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By Tom Foster,
May 16, 2020

The Future of the Texas Startup Economy

Austin may get all the innovation glory today, but the real story in Texas is the awakening of its other giant cities–and giant fortunes.

Widely seen as a Southern Silicon Valley, Austin has recently hogged much of the entrepreneurial limelight in Texas. The city has topped Inc.‘s Surge Cities list of the best places in America for startups in both 2019 and 2020, and it has produced numerous name-brand startups–from Dell and Whole Foods in the 1980s to Bumble and Kendra Scott today.

Yet, the story of Texas is far bigger than any one of its cities. “If you’re going to do things new and different, Texas offers a very good economic and regulatory environment,” says Tom Markusic, the CEO of Austin-based Firefly Aerospace, a six-year-old maker of rockets for sending small satellites into space. Before starting Firefly, Markusic worked for NASA, SpaceX, Blue Origin, and Virgin Galactic–in Alabama, California, and Washington. But when it came time to start his own rocket company, he chose to build it in Texas.

He cites a few factors that are common refrains among business leaders who choose to launch in the Lone Star state: low cost of living, low taxes, and relatively permissive environmental regulations and land rights. “It allows you to move quickly. Texas allows new businesses to flourish,” Markusic says.

If you’re thinking of starting or growing your company in Texas, here’s what you need to know.

1. Texas offers a very large, diverse market.

If Texas were a country, it would have the 10th-largest economy in the world. In the U.S., it’s second only to California in economic might, contributing about $1.9 trillion to U.S. GDP. Consider that the 11th-largest privately held company in America, grocery chain H-E-B, has grown to its size without operating in any other state. The Houston metro area, with seven million people, is not only the fourth-largest city in the country but also the most diverse, with the Dallas area right behind it on both counts. DFW is one of the busiest airports in the world, easily accessible to both coasts. The four major cities in Texas are all a short drive from one another and together comprise nearly 20 million people. All of which adds up to an ideal test market for new products and a convenient base from which to reach the rest of the country–or the world.

“You’ve got all the pieces in place here: R&D spending, a global market, lots of talent,” says Joshua Baer, the CEO and founder of Capital Factory, an Austin-based startup incubator that has locations in Houston and the Dallas/Fort Worth area.

2. A base of established corporations fosters both talent and opportunities.

Dallas/Fort Worth is home to many large corporate headquarters, including those of AT&T, ExxonMobil, American Airlines, Southwest Airlines, Kimberly-Clark, and the North American Toyota. The so-called Metroplex shapes much of the region’s startup activity. Many entrepreneurs either spin out from the big companies or spot opportunities to serve them, explains Bruce Ballengee, founder of six-time Inc. 5000 company Pariveda Solutions, a Dallas tech consultancy. “If you can land a whale of a client, it gives you instant credibility,” he says.

Houston, meanwhile, is the world capital of the energy industry and a global leader in health care. The Texas Medical Center is the world’s largest medical complex, with some 100,000 employees. Both industries are ripe with opportunity for entrepreneurs developing new technologies.

3. Cybersecurity is expected to be a major source of growth and jobs.

San Antonio, often the forgotten member of Texas’s quartet of large cities, has been building a new strength on top of its history as a military town. Joint Base San Antonio employs some 80,000 people, not including all the defense contractors orbiting it. Today the city is a hub for cybersecurity, which is projected to be a $1 trillion industry by 2021. Local companies in that industry include Inflowlogistics (No. 99 on the Inc. 5000 Series: Texas list) and Silotech Group (No. 139). The University of Texas at San Antonio has developed a cybersecurity-training program that’s among the top-ranked programs in the U.S., ensuring a strong talent pipeline.

4. Texas has money–but not much of it goes to startups yet.

Challenges persist for Texan startups–especially when it comes to a tight labor market and access to startup capital. Despite the large amount of money in the state, much less of it goes into the innovation economy than in California or New York. In 2019, Texas companies raised about $3 billion in venture capital, compared with California’s $58 billion, according to the PwC/CB Insights MoneyTree Report.

But even that picture has begun to change. The amount Texas startups raised last year was up by about 30 percent from the year before.

“There’s a lot of older money in Texas,” explains Ed Curtis Jr., author of Why Texas: How Business Discovered the Lone Star State (Brown Books Pub Group, 2019). “Most of it was in real estate and oil and gas. It’s what they know, and it works. But we’re starting to see a generational shift in those family offices, and the kids are starting to diversify into the venture capital and private equity worlds.”

When it comes to more traditional venture capital–especially for seed and A rounds–Austin is home to more of it than any other city in the state, with leading firms including Silverton Partners, Next Coast Ventures, and S3 Ventures. The Central Texas Angel Network is also a prolific source of funding for early-stage companies.