The Texas House Committee on Investments and Financial Services held a hearing last week on how the state can attract more venture capital.
It’s a good question that may have a multi-pronged answer and require some seeding.
Site Selection magazine just awarded Texas a “Governor’s Cup” for most capital investment in the country last year. According to the magazine, Texas had 689 capital investment projects completed in 2014, the most of any state. http://www.siteselection.com/issues/2015/mar/cover.cfm
Great news, of course, but these are largely real estate development projects.
What about capitalizing early and growth-stage companies to sustain our consistent (and nation- leading) job growth in the coming years and decades?
One way is a dynamic ecosystem of capital sources to fund our best small businesses here in the state, rather than have them funded and moved elsewhere. Access to capital is among the top two things entrepreneurs tell us are key to long-term business success, along with a skilled workforce.
Today, Texas lags in attracting venture investment, ranking a distant fifth in total investment for 2014; we represent just over three percent (3%) of all venture capital investment. By contrast, Silicon Valley alone takes in almost 50% of all dollars, while New York (metro only) and New England are about ten percent (10%) each.
Why is Texas not getting its share of venture investment and what can we do better?
• There is some sentiment that we need more and better “deals” (strong young companies) to fund since the investors would rather drive than fly to their board meetings. Incubators and accelerators help provide important infrastructure and experience to help young companies grow; what can Texas do to support their growth? For example the Director at University of Texas Venture Labs says that if there are more deals worthy of investment, the money will find them. TVL says that fifty percent (50%) of their companies get venture funding, compared to about 1% overall.
• We need more critical mass of venture capital in Texas. We just don’t have enough anymore. In the heyday of the late 1990’s, many national players set up shop here but moved out. In particular, Austin has been dominated by one major, local player. And that local firm announced recently they will not be raising another early stage fund.
How can we make Texas more attractive for all varieties of venture funding and private equity to come into this market? Given the clear political heartburn over the state taking equity positions in deals (the Emerging Technology Fund model), an approach that provides incentives to professional investors to get capital into the hands of innovative and scalable small businesses could be an attractive alternative.
• We can do a better job of leveraging federal programs to attract more investment to Texas, and make investments in rural and other underserved areas. The federal New Markets Tax Credit Program (NMTC) is one example. The program encourages investment in economically distressed communities. Twelve states have enacted state programs that attract federal NMTC investments, providing a leverage effect. Today, Texas is not getting its fair share of those investments. According to at least one report, the dollar return on the NMTC program is 8:1, tax receipts to credits extended.
• And, as Gov. Greg Abbott has observed, we must maintain al policy climate built for growth – low taxes, reasonable regulations – and fund infrastructure like water and roads. http://gov.texas.gov/news/press-release/20628
Texas has been generous with tax-related and other incentives for expanding or re-locating companies; in fact some sources say Texas leads the nation in that category. What seems clear is that states provide incentives to stay competitive, and the competition among states is fierce. That’s the landscape today.
More venture investment will be important to keep the state’s economic ground fertile for many years to come.