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Analysis: Amid a pandemic, it’s feast or famine for Houston startups

Published Oct 14, 2020 by Josh Pherigo

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Judging by Houston’s impressive venture capital haul this year, it’s hard to tell there’s a global pandemic underway.  

Tech companies in the Houston region have raised more than $550 million in venture capital (VC) funding through the first three quarters of ’20, only slightly off last year’s record pace, according to a Partnership analysis of Pitchbook data. In Q3 alone, Houston founders raked in $265 million, a new quarterly record. 

But the dollars only tell half the story. 

Deals themselves are proving harder to source during the pandemic, especially for the earliest stage companies. As VC investors grapple with declining valuations and a drying pipeline of startup prospects, later stage tech companies are offering a safe harbor amid the uncertainties created by COVID-19. The result is fewer, but larger, investments.

Houston’s 84 venture capital deals in the first three quarters of ’20 are down from 131 deals this time last year. The deficit comes entirely from a drop in seed and early stage fundings, which are down 45% from ’19. Later stage investments, on the other hand, have seen deal counts grow by 14%.

Much of Houston’s Q3 investment volume came from a single deal – a $137 million investment in the health tech firm Preventice Solutions, which builds patient monitoring systems for health care providers. The deal is one of Houston’s largest VC investments in the past two decades, but it’s hardly an outlier. In a city where massive, late stage deals were once rare, Preventice is the third Houston company in 12 months to raise $100 million in a single round.

This trend toward later stage investments has pushed the average value of Houston VC deals to $6.6 million, up 50% from last year. Heftier deals could benefit Houston by introducing new investors to the region, who might return for other deals. 

Nationally, the pandemic is taking a toll on investor’s ability to find new startup companies. When the pandemic first set in, VC firms were more focused on sustaining their current portfolio companies than finding new investments. Eight months later, many VCs are now hungry for early stage deals, but they’ve exhausted their existing entrepreneur networks. The virtual environment has made startup development organizations (SDOs) and other VC matchmakers more important than ever for connecting early stage startups to sources of capital. 

The pandemic is also reshuffling the economics of many tech markets in a way that investors and entrepreneurs are only beginning to understand. Internet of Things (IoT) technologies, automation and robotics, consumer health and wellness products, eSports, eCommerce, telehealth and life science are all emerging as promising sectors post-COVID. 

Houston is benefiting from a strong presence in life science and biotech companies. Health-related venture capital investment is up 3% from this time last year to $232 million, while information technology investment is up 29% to $189 million. Energy is the weak link, dropping 61% to $36 million. But despite the bigger values, deal counts are lower in each of those sectors. 

Read the Q3/20 update for venture capital in Houston. Learn more about innovation in Houston

Executive Partners