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Houston Can Kill Your Startup!

October 17, 2006

Starting a business in Houston? Paul Graham suggests that you get out while you still can. According to Paul the decision not to start your business in Silicon Valley, Boston, Seattle, Austin, Denver or New York is a mistake that can “Kill” your startup. He singles out Houston as a “Bad Location” for startups. His explaination,

Startups prosper in some places and not others. Silicon Valley dominates, then Boston, then Seattle, Austin, Denver, and New York. After that there’s not much. Even in New York the number of startups per capita is probably a 20th of what it is in Silicon Valley. In towns like Houston and Chicago and Detroit it’s too small to measure.

Why is the falloff so sharp? Probably for the same reason it is in other industries. What’s the sixth largest fashion center in the US? The sixth largest center for oil, or finance, or publishing? Whatever they are they’re probably so far from the top that it would be misleading even to call them centers.

It’s an interesting question why cities become startup hubs, but the reason startups prosper in them is probably the same as it is for any industry: that’s where the experts are. Standards are higher; people are more sympathetic to what you’re doing; the kind of people you want to hire want to live there; supporting industries are there; the people you run into in chance meetings are in the same business. Who knows exactly how these factors combine to boost startups in Silicon Valley and squish them in Detroit, but it’s clear they do from the number of startups per capita in each.

Really? When I was growing up I spent a few years in Houston and I seem to recall lots of companies doing fairly well in the city. This year Forbes ranked Houston as #3 in the nation for “Best Places for Busienss and Careers” (#1 in Texas ahead of Dallas and Austin). According to Wikipedia, Houston is second to New York City in number of Fortune 500 company headquarters. It might be easier to raise money if you locate your business in the Bay Area, but you might be able to build a ‘better’ company in Houston. Just a thought. Paul, give Houston a chance…

Written by Alexander Muse · Filed Under Blog ·

Comments »

Being a Houstonian and trying to do a startup (albiet my partner is in Austin), I know this is not true. I know of several startups in town that are doing quite well. I think Paul’s misconception comes from the fact they are not web 2.0 startups. There are tons of oil and gas, lots of medical, and a few space startups. But since it is not web 2.0 I guess it does not count.

Comment by Aaron — October 17, 2006 @ 9:46 pm

It’s not the startup culture of Houston that kills, it’s the humidity. (Sorry, as a native Houstonian, I couldn’t resist!) I was surgically removed from Houston ten years ago, and found myself in Nashville, TN, lately starting a web 2.0 podcast-related business. My business partner and I have definitely faced a few “speedbumps” along the way, and some of these I think could be directly attributred to not being located in San Fran or Seattle. I suspect there are some geographical reasons why we have had trouble attracting investment attention, not unlike my own reasons for never eating at a seafood restaurant in Idaho. We all tend to believe that the best thing in a given category will come from the same place that all the rest of them spawned. For better or worse, we are living with and overcoming this reality.

Comment by Carter Harkins — October 17, 2006 @ 10:51 pm

If you have a solid business turning profits, it doesn’t matter where you are. Maybe the hype isn’t in Houston but the revenue is.

Comment by Blake P. — October 17, 2006 @ 11:48 pm

Hi, I understand your comments. You may however find other ways not to be limited to local habits & moods about where is the good place to be for startup especially when raising finance.
One very good place to be is definitvely Internet, whatever it is from Houston, Seattle or from SF, and then you can easily withstand any local drawbacks.
Just figure out about that funny project FirstmillionEuros just starting apparently (link is http://www.firstmillioneuros.eu ) based in europe, but intending to match startup funding offers and needs on a worldwide basis !
I believe what is anyway the most important is providing profits, and then one may find investors every where even if you are located in Alaska.

Comment by erick G. — October 18, 2006 @ 9:36 am

Houston is a paradox. The city has the perfect blend of size and cost of living efficiency to make it a perfect location for a highly competitive starup. Unfortunately, startups are often driven by a strong ecosystem of talent and capital. Houston is weak on both counts.

Raising early stage capital in Houston was nearly impossible between 2001 and 2005. Angels here are still very hesitant to seed technology companies. 5 years after the big meltdown there are very few active funds that can support early stage deals in Houston.

Technology talent, which makes up the core of best startups, is very scarce. Best people are employed by HP, Attachmate, BMC, Symantec and several other very established companies that often pay top engineers beyond Silican Valley rates to keep the talent in Houston. Rice produces very good developers, but their graduates almost always end up at Google, Yahoo or Amazon.

As much as I love the city and wish we had better infrastructure to support tech startups, I have to agree with Paul Graham.

Misha

Comment by Misha — October 18, 2006 @ 2:50 pm

Houston people are overpaid? But weak on talent? NICE! So if you want to find a job you are unqualified for and want to get overpaid move to Houston?

Comment by Alexander Muse — October 18, 2006 @ 3:12 pm

Hey Misha, I couldn’t agree with you more! Finding qualified developers in Houston is difficult. I think one of the problems is that the people are drawn here because of the “stable” companies you listed, but as with many large companies, mediocrity runs rampant. After a few years in a big organization, you pick up skills that actually hurt start-ups. You might be a good developer, but better at building elaborate spreadsheets detailing your project status. Not exactly what my colleagues and I are looking for.

Comment by Brandon — October 19, 2006 @ 8:23 am

[...] Marc Nathan takes exception to this in his recent post over at Bull Dog Financial, saying he “gets to see emerging technology start ups based here every single day.” Alex Muse disagrees too, “It might be easier to raise money if you locate your business in the Bay Area, but you might be able to build a ‘better’ company in Houston.” Now, Paul didn’t bother to mention New Orleans, and that’s probably because we are a city where startup activity actually is too small to measure, who knows maybe like Detroit (Chicago seems like stretch too). But I know from personal experience that outside of Silicon Valley, I’ve had more connections to startup activity and entrepreneurial energy in Houston than anywhere else I’ve been lately. The BarCamp in Houston in June absolutely blew the doors off the BarCamp in San Francisco in July. They simply didn’t compare. [...]

Pingback by Voodoo Ventures - Idea Fuel Blog » Paul Graham: Mess with the Bull, Get the Horns — October 19, 2006 @ 11:57 am

I don’t know if this would help to dispel the notion that Houston (or
Dallas, for that matter) is a bad place for startups, here’s a Google Maps mashup of Texas VC activity in recent months. Quite a few companies in the area.
http://www.texastechpulse.com/intelligence/map/

(you can use the zoom/pan controls to get in closer, you can also click on
a dot to get the company name. Letters are which round of funding the firm
received).

Comment by Texas Techpulse — October 19, 2006 @ 12:46 pm

Alex,

First of all, I want to thank you for sticking up for your fellow Texas start up city. I know hard you have worked to make Dallas a force in the Web 2.0 world and cool companies are starting up in the Metroplex all the time. Chris Schultz at Voodoo Ventures in New Orleans was kind enough to mention my response to Paul Graham about the topic, and we came to the conclusion that this kind of slap in the face is just what we need to put the kinds of companies that you are dealing with on the map.

Also, this is to Misha - The Angels were investing in technology during the downturn of 2001-2005, but it was a lean time for everyone. While Houston might not be perfect, your company was one of a very small number to eventually get Houston based VC funding last year from some of the smartest and most knowledgable tech investors in the Southwest region.

And Carter - those same guys put a bunch of cash into a Houston-based Podcast company, http://www.podcastready.com, which I am proud to have an investment in at the angel level.

Comment by Marc Nathan — October 19, 2006 @ 1:01 pm

c’mon alex! Don’t take it personally.

Paul is talking specifically about tech startups. Even more specifically software-related startups. Houston may be a great town for business, and even a great town to start a business, but if you’re starting a technology company, the benefits you get from the shear startup-critical-exerience density in Paul’s top towns are immeasurable. I can give you countless, personal examples of these benefits in action for me in Silicon Valley.

You can always choose to ignore Paul’s advice and put your startup in a sub-optimal location, but then see his point #5.

Comment by mike simonsen — October 20, 2006 @ 12:34 am

Like I said, there are numerous benefits to running a startup in Houston.

Our seed investor was also a seed investor in Amazon and was an ideal fit for us early on. We were amazingly capital efficient, which would have been impossible in Silicon Valley. We also got a chance to gradually refine our model, gauge customer feedback and learn a lot before VC money came in. Taking money earlier, as often happens on the west coast, would have amplified our mistakes and potentially sent us down the wrong path. We learned at the right pace and did not burn a lot of capital in the process.

Unfortunately, none of that makes scaling a tech company in Houston easy. We have on many occasions found ourselves in a position where we found perfect developers and architects, but we unable to overcome the stigma Houston carries with it and convince the right people to move here. We still find brilliant developers, but it takes longer and longer the more we raise the bar.

I am not trying to discourage anyone from starting a company in Houston. I am simply saying that Paul has valid points and failing to consider them might not be good for your startups health. We need a stable ecosystem of successful startups with good exits, smart angel capital and top technologists that stay in Houston. I’d also suggest to anyone running a startup outside of well established tech centers needs to seriously consider adopting a highly distributed model. MySQL does this very successfully, although it requires the culture to be built around a global company from day one.

Misha

Comment by Misha — October 21, 2006 @ 10:57 am

http://texasvc.weblogswork.com/2006/10/23/most-vc-deals-are-now-outside-of-silicon-valley/

Comment by Alexander Muse — October 23, 2006 @ 2:10 pm

To folks who defend Houston as a good place to launch a tech startup (where launch = raise money) - just read statements of some prominent Houston-based VC firms. Many of them spell out requirements for a startup that describe Exxon quite well - “please, no tech risk - proven technology, only proven business model, executives with 30-years of experience being executives, etc”. Funny thing - these VCs still expect 70-times return on investment, and plan on taking over 55% of a company at their intro round of financing… I recall a conference Houston VCs put together a few years back at the Jones School at Rice University for wanna be startups - officially, as an educational event, but basically to set up expectations for entrepreneurs to hand over control, if they want VCs to participate….

I knocked on a few doors in Houston last year, only to realize that if you are really a very earlier stage startup, you ought to spend your time somewhere else. Which I did, funding development for a year with out of pocket money in Russia (advise - don’t go for Moscow, Moscow is too expensive already, go for a small city with a good university, and you’ll find lots of young and affordable talent). Now that it’s time to go after investment money to pay for the intro market launch (which is going to be limited to Houston - probably the best launch locations in the US for us), this is when I really get chills. A lot of folks here made a lot of money on low tech, and lost on high tech, so the tech investment culture is simply not here… If you guys know any angels in Houston who made their money in CA, please, drop me an e-mail :)… lol

Comment by Yuriy Chanba — October 24, 2006 @ 5:03 pm

Yuriy,

I was at that Rice event, and I got got something totally different from it. I’d love to know what VC in their right mind would demand the things that you say they did. I happen to know quite a few Houston-based angels that have made money in CA, but your preception of the tech investment culture here makes me think twice about making any introductions. I’d be happy to sit down with you over coffee to talk about your funding strategy, but please know up front that you’re are starting with a disadvantage with me since you will now to overcome my negative preconception of how you might treat potential investors in the future.

Comment by Marc Nathan — October 24, 2006 @ 9:45 pm

Marc,

Thanks for the reply. I should have put my posting in a bit cooler tone, thanks for pointing this out. However, I’d like to follow up to clear a couple of things.

Some numbers and statements I put in the first paragraph - these were taken from some googled up Houston VCs current websites, where VCs discuss ideal investment criteria, exit strategies and expectations. Regarding the event at Rice - if you attended, you might recall the valuation printouts VCs of the panel used for illustration. You might remember what that “sample valuation” (or reference point) called for… Now, I’ve seen similar “sample valuations” from the same group done a couple of years earlier, and the numbers were quite different. What happened in between these valuations? Tech bust for many of the Houston VCs. It got so bad, that the VC I knew pretty well from my days at Jones School and I had this phone discussion around 2004 : “What sector?” - “Scheduling Optimization” - “Not interested” -”You have not even heard what this is about…” - “We invested in a scheduling company, and it went belly up - no way we take on another one” - “Can you recommend any other shop in Houston that might take interest?” - “Honestly, nobody I know would…”… And he knew pretty much everyone here. It’s like guilt by association… :) Maybe things changed now, I just have not tried to approach a VC lately - other than checking out their websites for any updates.

Well, based on your posting, you are in the investment community, and you might see different things. I gave here a prospective (again, somewhat strongly - but the topic wording calls for it! :)) of someone on the other side. Regarding “negative perception how you might treat potential investors in the future” - the point is well taken. From now on, I’ll be saying only nice things about Houston tech investment climate! :)… I always thought you ought to treat people the way they treat you. Changing valuation because one got busted somewhere else does not make me feel very positive either.

Regards,

Comment by Yuriy Chanba — October 25, 2006 @ 10:25 am

There might be a million reasons he didn’t make a reference. First, it might be as simple as the fact that he didn’t know of anyone who would be interested in your space ~ I suspect that he had not called every equity investor in Houston to determine their level of interest. Second, he might not like your plan (this is most likely). If someone does not like your plan he is NOT going to refer you to another investor. The system works on referrals - he cannot risk his reputation referring things he is not interested in. Finally, there might not be an investor for your company in Houston, but don’t assume there is an investor in the valley for your company. Some companies just can’t get funded…

Comment by Alexander Muse — October 25, 2006 @ 12:39 pm

Alexander,
You bring up very valid points, and I totally agree with each one…But my point is that the comment “nobody would be interested” was made even without listening to the concept - just on learning sector; I did not approach the VC officially, no business plan was presented. It was most likely the “space” issue, but this is exactly what this thread is about - is Houston a good place to raise tech money? My past limited experience says “Extremely difficult”, but its one of few things where I would not mind proving myself wrong.:) But this experience indeed played a very positive role for us - pushed to find a way to do core development cheap and have a product to show. Could it also kill the company? You bet it could… And while writing this up, I got an e-mail through VentureCast from a UK equity investor asking for details - go figure…

Comment by Yuriy Chanba — October 25, 2006 @ 1:54 pm

I think that there is something that will kill your venture well before Houston. I went to lammazing dot com and through their business services section found “Is Venture Capital for You?” Well, although my plan seemed great, after reading through some of that information I realized that I don’t stand a chance!

Comment by Jon — October 26, 2006 @ 2:57 pm

“Nobody would be interested”? Well depends on the plan. My plan is to franchise the hitman business - well NOBODY would be interested would be a fair response. But for most other businesses - I would ignore one naysayers! You didn’t even have a business plan and never formally talked to a single VC, besides the guy who, without knowing your plan, told you “nobody would be interested.” Sounds like someone to ignore…

Comment by Alexander Muse — October 26, 2006 @ 6:50 pm

It is common for people who have lost money in one specific sector or niche not to want to go there again. Sometimes it’s justified (unfavorable industry structure, purchase cycle dynamics, etc.) and sometimes it’s not (specific company issues).

Either way, move on. You paint VCs with far, far too broad a brush. Would you approach Dustin Hoffman about a leading role in a violent action movie? Of course not! But he IS an ACTOR isn’t he? Point being, certain people will be interested in your chosen market, usually either because of direct experience in it or an adjacent market.

It is your job as an entrepreneur to filter through the pile of angels and VCs and zero in on those who are most likely to be interested in your market/company (unless they’re beating down your door via self-selection, which is happening to a lot of video sharing and search companies right now, for obvious reasons).

Finally, your frustration about valuations shows a naivete about how this all works. At the end of the day, investors want to get paid. They want to get paid commensurately for the risk they’re taking, where “commensurately” has to do with where you can realistically expect to wind up if all goes according to plan.

“according to plan” in the late 90s could have meant an unprofitable 2 year old software company at a $20MM revenue run-rate going public on NASDAQ at a $250MM market cap. “according to plan” today probably means a 5 year old software company at $20MM being acquired for $100MM.

The combination of time and valuation differences at exit mean that to earn the returns that venture capitalists’ limited partners demand, something has got to give. In the example above, you’ve either got to get there with a lot less money, or you’ve got to give up a lot more of the company. and that means valuation. otherwise the equation doesn’t work, the lines don’t cross, and the company isn’t financable.

Naturally if we return to a state where software companies again go into hypergrowth and trade at 10x revenue multiples, valuations will go up again. The market is actually fairly efficient that way. It isn’t as if every VC and angel out there is in a smoky back room trying to figure out how to screw entrepreneurs with lower valuations. Instead, we compete with each other regularly for investment opportunities, and the market clearing price for early stage companies has gone down for the reasons listed above.

You’ve got a lot to learn, and quickly, if you plan on being successful at raising money for your venture.

Comment by just.a.guy — October 27, 2006 @ 1:53 pm

I agree with Blake. The concept of a “distributed start-up” is easily executed these days. Offshoring dev is second nature now. Houston is a great place to HQ a startup. It’s location is central, logistical it’s fine and the commerce….one could make $xx mill selling anything down here.
; )

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