It’s been said that diversity drives innovation. And a new report points toward a lack of investment diversification in the Fort Worth startup scene as one reason why Funky Town falls behind Dallas in terms of density and VC funding.
Using PitchBook data from the last two decades, entrepreneurial networking organization Sparkyard found the despite accounting for only 10 percent of the Fort Worth ecosystem, startups in the energy industry made up about 60 percent of VC deals.
“This has led to a lack of investment diversification in our local economy and has created a vacuum of capital available for other early-stage startup companies and has potentially left startups in other industries unfunded or underfunded,” the report, written by Cameron Cushman, director of innovation ecosystems at the UNT Health Science Center, and Trent Barron, a previous intern at the UNT HSC, states.
Full disclosure: NTX Inno is a media partner of Sparkyard.
Sparkyard found that in the past 20 years, only 52 companies raised early-stage capital, totaling about $303.8 million in funding deals. Of that, companies in the energy sector accounted for nearly $183M. The second closest sector was IT, which pulled in close to $2 million in deals.
Even in a city known for the oil and gas industry like Houston, which the report shows has one of the most diversified startup ecosystems of all major Texas cities, the energy sector startups made up about 8 percent of deals since 2000, totaling about $258 million. In Austin and Dallas, the IT sectors accounted for most of the VC deals in the past two decades, bringing in about $4.5 billion and $991 million in funding, respectively.
“The bottom line is that there is no real incentive – from a startup capital standpoint – to launch a company in Fort Worth if it’s not in the energy sector,” the report states. “Given what we know about the importance of diversity in entrepreneurial ecosystems, this is something that needs to be addressed.”
Overall, Sparkyard said the data showed 1,263 startups were launched in Fort Worth since 2000, with most never raising venture funding. And even the ones that do rarely go on to raise more than one round.
While a lack of investment diversification could prevent several startups from launching or growing in the city, the region also falls behind other major cities when it comes to activity. In a separate report that used similar data from 2015 to 2020, Sparkyard found that despite being the 13th most populous city in the U.S., it ranked No. 40 in early-stage investment funding.
In total, there were 27 angel deals, six seed deals, and nine early-stage VC deals, totaling about $88.4 million in capital raised. According to Sparkyard, that means Fort Worth companies would need to increase 16 times more capital, or about $1.3 billion, to break into the top 15 cities for early-stage funding. For comparison, across the entire North Texas region, startups raised more than $753 million across 148 venture capital deals last year, according to a report by PitchBook and the National Venture Capital Association that includes data from the fourth quarter of 2019 – most of that funding came from startups in Dallas and its surrounding suburbs.
“In the aftermath of the current economic downturn, where will the next big employers in Fort Worth be created? Will the investment community continues to invest in energy, or will new and emerging industries take their place? And will those new companies have access to the capital necessary to grow,” the report states. “Only time will tell, but shifting our investment strategies and capital attraction efforts will require a significant effort moving forward.”
