Houston needs more angels, investors that is
"Houston, Texas? There's so much money in this town it makes your eyes bleed," the successful entrepreneur told a room filled with aspiring CEOs and their startup dreams.
But many of Houston's millionaires, the insider cautioned, inherited their fortunes from grandparents who made these fortunes in oil and gas and now reflexively reinvest the proceeds into the industry they know and love. They're not investing in Houston startups, which could return 10 times more than a typical oil company and diversify Houston's economy.
Houstonians trail the rest of the country in early-stage investing, popularly known as angel investing, according to The Halo Report 2014, written by the Angel Resource Institute, Silicon Valley Bank and CB Insights.
"I know people in this town who have $20 million a year in net cash flow coming into their bank account" from oil and gas royalties, Tom Pickens explained to the rapt audience. "I think they're just resistant to change because that's the way their daddy made his money. But oil is not the long-term play."
Pickens knows of what he speaks. His grandfather was a land man for Phillips Petroleum, and his namesake goes by T. Boone. He's also started and operated 18 companies and currently heads Astrotech Corp., which made its name preparing payloads for satellites and the space shuttle.
Texas ranked last out of 10 regions in terms of the total amount invested in startups, the Halo report found, representing only 1.4 percent of the angel investments in the U.S.
Only 5.7 percent of the nation's angel deals took place in Texas, compared with 17.7 percent in California and 12 percent in New York.
Andrew Barron, a Rice University chemistry professor who holds 20 patents and has started five companies, said Houston capital not only sticks with the industry the investors know, it shies away from the new.
"It tends to focus on the present technology, or the very near-term technology," he said. "The other problem I see ... is providing information to the investors on technology that is a little outside their comfort zone."
Natasha Greenwood, Photographer
This parochial approach, and the failure of entrepreneurs to make compelling pitches, misses the great angel investing opportunities coming out of Houston research centers and the many business incubators and accelerators. Generally, an incubator helps an entrepreneur turn an idea into a business, while an accelerator prepares the business to raise capital and expand.
The Texas Medical Center opened a 100,000-square-foot accelerator on Thursday, and the University of Houston will open an incubator soon. That doesn't include the many private and nonprofit programs to help startups in Greater Houston.
Pickens and Barron were speaking at the Houston Technology Center's annual Goradia Innovation Prize ceremony, where judges choose the best startups from the Houston Gulf Coast Region. The winners, which received cash prizes, included businesses that are on the brink of putting new, potentially revolutionary products on the market:
-Third place: Vax-Immunune, which developed a test and vaccine for ureaplasma bacteria, a common infection that can cause miscarriages, premature births and infertility.
-Second place: Brevitest Technologies, which has a method for completing blood screens within minutes in a doctor's office, eliminating the need for a lab.
-First place: Big Delta Systems, which has patented a way to make flexible free-form batteries for small devices.
Natasha Greenwood, Photographer
-Grand prize: NanoLinea, manufacturer of a carbon nanotube suture that can help heart attack survivors cope with irregular heartbeats.
More than 50 startups participated in the Houston Technology Center's conference to attract that elusive Houston angel investor. The most surprising fact about angel investing is how little money is at risk, and how angels often group together. More than 75 percent of angel deals are made within the investor's home region.
David Steakley, current chairman of the 80-member Houston Angel Network, said the average investment is $400,000 per deal, with each angel contributing an average of $25,000. The pre-revenue value of these startups is typically between $1.5 million and $3 million, well before venture capitalists or private equity gets involved.
"When we think about what is the prospect of being paid back, we're really thinking about the mergers and acquisitions market," he said. "A good average is a $50 million exit price for the company."
Steakley said that big corporations increasingly rely on startups for research and development. These industry giants will invest in the startups as they show promise and then buy them when the product is ready for market.
To make this kind of early-stage investment, a person must first become an accredited investor with the Securities and Exchange Commission. To qualify, an individual must have a net worth greater than $1 million, excluding their primary residence, and more than $200,000 in annual income over the previous two years and an expectation that the income will continue.
Pickens said the descendants of the early oil and gas pioneers too often forget that their ancestors made their fortune betting on their era's cutting edge technology, the combustion engine and plastics. He said today's investors would do well to follow their ancestors footsteps and look for the next big thing.
Angel investing is not easy money, by any means. Most businesses fail, and those that survive often struggle for years. But these investments can diversify a portfolio, and if the company succeeds, the patent offers a potentially lucrative monopoly.