you money and you go decide what to do with it."

Houston Exponential, the city-backed innovation arm for Houston, launched a fund of funds in October. The HX Venture Fund has the potential to create a "flywheel effect" in Houston, says Garrou.

"We're going to see dozens and dozens of funds from across the country come to Houston — they're already coming," Garrou says. "But what's important is they are going to want to co-invest with local investors, and that's the key to venture capital."

While encouraging out-of-city investors is a key part of the equation, Houston does stand well on its own, Milam says. Houston has historically been compared, perhaps wrongly, to Austin., because it got a head start when it came to startup growth. But it's a different story now.

"Austin isn't as advanced as people give it credit for," says Milam. "I don't think Houston at all has [to] look at Austin as a role model or for guidance. Houston has a far better and brighter future when it comes to mobilizing capital and Houston-born startups."

Ultimately, the panelists agreed that despite Houston's slow start and rough waters ahead, Houston's future is bright when it comes to venture capital and startup growth.

"When you look at Houston, we've got a huge economy here — a huge number of customers here," Friday says. "I think we can close the gap of the ratio the amount of venture and startup activity to the overall size of our economy."

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These 3 Houston research projects are aiming to fight or prevent cancer

Research roundup

Cancer remains to be one of the medical research community's huge focuses and challenges, and scientists in Houston are continuing to innovate new treatments and technologies to make an impact on cancer and its ripple effect.

Three research projects coming out of Houston institutions are providing solutions in the fight against cancer — from ways to monitor treatment to eliminating cancer-causing chemicals in the first place.

Baylor College of Medicine's breakthrough in breast cancer

Photo via bcm.edu

Researchers at Baylor College of Medicine and Harvard Medical School have unveiled a mechanism explains how "endocrine-resistant breast cancer acquires metastatic behavior," according to a news release from BCM. This research can be game changing for introducing new therapeutic strategies.

The study was published in the Proceedings of the National Academy of Sciences and shows that hyperactive FOXA1 signaling — previously reported in endocrine-resistant metastatic breast cancer — can trigger genome-wide reprogramming that enhances resistance to treatment.

"Working with breast cancer cell lines in the laboratory, we discovered that FOXA1 reprograms endocrine therapy-resistant breast cancer cells by turning on certain genes that were turned off before and turning off other genes," says Dr. Xiaoyong Fu, assistant professor of molecular and cellular biology and part of the Lester and Sue Smith Breast Center at Baylor, in the release.

"The new gene expression program mimics an early embryonic developmental program that endow cancer cells with new capabilities, such as being able to migrate to other tissues and invade them aggressively, hallmarks of metastatic behavior."

Patients whose cancer is considered metastatic — even ones that initially responded to treatment — tend to relapse and die due to the cancer's resistance to treatment. This research will allow for new conversations around therapeutic treatment that could work to eliminate metastatic cancer.

University of Houston's evolved brain cancer chip

Photo via uh.edu

A biomedical research team at the University of Houston has made improvements on its microfluidic brain cancer chip. The Akay Lab's new chip "allows multiple-simultaneous drug administration, and a massive parallel testing of drug response for patients with glioblastoma," according to a UH news release. GBM is the most common malignant brain tumor and makes up half of all cases. Patients with GBM have a five-year survival rate of only 5.6 percent.

"The new chip generates tumor spheroids, or clusters, and provides large-scale assessments on the response of these GBM tumor cells to various concentrations and combinations of drugs. This platform could optimize the use of rare tumor samples derived from GBM patients to provide valuable insight on the tumor growth and responses to drug therapies," says Metin Akay, John S. Dunn Endowed Chair Professor of Biomedical Engineering and department chair, in the release.

Akay's team published a paper in the inaugural issue of the IEEE Engineering in Medicine & Biology Society's Open Journal of Engineering in Medicine and Biology. The report explains how the technology is able to quickly assess how well a cancer drug is improving its patients' health.

"When we can tell the doctor that the patient needs a combination of drugs and the exact proportion of each, this is precision medicine," Akay explains in the release.

Rice University's pollution transformation technology

Photo via rice.edu

Rice University engineers have developed a way to get rid of cancer-causing pollutants in water and transform them into valuable chemicals. A team lead by Michael Wong and Thomas Senftle has created this new catalyst that turns nitrate into ammonia. The study was published in the journal ACS Catalysis.

"Agricultural fertilizer runoff is contaminating ground and surface water, which causes ecological effects such as algae blooms as well as significant adverse effects for humans, including cancer, hypertension and developmental issues in babies," says Wong, professor and chair of the Department of Chemical and Biomolecular Engineering in Rice's Brown School of Engineering, in a news release. "I've been very curious about nitrogen chemistry, especially if I can design materials that clean water of nitrogen compounds like nitrites and nitrates."

The ability to transform these chemicals into ammonia is crucial because ammonia-based fertilizers are used for global food supplies and the traditional method of creating ammonia is energy intensive. Not only does this process eliminate that energy usage, but it's ridding the contaminated water of toxic chemicals.

"I'm excited about removing nitrite, forming ammonia and hydrazine, as well as the chemistry that we figured out about how all this happens," Wong says in the release. "The most important takeaway is that we learned how to clean water in a simpler way and created chemicals that are more valuable than the waste stream."

Deloitte lays out the benefits of digital innovation

Some workers fear technology, wondering "will a robot eventually replace my job?" Yet, Deloitte Insights and MIT Sloan Management Review found in a recent study that the more a company uses digital technology, the more likely it is to be innovative, which can benefit individuals, teams, organizations, and groups of organizations.

Deloitte and MIT collaborated for the fifth time to conduct a global study about digital innovation. They surveyed more than 4,800 businesspeople and interviewed 14 subject matter experts. The results were published in a June 2019 report titled "Accelerating Digital Innovation Inside and Out."

Deloitte and MIT shared two main findings from the survey:

  1. Digitally maturing companies innovate at higher rates — both internally and externally — than companies with early or developing digital maturity.
  2. Companies should know their ethics so that they can innovate wisely.

Internal innovation
Most digitally maturing companies innovate internally in two ways. First, they typically allow individuals to innovate within their jobs. The more digitally mature a company is, the more likely an employee was to say that more than 10 percent of their work involves the opportunity to experiment and innovate. The opposite was also true. Employees of less digitally mature companies were more likely to say that less than 10 percent of their work involves the opportunity to experiment and innovate.

In addition to encouraging individuals to innovate, most digitally maturing companies urge groups to innovate by establishing cross-functional teams. These teams are generally comprised of individuals from across multiple departments and roles and often exist to accomplish a specific task. Deloitte and MIT found that 83 percent of digitally maturing companies surveyed use cross-functional teams. This is far higher than respondents of either developing or early-stage companies' cross-functional team use — 71 percent and 55 percent, respectively.

External innovation
In addition to having employees innovate internally (both individually and in groups), digitally maturing companies often innovate externally by collaborating with others (e.g., their customers, their competitors, government institutions, and more) in their ecosystem. Ecosystems, which are formal or informal networks of organizations working toward a common goal, typically feed innovation in two ways. First, they integrate platform companies, meaning that companies that provide services to other companies — such as Amazon and PayPal — are both a part of the ecosystem and also strengthen it by being part of it.

Second, digitally maturing companies allow all organizations within the network to get better feedback. A company is not just getting feedback from their own customers, but from all customers within the ecosystem.

Ethics and innovation
In order to get the most benefit from their internal and external collaborations, companies should use "loose coupling," a term first coined by organizational theorist Karl Wieck. This means that individuals are linked to teams, teams to the organization, and the organization to fellow members of its ecosystem — but not too tightly. This model allows people the freedom to have both some autonomy and also some oversight as they innovate. If people are micromanaged, they are not able to innovate as well.

Because innovation requires loosening the reins somewhat, companies should have strong ethics systems in place. Otherwise, innovation can get out of hand, and a company risks having employees develop goods or services which aren't in line with organizational values.

Survey conclusion
Over half (56 percent) of survey respondents said they think their organization will exist and be in a much stronger position in 10-20 years due to the organization's use of digital capabilities. A similar percentage (44 percent) of survey respondents said that in 10-20 years, they think that their organization will have been bought out or gone out of business. Companies can act based on market and competitive forces but cannot control them. Companies can, however, decide how much of a priority digital innovation will be.

If they decide it is a priority, how can companies become more innovative? Companies should consider several tips:

  1. Work with other organizations within your ecosystem.
  2. Prioritize cross-functional teams.
  3. Use loose coupling which allows room for trial and error.
  4. Establish and continually update your ethics guidelines.

Innovation in Houston
The Houston innovation scene is thriving, and local organizations know that they are stronger together than apart. Houston Exponential is a "nonprofit organization created to accelerate the growth of Houston's innovation ecosystem" which hopes to "turn Houston into a hub for high-growth high-potential companies by creating pathways for innovation to flow at scale." Houston Exponential has stakeholders from companies, non-profits, government entities, and academic institutions.

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This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2020 Deloitte Development LLC. All rights reserved.

Growing Houston thrift startup aims to impact the unsustainability of the fashion industry

do goodfair

A Houston-based online retailer for second-hand clothing is quickly growing, aiming to make "No New Things" the mantra of the fashion world.

As the popularity of "Fast Fashion," or cheap clothing produced rapidly by mass-market retailers, begins to decline, brands are refocusing on upcycled, recycled, and sustainable clothing — and Goodfair has bet its business plan on this movement.

"I realized that there was too much stuff out there," says Topper Luciani, founder and CEO of Goodfair, "and there is an environmental crisis being caused by the clothing industry. They're manufacturing so many items, they're using slave labor, they're pumping dyes and other chemicals into rivers. It's absolutely wild."

The fashion industry contributes 10 percent of the world's carbon emissions, is the second-largest user of the earth's water supply, and pollutes the oceans with microplastics according to a report from Business Insider in October 2019. Additionally, the outlet reports that 85 percent of all textiles go to the dump every year.

"Still, we have an enormous demand for these clothes that are being thrown away and that demand is just being filled by more cheap new clothes at malls and things like that, instead of reintroducing second-hand clothes," says Luciani. "I've been working really hard on creating a way to make a frictionless process for reintroducing those clothes."

Luciani, tells InnovationMap that he predicts the size of the recycled clothing industry will grow to $51 billion by 2023. Following in the footsteps of second-hand online retail giants such as thredUP and Poshmark, Luciani takes things to the next level by focusing on adding ease to the online shopping experience, telling InnovationMap that it should be as easy as clicking one button.

The idea of Goodfair was surprisingly not inspired by the apparel industry at all. Luciani tells InnovationMap that he was influenced by the founder of Uber, Garret Camp, and Camp's idea for a one-click car service.

"Their whole concept was to just hit a button and a taxi comes, says Luciani. "I wanted to look at a thrift store through that lens."

Goodfair, which launched in 2018, adds to the trend of second-hand clothing with the introduction of "mystery shopping," shipping all of their clothing in variety packs chosen according to a customer's size and taste. This eliminates the cost of photographing, measuring, lowering the price for both the customer and the company.

"I had this idea that not only would mystery shopping eliminate the paradox of choice, but everyone loves a surprise," he tells InnovationMap.

Luciani tells InnovationMap that he sees a trend among Gen Z, individuals born between 1995–2009, for buying second-hand, noting that about 90 percent of Goodfair customers are between the ages of 18 and 25. thredUP also reports that Gen Z and Millennials are driving the growth of used clothing retailers, noting that "18–37 year-olds are adopting second-hand clothing 2.5 times faster than other age groups" in the company's 2019 Resale Report.

"This was the generation that was forged in the Great Recession and they saw the ills of decadence," says Luciani. "They saw the ills of not having financial literacy. Ultimately, these woke kids are aware that branding is kind of a heist."

Goodfair taps into this market, leaning into social media platforms such as Instagram and Snapchat to promote the company. The company recently kicked off an Instagram series called "In the racks, in the rags" where followers can win a random item from their warehouse, located in Houston's East End.

Goodfair joins the growing roster of local companies focused on sustainable fashion. For example, Magpies & Peacocks, the nation's only nonprofit design house, opened a new store in the East End last year. Houston is home to a number of brick-and-mortar stores which line Westheimer Boulevard in the heart of the city, including Buffalo Exchange, Leopard Lounge, Pavement, and LO-FI.

Luciani, who moved to Houston from Brooklyn, New York, leads Goodfair with Emily Keeton, COO. Keeton joined the company in October 2019, leaving her previous leadership role at WeWork. The company announced in January 2020 that they will be adding a vice president of marketing to the team.

In the coming years, Luciani tells InnovationMap that he hopes to launch an app for the brand, and also expand into offering other goods.

"I have a vision of essentially creating a used Amazon," says Luciani, "Everything that gets donated to thrift stores can get donated in this mystery mechanic."

Luciani has a long history in the textile industry. In 2004 while in college, he launched a men's polo shirt brand, Sir Drake.

"When I reflected on the experience and as I educated myself about the clothing industry, this was right when fast fashion was taking off, I realized that if I launched another fashion brand that I would just be contributing to industrial pollution problem," he says.

He tells InnovationMap that he then started selling used neckties on eBay, launching his mission with sustainable fashion.

"We expect that a year from now we will be generating five times the sales we did in 2019 and become a multi-million dollar business," Luciani says.