There are obvious differences in venture capital investment in Houston's tech ecosystem and the sophisticated Silicon Valley VC environment. Sunnyvale, California-based Plug and Play Tech Center, which sources deals from around the globe and expanded operations into Houston in 2019, sees opportunity in the growing Bayou City tech landscape.
Matt Claxton, global director of sustainability for the accelerator and venture capital firm, said Houston's technology startup ecosystem focuses less on the scalable software companies traditionally found in Silicon Valley. In Houston, a lot of tech innovation supports the large corporations in energy, chemicals and manufacturing that call the Bayou City home. Many of these corporate powerhouses are looking to partner with enterprise-focused startups with novel hardware technology, material science or other scientific applications.
"The ones I really focus on (in Houston) are hard tech, hardware, hard science companies," Claxton said. "There's far less volume of them, but also they just take a lot longer to really get up and running and need different resources."
Milad Malek, associate for Plug and Play Ventures, reiterated the company's interest in the hard tech startups in energy, materials and sustainability among other things.
"We're also seeing a lot with supply chain and logistics. Houston has one of the largest ports in the world — certainly in the U.S.," Malek said.
Houston's life sciences sector also drives a lot of dealmaking, Malek said. Nearly 40% of all venture capital funding in the Houston metro region from 2015 through 2019 has gone into the health care sector, according to a Greater Houston Partnership analysis of PitchBook data.
One advantage for startups in Houston — and other cities in the middle of the country — is valuations. Startup valuations in developed markets like Silicon Valley have ballooned, whereas startup valuations in a market like Houston tend to be more reasonable, Malek said. The high valuations on the West Coast have caused Silicon Valley investors to look elsewhere for more modestly priced deals, he said.
"There's no exact formula for setting a valuation," said Claxton. "It's much more of an art than a science."
However, one problem for Houston startups is related to early growth opportunities. Payal Patel, a Houston-based director for Plug and Play, said Silicon Valley investors are typically looking for traction, and there has traditionally been a lack of pre-seed and seed-stage funding for companies in the earliest stages of their lifecycles in Houston.
Plug and Play sees itself as a resource to be able to bridge some of those gaps in the Houston tech landscape, where it's initially focusing on energy and sustainability. The company helps startups connect with large corporate partners, source tech talent from other markets and bring in investment capital opportunities from outside Houston.
Plug and Play said that Houston founders should continue leaning into the region's strengths by helping large enterprise clients with difficult technological and scientific problems, whether that's in energy, health care, material science, or supply chain and logistics. Claxton said Houston is full of inventors, but those who develop business plans with a clear path to profitability will nearly always pique the interest of Plug and Play's venture team.
"Maybe you're working in hard tech and today you're pre-revenue, but you have an understanding of what it will take to actually form a business that can operate above the red line," said Malek. "That's important to think about."
Houston-based companies in Plug and Play's portfolio include Data Gumbo, a technology firm that developed an industrial smart-contract network powered by blockchain, and Rugged Robotics, a construction-technology company aimed at improving labor productivity through automation.
