Sunday, May 28, 2006

Houston and Texas entrepreneurial hotbeds

The Kauffman Foundation, a prominent nonprofit that promotes entrepreneurship, recently released their report on entrepreneurship rates across the states and the top 15 metros - and it contains some very good news for Texas and Houston. First, the big picture:
Immigrants far outpaced native-born Americans in entrepreneurial activity last year while African Americans were the only major ethnic or racial group to experience a year-to-year increase in the rate of entrepreneurship, according to a national assessment of entrepreneurial activity by the Ewing Marion Kauffman Foundation.

The rate of entrepreneurial activity for immigrants in 2005 was 0.35 percent compared to 0.28 percent for native-born Americans, according to the Kauffman Index of Entrepreneurial Activity. In other words, approximately 350 out of 100,000 immigrants started a business per month in 2005 compared to 280 out of 100,000 native-born Americans. These rates represent approximately 85,000 immigrants creating new businesses per month and 379,000 native-born individuals creating new businesses per month.
Moving on to Texas:
Among the most populous states, Texas has a relatively high rate of entrepreneurial activity (350 per 100,000 adults) and is ranked fourteenth for entrepreneurial activity in the United States. California's rate of entrepreneurial activity is just above the median at 320 per 100,000 adults. New York and Florida both have rates of entrepreneurial activity that are ranked just below the median at 280 per 100,000 adults.
(Elsewhere in the report, they seem to have a misprint of Texas at 480 per 100,000, but all the tables say 350)

The 13 states ranked ahead of Texas are much smaller. As a matter of fact, all 13 are smaller in population than metro Houston. Houston itself came out very well:
Analysis of the fifteen largest MSAs in the United States reveals that Atlanta (430 per 100,000 adults), Riverside (430 per 100,000 adults), San Francisco (420 per 100,000 adults), and Houston (400 per 100,000 adults) had the highest rates of entrepreneurial activity. Detroit (160 per 100,000 adults), Philadelphia (180 per 100,000 adults), Boston (190 per 100,000 adults), and Seattle (190 per 100,000 adults) had the lowest rates of entrepreneurial activity.
Boston and Seattle less than half our rate? It just goes to show the substantial difference between tech startups and everyday small business entrepreneurship. DFW came in at a surprisingly anemic 260, well below the state average of 350. I can see Houston's boost from a high immigrant population and a lack of zoning, but I have a hard time explaining why DFW would be so much lower. Theories welcome in the comments.

On a related note, Paul Graham, who writes amazingly insightful essays on technology among other topics, recently released one titled "How to be Silicon Valley." It's his thoughts on what it takes to be a tech startup hotbed.
I think you only need two kinds of people to create a technology hub: rich people and nerds. They're the limiting reagents in the reaction that produces startups, because they're the only ones present when startups get started. Everyone else will move.
The rich people are for venture capital, of course. And Houston has plenty of rich people (although much weaker on formal VC). But we're a little weaker on the young college nerds - Rice is too small, and UH is still trying to get to Tier 1 status. Austin and Seattle seemed to do just fine without that many rich people (at least when they started), and Chicago hasn't done all that well with plenty of rich people and nerds (Northwestern, U.Chicago), so the theory's got some weaknesses.

He goes on to discuss the elements needed in several sections:
  • not bureaucrats (government programs)
  • not buildings (tech office parks)
  • top universities (purchasable for a mere half-billion)
  • personality (attractive to the creative class)
  • nerds (how they're a distinct subset of the creative class)
  • youth (inc. tolerance/liberalism and an "intact center"/core)
  • time for it all to ferment
A few other interesting excerpts:
To spawn startups, your university has to be in a town that has attractions other than the university. It has to be a place where investors want to live, and students want to stay after they graduate.
(On NYC) It's the kind of place where your mind may be excited, but your body knows it's having a bad time. People don't so much enjoy living there as endure it for the sake of the excitement. And if you like certain kinds of excitement, New York is incomparable. It's a hub of glamour, a magnet for all the shorter half-life isotopes of style and fame.

Nerds don't care about glamour, so to them the appeal of New York is a mystery. People who like New York will pay a fortune for a small, dark, noisy apartment in order to live in a town where the cool people are really cool. A nerd looks at that deal and sees only: pay a fortune for a small, dark, noisy apartment.

Nerds will pay a premium to live in a town where the smart people are really smart, but you don't have to pay as much for that. It's supply and demand: glamour is popular, so you have to pay a lot for it.

Most nerds like quieter pleasures. They like cafes instead of clubs; used bookshops instead of fashionable clothing shops; hiking instead of dancing; sunlight instead of tall buildings. A nerd's idea of paradise is Berkeley or Boulder.
To attract the young, a town must have an intact center. In most American cities the center has been abandoned, and the growth, if any, is in the suburbs. Most American cities have been turned inside out. But none of the startup hubs has: not San Francisco, or Boston, or Seattle. They all have intact centers. My guess is that no city with a dead center could be turned into a startup hub. Young people don't want to live in the suburbs.
Again, while the writing is excellent, I think the theory's got a few weaknesses. He lives near Cambridge himself, and it clearly colors his views, including an over-buy-in on the simplistic view of ideal creative class living. The reality is that the core tech hubs are all in suburban office parks outside Austin's core, in Silicon Valley outside SF, in Redmond outside Seattle, and Route 128 outside Boston. Clearly there's a synergy between their core and their 'burbs, but it's easy to overemphasize the "cool core".

I think Houston's on the right track with all the variables he describes (inc. #7 on creative class), although bio/nano tech will be our cluster/hub if it happens rather than hardware/software. There's just too much critical mass from the Texas Medical Center plus supporting research at Rice and UH. If we keep increasing local venture capital, allow our core to redevelop (esp. along the light rail lines), and get UH to Tier 1 status, our odds look pretty darn good.


At 10:29 AM, May 30, 2006, Anonymous Anonymous said...

Houston does have some strong assets but don't assume too quickly that we'll be a biotech hub. Malcolm Gillis of BioHouston spoke recently on where Houston is on biotech, and the barrier seems to be that we don't have the people we need---managers who can take biotech research and ideas into commercial enterprises. Once again, the city's unattractiveness to the very capable seems to be the barrier. What law firm, hospital, any institution that recruits talent nationwide isn't familiar with the need to work harder to bring the talented to Houston, given our rep for ugliness and air pollution? People who blame Houston's image on climate alone are missing the point. We need to focus on quality of life issues that impact the way real people live -- figure out what the key and potential peak experiences are here, market them, and improve the city's appearance and public spaces especially. This is a missing piece in making Houston a biotech hub.

At 3:08 PM, May 30, 2006, Blogger Tory Gattis said...

I find this somewhat believable, but I have personal experience with a contradictory data point. I know professional doctors who work in the Med Center, and they're always pointing out they must accept much lower salaries here than they could get elsewhere because everybody wants to be in the big city. One friend is getting a *huge* salary boost by going to South Dakota.

If a biotech firm is trying to recruit top mgt talent (which I'm assuming is older and married), and they actually fly them in and *show* them The Woodlands, Sugar Land, or even Bellaire/West U, I have trouble seeing how they would categorically reject that vs. costs/quality/value in other cities.

At 3:56 PM, May 30, 2006, Anonymous Anonymous said...

If a biotech firm is trying to recruit top mgt talent... and they actually fly them in and *show* them The Woodlands, Sugar Land, or even Bellaire/West U, I have trouble seeing how they would categorically reject that vs. costs/quality/value in other cities.

Tory, you must not think too highly of Houston since each of those locations you've suggested is not actually in the city limits!

At 4:13 PM, May 30, 2006, Blogger Tory Gattis said...

I actually do think highly of the city, but I also know it doesn't always make a good first impression on people who are aesthetically focused. It takes time to appreciate our wonderful chaos. So, in many cases, a short-term sales job probably makes more sense in those areas, and they'll discover Houston's subtler advantages/amenities down the road.

At 5:09 PM, May 30, 2006, Anonymous Anonymous said...

I know you think highly of Houston... I was poking fun.

But I would certainly add in-city neighborhoods such as River Oaks, Southampton, Boulevard Oaks, Southgate, the Heights, and Tanglewood among others to your list if I'm trying to attract top management talent.

At 5:20 PM, May 30, 2006, Blogger Tory Gattis said...

Absolutely, time permitting.


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