The Je Ne Sais Quoi of the Entrepreneur is the Sine Qua Non

What element of Houston is indispensable, the “sine qua non“, for the creation and growth of a high-tech, cleantech, and health-tech startup ecosystem?

What led me to ponder this question is a recent Kauffman study comparing high-tech startup density amongst the largest metropolitan areas between 1990 – 2010. I have mentioned this before. The study found that 4 Texas cities had the largest decreases in high-tech startup density: Houston, Dallas, Austin, and Fort Worth. “The metropolitan areas in the top ten shuffle around, for example, but only one top ten city in 1990, Houston, dropped off the list entirely.”

And that same study pointed to the fact that “while metro areas with research universities and other postsecondary institutions certainly appear among the top ranks by tech startup density, their presence does not appear to be a sine qua non.”

What made Houston go from the #7 most dense and thriving high-tech startup ecosystem in 1990 to completely falling off the list by 2010? Houston was the ONLY ONE! As a Houstonian, I am rather annoyed. If it is not the presence of research universities and other post secondary institutions, what is it?

Between 1990 – 2010, Houston had many assets in its favor: Rice University becoming one of the top graduate entrepreneurship programs (2009), UH building the #1 undergraduate entrepreneurship program (2007), the formation of the Rice Alliance (2000) which built the #1 business plan competition (and inspired second order impacts of key investors including the Goose Society and The Owls), the formation and rise of one of the top angel investor networks (2001), the formation and rise of one of the top venture funds (2005), the formation of a technology centric incubator (1999). At best, all of these groups combined slowed down the inevitable bloodbath before us.

Why didn’t these guys fix the reversal? It is my hypothesis that the answer is simple: Houston’s Sine Qua Non is the the Entrepreneur! Entrepreneurs are the ones that dream, commercialize, hire, and come back to make an impact in our community so that all of the groups mentioned above can react. These groups above can help as a critical support network, but most of them invest and mentors entrepreneurs that are NOT in Houston.

David Cohen at TechStars talks about the importance and power of the second order effects whereby entrepreneurs come back after a successful and failed ventures to try again. Others come back and invest into other startups and mentor. This ripple becomes a dramatic and powerful force. Techstars, which is based in Boulder, was founded in 2006 and while late to the game for the Kauffman study, helped its city remain at the top of the list in high-tech startup density for its market size. Causation, maybe, but I do not think so.

Let me pause to explain what high-tech startup density means and why you should care. “According to a report by Ian Hathaway of Engine that looked closely at the dynamism of the high-tech and ICT sectors in the United States, particularly new and young companies, these are the firms that create jobs at the fastest pace and are important drivers of economic growth.”

Since David Birch published his ground breaking research called “the job generation process” in 1979 (in which I based the foundation of Chief Outsiders), researchers and experts have been studying where jobs come from in a community. It turns out that a majority of all new jobs are created by “Gazelles.” Gazelles is a term David Birch coined to describe the small percentage of companies that account for virtually all the net job growth. “He defined gazelles as companies that, beginning with at least $100,000 in sales, grow 20 percent or more annually for four years, at least doubling their revenue in the process. In the period that one of the essays covered—1989 to 1992—there were about 350,000 of them, or just 4 percent of all firms, and yet they accounted for about 60 percent of the net new jobs in the economy. (Of the remaining 40 percent, about half came from start-ups, and half from large companies.)”

In other words, high-tech startup density (and the majority of net new jobs) are created by entrepreneurs building gazelles. The obvious next question is this? Where are the gazelles in Houston and the underlying entrepreneurs that are running them? It is not fair to blame the heroic organizations that were started over the past two decades. The real culprits are the entrepreneurs that put Houston on top of the list in 1990.

Where did they go?

First of all, many of the entrepreneurs of Houston’s past are baby boomers and are decades past their faded memories of what it took to build an idea from scratch. These guys make awesome mentors and investors, but we cannot depend on them to build the next Tesla, Facebook, Google. Where are the GenX’ers and Millennials that will build the future of Houston?

What does the data say? I knew you would ask…so I consulted my most referenced and credible Encyclopedia Britannica: Harvard Business Review. Is the average age of founders in Silicon Valley that built unicorns (billion dollar + companies) really younger or is this just a myth?

“The average age at founding in our dataset was just over 31, and the median was 30. Today, of course, these founders are quite a bit older, with an average age just under 39, and a median of 38...By way of comparison, the average age of an incoming CEO to an S&P 500 company was 52.9 in 2010.”

In other words, the future of Houston and its high-tech, cleantech, and healthcare tech ecosystem relies upon the young entrepreneur. Where is the second order effect? And it’s not fair to blame the lack of baby boomer participation in this ecosystem. Let’s face it, what was the last big hit to come out of Houston (this is a setup question…if your can’t name them yourself, my point is made). If you are a baby boomer, I am asking you to participate by getting out of the way, investing, mentoring, and removing road blocks. Will you yield?

Yesterday, I attended the TechStars Cloud demo day in San Antonio. There were dozens of founders participating as mentors and investors from amazing successful cloud companies including: Rackspace, SendGrid (on track to IPO and one of Cloud’s first alumni), Slice Host, StumbleUpon, Cloudability, Conspire, and many more. What struck me was the large presence of successful entrepreneurs that were engaged and helpful. The 11 companies that presented all had traction and momentum…from the former successful entrepreneurs that stepped in and mentored, invested, and in some cases hired these earlier startups as customers.

One of the companies announced that Rackspace had become a pilot customer. Now Rackspace is the backbone of the Techstars Cloud program…the company was founded in San Antonio by guys that fit the study by HBR. Instead of participating as mentors with a chip on their shoulder (like many corporate customers in other genre’s), they wanted to give these startups pilots. Why? First, the “Rackers” love working with entrepreneurs (it is in their DNA). Rackspace also benefits from having the smartest cloud entrepreneurs from around the world innovate their business (and this is much less expensive than being completely disrupted or having to access the capital markets to make a $B acquisition). In other words, San Antonio is getting its act together to build a dense hi-tech startup ecosystem.

If Houston is going to rebuild what once was a gem of this city, we must go find, recruit, and encourage our best entrepreneurs to give back, come back, and join the fight. My ask of you (if you made it this far) is to join us.