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Analysis: Identifying Houston's Tech Specialties

Published Sep 01, 2020 by Josh Pherigo

tech network

This year, the one-two punch of COVID-19 and an energy downturn has knocked Houston’s economy into a tough spot. 

Without conventional energy jobs to bolster a recovery, the region will now have to find new sources of job growth to regain lost ground.
Venture-backed startups have unlimited job-creation potential if their technologies are brought to scale. But what tech specialties are most primed to succeed here in Houston?  

Partnership Research analyzed 20 years of venture capital deals across Houston, Dallas, and Austin to understand how Houston’s tech strengths compare to our closest neighbors and the nation at large. The data reveals key differences in each innovation ecosystem. 

While Austin and Dallas have strong digital tech sectors, Houston’s VC-backed companies trend toward solving fundamental problems of science and engineering, often with software as a secondary component. Health Care and Energy are especially well represented in Houston’s innovation landscape, whereas Software and Telecommunications are more prevalent in Austin and Dallas. But it’s not enough to look at industries alone. 

Tech Verticals

Because emerging technologies don’t always conform to standard industry classifications, PitchBook tracks 58 vertical markets – everything from Autonomous Cars to Nanotechnology.  A single company might have several vertical tags at once. Uber, for example, has seven verticals, including “Ridesharing” “Mobile,” and “FoodTech.” Verticals are a good way to gauge activity in often overlapping tech fields. 

This analysis groups deals into verticals and considers them in three ways:  

  1. Number of deals – Which metro generates the most VC deals for each vertical market? 
  2. Frequency per 100 deals – How common is a particular vertical within its ecosystem?   
  3. Location quotients – How specialized is a metro in a particular vertical compared to the U.S. overall? This metric is indexed to the national market and presented as a ratio. A location quotient of 1.0 means a metro has the same specialty as the national benchmark. A 2.0 means the metro has twice the specialty. 

A Deal’s a Deal

When it comes to venture capital deals in Texas, Austin leads by a long shot. The state capital has become a national hotspot of startup activity, drawing over 4,000 deals in the last two decades - more than Dallas and Houston combined. 

tech 1 9-1-20.PNG

Austin has maintainted a clear advantage in venture capital deals over both Dallas and Houston over the last two decades, according to PitchBook data. COVID-19 has caused a drop in deal counts in 2020.

It’s no surprise that Austin leads the pack in deal count across most of the tech verticals PitchBook tracks. Over the last two decades, Austin-based companies received the most venture capital deals in 50 out of 58 vertical markets. Dallas, a smaller VC market with most of Austin’s same focus areas, had more outright deals in only two especially niche markets – Pet Technology (dog-walking apps, for example) and Ephemeral Content (disappearing messenger apps like SnapChat). 

Houston companies had the most VC deals in six vertical markets: 

  1. Life science (239 deals) 
  2. Oil and gas (229) 
  3. Oncology (150) 
  4. B2B payments (9) 
  5. Infrastructure (7) 
  6. FemTech (8)

   
The table below lists the ten most commonly funded verticals in Houston, including comparisons to the U.S., Austin and Dallas.
 

Deal counts are important because they indicate that expertise exists in a particular market. But overall counts aren’t a great measure of specialization. If a VC market is active enough, deals are bound to occur across many sectors that may not have particular strengths in the underlying economy. 

Identifying Tech Clusters

To get an idea of the importance of each vertical to its ecosystem, we counted the top verticals by their frequency per 100 VC deals.  This gives us a better sense of the concentration of talent and the clustering of ideas in each metro. For example, how often might someone working at a CleanTech startup encounter another CleanTech firm within the local community? These collisions can provide important opportunities for ideas to pollinate into new products and companies. 
 

Austin and Dallas share many of the same top verticals in about the same concentrations. Both regions have pronounced strengths in software-as-a-service (SaaS) and mobile technology and are less specialized than the U.S. average in life science. Notably, oil and gas is not a particular strength in either Dallas or Austin. 

Life Science: Houston, on the other hand, is a hotbed for life science activity, particularly in oncology. One out of ten venture capital deals in Houston goes to a company developing cancer-fighting technology. As expected, Houston has a large concentration of oil and gas tech firms, though it may be a surprise that life science companies make up a bigger share of overall VC deals. For every 100 VC deals in Houston, roughly 18 go to life science companies and 17 go to oil and gas tech firms. 

Energy: While life science may represent a bigger share of deals, Houston’s competitive advantage is much greater for oil and gas. The national rate is 1 oil and gas deal for every 100 Venture Capital deals. In Houston it’s 17 times higher. To put that in perspective. Houston-based companies accounted for 1 in 6 oil and gas venture capital deals closed in the U.S. over the last 20 years. A dominant advantage. 

Cleantech is an emerging specialty for Houston. Houston VC deals go to CleanTech companies at twice the national rate. Though, Houston does not enjoy the same dominance in CleanTech that it does in Oil and Gas. In fact, Austin generates more CleanTech deals than Houston. That trend could change as Houston takes proactive steps to position itself as a leader in the growing field.  Two new CleanTech accelerators are poised to launch in Houston in the coming months. These investments could give Houston a needed edge in attracting more startups. The wheels are already in motion. In ’19, CleanTech VC deals outnumbered Oil and Gas deals for the first time in Houston.  

The presence of MD Anderson and other leading cancer research Institutions in Houston have led to a surge in innovation funding for Oncology startups. One out of 10 venture capital deals in Houston goes to a company developing cancer-fighting treatments or technologies.

 

The star-plot above depicts the frequency of verticals in each region and the U.S. overall. By their similar shapes, it’s clear that Austin and Dallas are more similar to the overall U.S. tech footprint than Houston, where life science and energy attract a higher share of venture capital deals.

Certain niche technologies show particular promise in Houston – Advanced Manufacturing, Space Technology, FemTech, B2B Payments. The fact that these smaller verticals have found good footing in Houston suggests the region has certain structural advantages that support their development. 

As Houston looks toward a prolonged economic recovery, we could do well to foster growth in the innovative sectors that have already proven themselves especially well-suited to be here. 

Learn more about Houston's tech scene and innovation ecosystem

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