Startup funding has slowed across the U.S., though there are some bright spots in Houston.
The quarterly Pitchbook-National Venture Capital Association Monitor Report found that the Houston-Pasadena-The Woodlands metropolitan statistical area, which was formerly known as the Houston-Sugar Land-The Woodlands MSA, recorded 38 venture capital deals in the first quarter of 2024 and $462.4 million in capital invested.
Local startup funding remained down in Q1 2024, despite a few significant companies scaling and several technology-focused funds securing funding. That follows a national trend, with the Pitchbook report suggesting that venture capital activity is still finding its level after a post-pandemic reset.
“Pre-seed/seed rounds are at their lowest relative share than at any time in the last 10 years, and later rounds are up commensurately," wrote Bobby Franklin, president and CEO of the NVCA, in the report's executive summary. "Investors seem to be circling their wagons and making sure their most promising companies are positioned for success before they make new bets."
The number of national venture-capital deals in the first quarter fell to the lowest level since 2017. There were just 2,882 venture deals in U.S. startups last quarter, a 16% decline from the previous quarter and down 28% from the same time last year, according to PitchBook.
Houston’s deal count is a dip from the previous quarter and Q1 2023, which saw over 40 deals each in another slow year for venture capital funding. It’s also a continued slide from the heights of late 2021 and early 2022, when Houston saw over 70 deals in the last quarter of 2021 alone.
The deals that closed last quarter, however, resulted in a total valuation higher than almost all of 2023, barring Q3. Houston-based Fervo Energy, a geothermal energy company, had the highest-valued deal in the state of Texas thanks to a $244 million funding round led by Oklahoma City-based Devon Energy Corp. (NYSE: DVN) and featuring investment from Houston billionaire John Arnold.
Pitchbook classified the Fervo deal as a Series D1 round, putting the company in the same bracket as a few others in Houston that have been capitalized to later levels on the back of hard technology — an industry term referring to businesses capitalizing and commercializing advanced technologies.
Houston-based companies that have recently raised venture funding to at least a Series C level include Cemvita, Syzygy Plasmonics and Solugen Inc. Like Fervo, all three saw backing from large companies working in the energy space, such as Houston-based Occidental Petroleum Corp. (NYSE: OXY) and Mitsubishi Heavy Industries.
Another Houston-based hardtech startup with major corporate backing, NanoTech Materials, became the first company incubated at Houston-based Halliburton Labs’ campus to spin out into its own manufacturing space this week. Halliburton Labs is a subsidiary of Houston-based energy services giant Halliburton Co. (NYSE: HAL)
Mike Francis, CEO and founder of NanoTech Materials and a repeat entrepreneur, said hardtech was the way for Houston to grow as a startup city.
“I think [we will lead] in company valuation,” Francis told the Houston Business Journal in an interview. "The most difficult thing to do in a startup is bringing it from early-stage to scale. Once we get to that scale stage, we [still] might not have as many startups as Silicon Valley, but the value we're creating will be comparable."
Another local geothermal deal closed in Q1, though its valuation was too low for the state's top-five rankings. Houston-based Sage Geosystems raised $17 million in a round led by Oklahoma City-based Chesapeake Energy Corp.
Meanwhile, four Houston-based venture capital funds closed in the first quarter, bringing the Bayou City to the top ranks in Texas. Chevron Technology Ventures, a Houston-based subsidiary of California-based energy giant Chevron Corp. (Nasdaq: CVX), marked its 25th anniversary by closing a $100 million fund known as CTTV Investment Fund IX.
CTV President Jim Gable told the Houston Business Journal that the company’s investment portfolios are split across its Core Fund, which deals with Chevron’s current operations in oil and gas solutions, and its Future Energy Fund, which invests in mobilization and industrial decarbonization.
One fund that is still open but emerged from stealth in Q1 is Houston-based Fathom Fund, founded by local investors Paul Sheng and Eric Bielke. According to a data profile provided by Pitchbook, the fund has secured $108 million in commitments since opening in September 2023. Fathom Fund aims to close a $150 million fund later this year.
“When you look at the landscape [in Houston], we have corporate venture capital and private equity that is focused on large infrastructure,” Sheng told the Houston Business Journal in an interview. "But when it comes to early-stage investing in hard sciences, there needs to be a series of breakthroughs and investors that are willing to take calculated risks.”
