Soul-searching in Houston on Energy Innovation as Surge Closes

Houston — Since Surge Ventures closed its cleantech/energy venture accelerator last week, the question lingering has been, If a Surge can’t succeed in Houston—the energy capital of the world—then where?

Houston’s prowess in energy turned out to be Surge’s Achilles heel: a lack of buy-in from incumbent oil and gas companies and electric utilities, says Surge founder Kirk Coburn. “It’s a cultural problem: ‘Drill, baby. Drill.’ is the culture,” he says. “This is the way we’ve always done it.”

“Industries don’t like to disrupt themselves until they’re being disrupted,” he added.

Surge, which began five years ago, hosted four classes of startups, each seeking to innovate in some facet of the energy industry.

When oil prices soared, topping $100 a barrel two and three years ago, Surge was an easy sell. Energy companies “were intrigued by what we were doing,” Coburn says. “They saw it as a cool Silicon Valley-type of thing.” But the ensuing price drop-off, by more than half in two years, cooled the industry’s ardor.

Seeing this, Coburn says he tried to pivot the makeup of the last class. Whereas the first classes featured startups with more of a cleantech pedigree in wind and solar, the last class was more targeted to bringing incremental efficiencies to existing operations of traditional oil-and-gas operations. “Surge continued to get pulled more and more into oil-and-gas related projects, and I didn’t like that,” he says.

By last fall, in the middle of raising a $30 million fund, Coburn says he saw the writing on the wall. “I thought, ‘we’re not going to do the fund. It wasn’t big enough; it wasn’t bold enough,” he says.

He almost off-handedly announced his decision that the accelerator program was hitting “a pause button” and not taking on a fifth class during a panel discussion at a Rice University energy forum.

Coburn now says he looked at offers from industry partners and accelerators, including an energy-focused Techstars—“Absolutely did explore that,” he says. “They’re the best at what they do.”—to find a way for Surge to survive.

Nothing panned out. “At the end of the day, the industry said, we don’t believe in it; it’s not important for us to get behind,” he says. “Houston needs a Tesla. Without Tesla and Google chasing automated cars, do you think GM would care?”

Yael Hochberg, a Rice University professor who studies entrepreneurship and efforts to encourage it, says accelerators need as much as a decade before they are successful financially. “The exit horizons are so long,” she says. “The startups finish but still need seed (money) before a Series A … to get them into the regular VC food chain. It’s a valley of death for startups.”

Surge was especially hampered because of its reliance on the energy industry for funding, she adds. “Most of the money that goes into energy comes from corporate, not from generalist VC funds,” she says. “It’s one of those verticals where it’s much more concentrated. Techstars, for example, can weather downturns better. The investor base is broad; there’s some diversification.”

Essentially, it takes a village to raise an accelerator. “Many accelerator programs that are based outside of core tech ecosystems and are long-running programs have received major support from state/city governments or from corporations,” says Blair Garrou, founder and managing director at venture capital firm Mercury Fund in Houston, which was a Surge investor. “However, local city organizations and corporations were apathetic when it came to stepping up and providing financial support for the program.”

Garrou acknowledges that part of this indifference is an understandable reaction to dropping commodity prices. But he adds that the lack of support for Surge also reflects a worrisome “apathy” in Houston for supporting innovative companies. “Houston has survived for years on the ‘Energy Economy,’ and hasn’t seen a need to invest outside its core,” he says.

Russ Conser for seven years led the Shell GameChanger program, which acts like an angel investment arm for the multinational oil company, and he mentored Surge startups. Houston entrepreneurs are, by and large, in energy and made their money “buying into the Eagleford,” or other oil-and-gas plays. The difference, he adds, is that that sort of entrepreneurship, while undoubtedly successful, doesn’t entail “business model innovation.”

“You’re basically just replicating existing business models and marrying them with novel technologies,” Conser says. “Business model innovation is why Uber exists; it happens to be wrapped up in software.”

In the last few years, about half a dozen Surge startups have left Houston for more hospitable climes. Conser points to a company he mentored, Autonomous Marine Systems, which makes a self-sailing, solar-powered catamaran that can monitor the ocean for months at a time, and was part of Surge’s third class. “They decided to be in Boston to plug into the more entrepreneurial ecosystem,” he says. “They are now at Greentown Labs in Boston.”

Other companies have landed in Austin, including RunTitle, which was in Surge’s second class. The startup has an online database to search mineral rights titles, and moved to Austin in 2013 because investor “Austin Ventures mandated that we move as part of our round … because they care about the community,” says Reid Calhoon, founder and CEO. “We were intending to stay.” Last fall, the startup raised an additional $8 million in a round led by San Francisco-based Founders Fund.

SEEForge, which was also in the accelerator’s third class, has remained in Houston. The company makes an app that digitizes reporting paperwork for safety inspections and other reviews that take place at remote industrial sites such as oil and gas platforms.

“We were in Silicon Valley as well as Australia, and we wanted to come to Texas to focus on energy,” says James McDonough, the company’s founder and CEO. (It doesn’t hurt that their software can be modified to attract customers from more than just the Oil Patch.)

Both Calhoon and McDonough are effusive in their praise of the Surge program. “Surge was the single best thing that we’ve ever participated in,” Calhoon says. “The community of Houston needs to have an accelerator for oil and gas companies.”

Coburn told me he plans to stay in Houston, mentor the 32 existing Surge companies, and noodle on the idea of building an exploration and production company that is built on technology. “How do we build a new company from the ground up that has the purpose of building the future of energy,” he says. “That can only be done here.”

Otherwise, Houston is, well, “screwed,” says Conser, the Surge mentor formerly at Shell. “Shame on Houston if we can’t figure out how to do that.”

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