Houston Exponential Aims to Bring Venture Investment, Boost Startups
Houston—Houston leaders will officially launch a venture capital fund of funds later this morning, aimed at jumpstarting the city’s innovation ecosystem and elevating Houston into the top tier of startup hubs.
The HX Venture Fund, which will be in the $40 million to $50 million range, will be made up of corporate investments which, in turn, will be invested in venture capital firms around the country. Venture firms receiving investment are not required to invest in Houston startups, though leaders here hope that they will at least take a look. In the meantime, such a fund of funds could also enable greater interaction among multinational corporations seeking new technologies, startups that might be developing those, and venture capital that can help fund those startups.
“This is about taking Houston up the rankings in innovation,” Guillermo Borda, HX Venture’s fund of funds manager, told me in an interview. “We’re looking to attract very significant levels of venture investment in this city.”
Borda, most recently a Bank of America fund of funds manager, says he plans to invest in about 10 to 12 venture firms with innovations in IoT, robotics, advanced materials, healthcare, and manufacturing intelligence, among other sectors, with the first investment closing within a year. Insperity has agreed to be HX Venture’s lead sponsor for runway capital, and Borda says he expects to be able to announce the fund’s lead corporate investor soon.
The new fund of funds is one part of an effort called Houston Exponential, a new civic organization founded from efforts among the Mayor’s Innovation and Technology Task Force, the Greater Houston Partnership, and the Houston Technology Council. Gina Luna, formerly chair of the GHP’s innovation roundtable, will be chair of Houston Exponential. Dick Williams, former president of Shell Wind Energy and former Chairman of the HTC, will be Houston Exponential’s interim president and CEO until a permanent executive can be found. (Lori Vetters had been HTC’s CEO since January.)
These sorts of funds of funds have been used in a variety of regions across the country as a way to supply needed capital to early stage startups after the seed round of funding. In 2013, Wisconsin set up a government-backed fund of funds in which the state put up $25 million as long as fund-of-funds managers contributed $300,000 of their own money and secured at least $5 million from other investors.
But the closest example to what Houston is planning to do is the Renaissance Venture Fund in Detroit. The first fund was started in 2008, and like Houston’s, was around $45 million in size. “Michigan had been in a one-state recession for the better part of a decade,” says Chris Rizik, Renaissance’s CEO and fund manager. “We were exporting people and technology to other places.”
Today, Renaissance is on its third fund and has made investments in about 30 venture firms, including 5AM Ventures, Techstars Ventures, and Houston’s Mercury Fund. Rizik says the first Renaissance Fund has attracted nearly $1 billion in capital.
“What the fund of funds does is it creates that group of players that will say yes,” says Rizik, who is on HX Venture’s investment board. “It’s a terrible thing for angel investors, who create this great startup community, but then there is no follow-up money. Companies either go out of business or they move.”
Recognizing a need to fill a similar gap in Houston, in the last year, local civic and business leaders have studied ways to boost the city’s anemic startup ecosystem. Among the primary recommendations, according to a report put together by Accenture earlier this year: figure out a way to provide more funds to young Houston startups.
While Houston is the fourth largest city in the country and home to a number of global corporations—not to mention being the energy capital of the world—the amount of venture capital its startups have raised pales in comparison to other smaller Texas cities. Houston companies raised $154.58 million this year as of Sept. 30, according to PitchBook/National Venture Capital Association. (Austin companies raised $976.26 million in that same period, while Boston startups posted $6.2 billion.) A recent Kauffman Foundation report ranked Houston 19th in the rate of startup growth, a drop of five places from the previous year.
“Houston’s investment community was secondary or tertiary at best against other ecosystems,” says Blair Garrou, founder of Mercury Fund in Houston and a senior strategy advisor to HX Venture Fund. But he says the timing is now right for HX Venture Fund to reach its potential. With groups like TMCx, the Texas Medical Center’s health IT and medical device accelerator, and Station Houston working to enable the formation of a larger number of viable startups, a fund of funds can have a real impact.
“If you attract 20 venture capital funds to Houston, you need to have quality startups for investments,” he says. “If we did this prior to Station or TMCx, you couldn’t have said that about the Houston economy.”