Thursday, June 25, 2009

Securing Houston's economic and world-city future

Houston has a unique window of opportunity right now to secure its economic future as well as improve its world-city status. We're currently the global capital of the oil and gas industry, one of the most important industries in the world. The short to medium-term future for oil and gas also looks bright. But the long-term future of energy technology is fuzzy. Will we be well positioned to be the capital of all energy technologies? Or will it pass us by, and we will become the next Detroit/Cleveland/Pittsburgh/etc.?

A good case study would the information technology industry and Boston vs. Silicon Valley. Boston was the original information technology hub, especially in the mainframe and mini-computer eras, but Silicon Valley's vibrant entrepreneurialism eventually left Boston in the dust. Could the same thing happen to us with alternative energy and California, Denver/Boulder, Austin, or elsewhere?

There is a lot of acknowledgment that we need to broaden our energy-industry base to include more alternative energy, but there doesn't seem to be a lot of specific strategy (Opportunity Houston excepted). My suggestion? Build on Paul Graham's idea for creating the next Silicon Valley (estimated price only $1B, or two Reliant Stadiums), but focus it instead on alternative energy companies. These companies are cheap right now and starving for capital in this economy (see this Business Week story on the Biofuel Bubble). Investing in them conditional on moving to Houston would be a bargain many would readily accept, helping to establish a Silicon Valley-like critical mass here.

Where would the capital come from for these investments? A massive private equity/venture captial fund would be established with a focus not just on absolute returns, but on broadly enhancing the Houston economy, especially in alternative energy. Employers all over the region would offer this fund as an option in their 401K plans (it's like one of those "special situations" funds you may have seen combined with a mission-oriented, socially responsible fund like the environmental ones), maybe limited to no more than 5% of your portfolio (since it is a high-risk investment category). I think huge numbers of people would happily put part of their retirement portfolios in this fund, not just because they believe in Houston and want to see it succeed, but also because it's in their own best interest: if the city does well, their home value does well and their kids will have more opportunities here. It's a win-win virtuous cycle.

I think the primary target should be biofuel companies (especially algae), since that plays to our engineering, refining, and distribution strengths more than wind or solar (and we already have some traction here). Just like Silicon Valley is awash in programmers all trying to create the next big thing, we need to be swimming in chemists and biogeneticists all competing to make the next big biofuel breakthrough.

Of course, all of this needs to be backed up with not just money, but with academic support in the form of the world's largest collaborative energy research institute spread across Rice, UH, and TAMU - just like the support Stanford provided Silicon Valley.

At the beginning of this post, I also mentioned that this could improve our world city status. The more I've thought about it, top world cities don't just have big economies, industries, and populations (which we certainly have), they also have an intangible "buzz factor" - a sexy, exciting story as part of their identity. The fame and celebrity of the entertainment industry gave it to LA. Technology and natural beauty gave it to the San Francisco bay area. Media, finance, the UN, and Manhattan gave it to NYC. Some cities have the buzz without the world-city economy or population to back it up - Vegas, Denver, Portland, and Austin come to mind. Atlanta tried to buy the buzz with the Olympics. You get the idea. Houston lacks that popular buzz factor, and oil and gas alone is not going to get us there. Top-tier tourism is not a realistic option. But if we morph into the Silicon Valley of Energy - one of the bedrock industries of the world - I think that would do it.

It's an incredible opportunity, and one we should seize quickly. If oil prices continue to re-inflate, these alternative energy companies will again become popular and expensive with plenty of capital options - making it almost impossible to move them here. Other cities may build an insurmountable lead in different alternative energy clusters, leaving us behind (right now it is very open, with no clear leader). It's all too easy to cruise on our recession-resistant economy and strong oil and gas industry, but this is the time to take aggressive action. Attack, while the moment is right, and secure Houston's future greatness.

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At 8:00 PM, June 25, 2009, Anonymous Anonymous said...

I heard an investment banker the other day who had lots of experience in the oil gas industry say that oil is not going anywhere. The caveat? All our engineers might not be working for companies in the USA, they'll be working for National Oil Companies.

The reason is because all the reserves are overseas.

So, let's hope your idea, or something like it, comes to fruition.

All our companies could be headquartered in Dubai or Paris soon.

At 8:17 AM, June 26, 2009, Anonymous Anonymous said...

I think companies would be willing to move here if given money for startup, having a colloborative environment with other startups, support from the universities. That's not the hard part.

The hard part is raising enough money that is earmarked SPECIFICALLY for moving these energy companies here. As an investor, I wouldn't care whether my investment grows in Bismarck, Saskatoon, Kiev, or Houston. I just want the best return on my investment.

Once we reach critical mass, it'll take care of itself, but what will we do before that point?

How do we convince investors that a significant portion of their money should go towards luring companies to relocate and not for other purposes?

At 8:26 AM, June 26, 2009, Anonymous dcoolbro said...

Let's hope the leadership in oil and gas in Houston don't try to stifle opportunities for alternative energy to form here. It's really not in their best interests to have alternative energy here and they'll do everything to keep them from prospering on their turf.

At 8:37 AM, June 26, 2009, Blogger Tory Gattis said...

The fund would say it's specific mission is not just ROI, but enhancing Houston economic base, esp. in energy. People would understand that might include and ROI tradeoff, the same as funds with environmental or other missions.

I don't think big oil want to kill the small alt energy players, esp. since they want to buy the successful ones while they're still small (and affordable). They need to see their role the same as Oracle and Intel do in Silicon Valley.

At 2:52 PM, June 26, 2009, Anonymous Anonymous said...

"It's really not in their best interests to have alternative energy here and they'll do everything to keep them from prospering on their turf."

Sorry, but that's a little far-fetched. These oil companies have enough trouble keeping costs down for supplies, construction, and contractors, while constantly trying to find more reserves and bring them to market. Why would they care whether or not some other energy company is successful in Houston or not???

It goes back to the same point: if I'm an investor, why should I care if my investment makes me money in Houston or another city? (Or your your example, crowd out a competitor in Houston or another city.)

(Btw, a lot of these oil companies have started doing a lot of research of their own in these areas to hedge their bets. e.g., biodiesel plant in Galveston. As Tory notes too, they also buy up companies and participate in joint ventures as well.)

At 2:58 PM, June 26, 2009, Anonymous Anonymous said...

Tory, I understand the benefits for Houston, but why would an investor care? Rich Houstonians with a sense of civic interest could get it kickstarted, but they would need to convince investors not only that Houston is the better place, but it SO MUCH a better place, that investor money is well spent on relocating companies here.

We need to focus on what makes Houston THE IDEAL PLACE ABOVE ALL OTHERS. In my mind, that is the combination of the following:
-low taxes (some others cities have)
-low cost of living (some others cities have)
-low regulatory hurdles for building research facilities or lots and lots of offshore wind and tidal farms (only a few other metro areas have)
-engineers, engineers, engineers, engineers - I can't emphasize this enough. There is so much engineering expertise at the professional level - not just the university level - in Houston.

Do you have any others?

Maybe we would also have to start up a few very ambitious projects here to get the ball rolling: offshore wind farm, tidal farm???

At 4:15 PM, June 26, 2009, Blogger Tory Gattis said...

Investors will care for the same reasons they buy environmentally-oriented or ethics-oriented funds (no tobacco companies, for instance). See this article on Socially Responsible Investing:

Good list.

I'm not a fan of high-PR mega-projects. If you follow the Paul Graham link, he's not either. Better to let a thousand small flowers bloom and let the market sort them out. But we can kickstart and attract those 1000...

At 10:38 AM, June 27, 2009, Blogger CarmineSantucci said...

I think you are discounting Opportunity Houston's impact on attracting new companies and industries to the region. Already, Vestas has relocated here and they are a major player in alternative energy. That will influence other companies in similar industries to come here to draw on all the energy brainpower located here.

Rice University and other local schools play a huge role, as well. Stanford and Cal Tech have the best tech transfer departments and many Fortune 500 companies were started by their students.

Also, have you heard about the World Nano HQ in Pearland? Not sure of its current status, but it sounds ambitious.

At 11:22 AM, June 27, 2009, Blogger Tory Gattis said...

This would be complimentary to Opportunity Houston. Their budget is for recruiting, but they can't invest directly in companies like this fund could.

At 12:12 PM, June 27, 2009, Blogger CarmineSantucci said...

Why not go after the Nano market? We could be the world's "Nano" capital. Rice University is already the leader in research in that field. The market is a trillion dollars.
The Nanotech Conference & Expo 2009 was held in Houston in May and as I posted the Nano HQ facility is being built in Pearland.

At 5:42 PM, June 27, 2009, Blogger Tory Gattis said...

I have no problem building up our nano economy too. It does have a lot of potential, but a lot of other places are going after it pretty aggressively too. And it's incredibly broad, with applications from bioscience to materials. I'm not sure a city can corner nano any more than it could corner plastics or composites - it's just too broad. I suspect nano-clusters will develop in different industries depending on the application: autos, aerospace, health care, semiconductors, etc.

I'd probably prioritize the focus in this order:
1) Biofuels
2) Other alt energy (wind, solar)
3) Biotech nano (with the TMC)
4) Other nano, other biotech

At 9:55 AM, June 29, 2009, Anonymous Anonymous said...

"Investors will care for the same reasons they buy environmentally-oriented or ethics-oriented funds (no tobacco companies, for instance)."

People are free to invest in alternative energy and are driven to do so sometimes for reasons other than maximum profit.

But what I'm sure of is that investors in NYC or Chicago or Washington D.C. will not have any such feelings sway them when they're trying to decide between a socially-responsible investment in Houston or a socially-responsible investment in City X.

I assume that people in other cities in general have no idea about Houston's positive attributes and my personal experience backs this up as well. We not only have to make them (the investors, not twentysomethings looking for a place to party)realize these pros of Houston, but make them realize Houston is better than the rest. That is the hardest part.

At 11:56 AM, June 29, 2009, Blogger Tory Gattis said...

Yes, I'm not counting on investors outside of Houston. I'm assuming many locals would consider it as part of their 401K allocation. I'm only pushing for this as an investment option locally (although we certainly wouldn't turn down money from elsewhere).


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