Fueling Startups: New Firms Emerge on Texas Venture Capital Landscape
A perceived weakness in Texas’s startup communities is a lack of early stage investment capital available for budding tech entrepreneurs.
Texas tech entrepreneurs share anecdotes about the difficulty they can have in securing funding. And data compiled by industry organizations show that venture capital activity in the state is a fraction of what is seen in bigger-name startup hubs like Boston or San Francisco.
By far, Austin companies raised the most of all Texas cities with $976.26 million this year as of Sept. 30, according to PitchBook/National Venture Capital Association data released this week. Dallas posted $309.85 million in the same period, with Houston and San Antonio coming in at $154.58 million and $86.82 million, respectively. (Compare that to the $6.2 billion raised in the Boston metro area by the Sept. 30 cutoff date.)
Texas has homegrown venture firms active in the state’s entrepreneurial ecosystem, of course. Houston-based Mercury Fund, Dallas’s Naya Ventures, and LiveOak Venture Partners in Austin are active investors. And last month, Austin-based AVX Partners announced a name change to Elsewhere Partners to reflect the firm’s focus on neglected startup communities both in and out of Texas.
Recently, new investors in Houston and Dallas are seeing opportunity and have set up shop. We talked to three new investment firms:
Cottonwood Venture Partners, Houston
—Notable investments: Ambyint and Novi
—Founded this year by oil and gas veterans Ryan Gurney and Jeremy Arendt.
—Cottonwood is raising a $50 million fund and plans to make 10 investments of between $3 million to $5 million.
“We’ve always been impressed by the mechanical prowess of the [oil and gas] industry. They can drill miles below the surface of the earth with pretty good precision,” Gurney says. “But we were underwhelmed by the lack of digital adoption.”
Gurney says he and Arendt believe that mindset is changing, so they set up Cottonwood Ventures, focusing on software in the oil and gas industry. A low price environment for oil is driving companies to operate more efficiently and adopt a “digital oilfield” mindset. Also influencing things is “the great crew change”—a generational shift as young workers start to replace retiring Baby Boomers— that “is more receptive to technology,” he says.
Gurney says he believes Cottonwood is in the best position to finance energy tech startups. “If you’re an oil and gas software company, you view yourself as a tech company” that doesn’t necessarily have the contacts in the energy sector, he says. And, on the investor side, “you’re a traditional VC shop, but have no idea what you’re talking about in oil and gas.” Cottonwood wants to bridge that gap, he says.
“A lot of this is explaining what these tech companies are doing, or can be doing for the ultimate customers and making that value proposition crystal clear,” he says.
Gurney and Arendt say they have spent the past year researching the market, getting to know entrepreneurs, and connecting them with contacts in the energy industry. “Deal flow has been terrific and, frankly, a bit overwhelming at times,” Arendt says.
Cottonwood plans on concentrating on what it calls digital oilfield hubs like Texas, Denver, and Calgary.
Intelis Capital, Dallas
—Notable investment: BioLum Sciences
—Founded by Jonathan Crowder along with Kevin Stevens and Kevin Crowder.
—Intelis Capital will focus on seed and Series A funding. (No information on its fund size was provided.)
When he graduated from Southern Methodist University in Dallas four years ago, Jonathan Crowder decided to go to Silicon Valley to get a firsthand look at the region’s powerhouse startup ecosystem. “There is this pervasive lore that all great technologies must be funded in the Bay Area,” he says. “I have a background in organizational theory. I wanted to see what that looked like and to see if that’s true.”
Three months later, he returned to Dallas to join Choose Energy, a Kleiner Perkins-backed greentech startup. “It was a great opportunity to be part of a tier-one venture capital-backed startup, but here at home,” he says. (Choose Energy was acquired by Red Ventures of North Carolina in June.)
That experience convinced him that North Texas had the ingredients to be a more robust innovation ecosystem, and so he started Intelis with his father and longtime Dallas entrepreneur Kevin Crowder and Kevin Stevens, a former colleague at Choose Energy.
“One thing that I see as a community that was done well is building a dense network of really generous [executives] who are generous with their time and willing to connect [founders] to their network,” Jonathan Crowder says. But, he added, those founders needed cash, as well as expertise, to build their businesses.
“There are a lot of industries that have not yet been fully disrupted by technology,” he says. “A lot of the talent to understand those businesses is actually located here.”
Work America Capital, Houston
—Notable investment: Vype
—Founded by Mark Toon, serial entrepreneur and most recently CEO of KPMG Capital in Houston, and Jeff Smith, longtime business consultant.
—Work America is raising a fund in the $20 million to $40 million range and will focus on investments between $500,000 and $3 million.
Serial entrepreneur Mark Toon spent much of the past 20 years building technology companies—including selling IT consultancy EquaTerra to KPMG in 2011—but says that Houston, then and now, does not fully support startups.
“My first companies were started in Houston in the ’90s and there was really no support structure for startups and early stage companies,” he says. “If you look at venture capital money in Texas, it sucks—and most of it is concentrated in Austin.”
So when KPMG Capital, where Toon was CEO since 2013, decided not to raise another fund, Toon says he decided to found Work America Capital to formalize a company around existing investments made by him and his co-founder Smith, in addition to seeking new opportunities. The pair also recently brought to the firm Kelly Dowe, formerly the chief business officer for the city of Houston, as CFO.
“I’ve spent my entire career hiring young professionals and giving them opportunities they could not have received at a corporation,” Toon says. “To improve the economy of Houston is to have job growth.”
So far, Toon says the pipeline for investment candidates is “robust.” In addition to capital, Work America is founding an accelerator/incubator in west Houston called The Cannon that could serve as a physical hub for young tech companies, he adds.