Houston’s identity as a home for innovation in spaceflight, health care and energy is secure, but to boost its startup ecosystem, the city needs to increase mentorship for entrepreneurs and fund more avenues for sectors outside of those legacy industries.
Those recommendations come from a report by Austin-based startup accelerator Capital Factory along with a consortium of business founders and investors. The report, titled “The Texas Rising Tide” and released Dec. 1, also includes city-level initiatives for Texas’ other big metros as well as state-level initiatives.
Altogether, the concepts in the report could lead to an additional $600 million to $900 million in increased funding for Texas startups by 2027, on top of the Lone Star State’s $8 billion in annual startup funding activity, the analysis estimates.
"We see how the state's cities, each with its distinct strengths, are coming together to create a vibrant tapestry of innovation," Capital Factory co-founders Joshua Baer and Bryan Chambers wrote in the report. "This collaborative spirit is the driving force that will propel Texas into the future."
The Rising Tide report specifically highlighted Houston’s strengths in energy, spaceflight and health care. The Texas Medical Center’s contributions to innovation through its accelerators — which have raised nearly $6 billion in funding as of June 2023 — were identified in the report’s highlights of Houston’s startup ecosystem. The creation of Houston's innovation district and the establishment of incubators such as the Ion and Greentown Labs' Houston location in 2021 were acknowledged as wins for the city.
The Bayou City’s efforts to lead the energy transition were also noted through the establishment of the Houston Energy Transition Initiative, which was created by the Greater Houston Partnership. HETI’s members — including major Houston employers Shell Oil Co. and Chevron Corp. — and its Energy Ventures Pitch Competition were named as highlights of Texas’ openness to collaborate.
The city’s initiatives and the presence of major institutions such as NASA drove a “broader trend of investor belief in Houston’s economic potential,” the report said. Venture capital funding in Houston nearly tripled from $530 million to $1.5 billion between 2020 and 2022, according to Pitchbook. Capital Factory also highlighted three fast-growing Houston companies: commercial spaceflight startup Axiom Space, artificial intelligence financial technology company HighRadius and biopharma company Solugen Inc. as businesses that have made waves in their respective industries.
How Capital Factory’s findings line up with Houston’s startup activity
One of the statewide recommendations Capital Factory made for Texas entrepreneurs was the need to cohesively market accomplishments from the Lone Star State. In Houston, investors and industry leaders alike have discussed the need for Houston to increase the perception of its success stories, which in turn would attract further funding.
In November, the Texas Climate Tech Collective, a group composed of three Houston natives all working in the climate technology sector, released a report that identified needs for the city’s innovation in climate and energy transition. Surveyed investors and business leaders identified Houston’s perception as an oil and gas city as a concern for innovators in energy transition.
“People in this community like to talk about energy because we’re the energy capital of the world,” TCTC co-founder Deanna Zhang said at Greentown Labs Houston’s Climatetech Summit on Nov. 1. “We don’t use the word 'climate' enough, and it might not be a big deal — but other ecosystems are using that word.”
The TCTC report also identified the need to educate investors about climate technology. Although Houston has a number of energy majors with active investment arms, a Deloitte report released in September suggested that energy industry executives may differ from institutional investors when it comes to where the money should go for energy transition investments. Executives surveyed focus more on expanding technologies that decarbonize their core operations, such as natural gas, hydrogen and carbon capture, while investors are more interested in battery storage and the electrification of transport as key technologies, the Deloitte report found.
Meanwhile, some funds in the city have targeted their focus in investments considered outside Houston’s legacy industries. Mercury Fund, a Houston-based venture capital fund that was part of the consortium that authored the Texas Rising Tide report, has invested in multiple companies in the past 18 months that specialize in software. That includes leading a seed round for Brassica Technologies, the brainchild of Houston fintech entrepreneur Youngro Lee.
Another Mercury-seeded local startup closed significant funding this year, with RepeatMD landing a $50 million Series A in November. RepeatMD founder Philipp Sitter told the HBJ that having access to Mercury’s resources made it easier to launch and grow the company as a first-time software executive.
Mercury also closed its $160 million Mercury Fund V in 2023.
One unicorn highlighted in the Texas Rising Tide Report brought its headquarters back to Houston after reaching its $1 billion valuation this year. E-commerce startup Cart.com said the move would allow the company to continue its growth after achieving profitability at the end of 2022. Cart.com previously moved its headquarters from Houston to Austin in 2021, and co-founder Omair Tariq suggested an IPO could come around three years after that move.
