Nov. 16–The oil bust that devastated Houston’s energy sector also served to invigorate it.
In the years since crude markets crashed and forced hundreds of thousands of layoffs, many of the city’s most prominent oil and gas companies have embraced technology as a means to become nimbler and more competitive as energy needs change. They have built internal teams to vet and perhaps invest in promising technologies and partnered with the likes of Google and Microsoft to make better use of their data.
Now, some of Houston’s biggest companies are trying to foster a startup scene as they look to develop a pipeline of innovative ideas and products. But they face the same challenge that has long flustered entreprenuers, investors and economic development officials: how to build a launch pad for emerging companies in a city where the tech sector has remained stubbornly second-tier.
Those tracking the sector’s transformation agree that Houston has made substantial progress in leveraging some of its strongest attributes — its economic strength, university programs and engineering talent — to build a culture of innovation geared toward its industrial base. More startups are taking root, sometimes with help from experienced workers laid off during the bust.
Venture capital investors are starting to focus on energy. And oil and gas companies have, to varying degrees, become more open to disruption and talking with competitors to encourage experimentation across the board.
“How do we make sure this is sustainable?” said Jose Silva, lead strategist for advanced analytics and emerging technologies for Anadarko Petroleum in The Woodlands. “The ecosystem is starting to flourish, and now we need the ability to expand on those ideas to scale them up and see the returns.”
Silva took charge of Anadarko’s search for partnerships with startups and other emerging companies in early 2017 as part of a team created to accelerate the oil producer’s use of new technologies. He and his team now oversee pilot programs with seven startups using biotechnology, artificial intelligence, data analytics and other capabilities.
The key to building an innovation sector, said Silva, will depend on energy companies sharing what they learn about new technologies, with the idea of helping startups forge connections with potential customers to develop their products and services.
Gaby Rowe, CEO of Station Houston, the city’s most prominent startup hub, said almost all of the city’s oil and gas companies are exploring the tech scene to some degree. “None of us want Houston to be the post-industrial giant that once was,” Rowe said.
The obstacles, however, are deeply ingrained. Houston is not a top destination for tech-focused graduates. The energy industry is often perceived as conservative and insular. And key players in the tech sector — startups, investors and customers — are spread throughout a city notorious for its sprawl, making collaboration more difficult to foster than it is in places such as Austin and Silicon Valley.
On top of that, Houston has a spotty track record when it comes to venture capital investments. Rice University’sMcNair Center for Entrepreneurship and Innovation earlier this year reported that the city attracts less than 1 percent of U.S. venture capital, putting it at risk of being “shut out of America’s future innovative economy.”
Dozens of startups have charged forward despite those challenges, with a growing number turning their attention to business applications rather than the sort of consumer technology that dominates Silicon Valley. Rowe said more than half of Station Houston’s 200 companies are developing applications for oil and gas and other industrial sectors.
DataGumbo, based in The Cannon, a startup hub in West Houston, is developing blockchain technology to make offshore operations more efficient, essentially by connecting operators, contractors and subcontractors with “smart contracts” that provide a common view of services rendered and other data. Right now, that information is often stored separately by the various companies supplying and operating rigs, making it challenging to execute contracts and improve efficiency.
The company in August secured $1.35 million in seed funding from investors in Houston and Silicon Valley. It’s working with the Houston company Diamond Offshore Drilling to roll out its system across Diamond’s fleet of rigs. It has four other customers and dozens more in the sales pipeline.
William Fox, DataGumbo’s chief product officer, said about half of the company’s 25 employees were bought out, laid off or otherwise displaced from oil and gas companies during the energy bust. “That’s part of the reason we were able to snap up people with 15 or 20 years of experience,” Fox said.
Other startups have faced more of a challenge in finding talent. The Houston metro area employed only about 20,000 software systems and applications developers last year, according to the U.S. Labor Department, considerably less than the national average.
Expedi, a Houston startup building an online marketplace for rig parts and equipment, has grown rapidly since launching in August of 2017. It started with two employees — CEO Tim Neal and COO Jonathan Hamilton — who delivered the parts themselves, logging 3,000 miles a week in pickups barreling across West Texas.
The company in July secured $2.25 million in seed funding from investors in Houston and New York, allowing it to open a warehouse in Odessa and hire 18 more employees. It now services 35 rigs and 10 other industrial customers.
Neal said Houston’s pool of software developers and technical talent has grown through Station Houston and similar organizations, but acknowledged that it isn’t as deep as it is in places with more established innovation cultures.
“When you compare Houston to other cities, there is still not that culture of people leaving college and wanting to go work for a startup,” Neal said. “You still need to look for talent.”
Investor interest, however, is starting to pick up. Blue Bear Capital, which invested in Expedi’s seed round, was founded early last year to focus exclusively on startups developing technology for the energy sector supply chain. The firm, which has offices in Houston, Los Angeles, London and Norway, only invests in companies that have a customer base and reliable source of revenue.
Expedi is the only Houston company in Blue Bear’s portfolio, but Tim Kopra, a partner, said Blue Bear is eyeing several more young companies in Houston.
“There is capital to go around for the companies that are able to demonstrate their value,” he said. “It’s definitely a growing sector.”
Houston energy investment bank Tudor, Pickering, Holt & Co., has made energy technology a focus of its advisory business. Maynard Holt, its CEO, last year hired John Gibson, formerly of Halliburton, to get to know the city’s emerging technology companies and learn how their ideas could benefit the bank’s energy clients . On any given day, young entrepreneurs pass through their offices, pitching the duo on sometimes-lofty plans for making the industry cleaner or more efficient.
“To better understand the industry itself, you have to understand technology,” Holt said.
The city has worked to develop an innovation district to foster collaboration among local universities, business districts and tech incubators to create a node of activity to appeal to larger tech companies and investors. The goal is to integrate cutting-edge startups among existing research and business hubs between the Texas Medical Center and downtown Houston. Rice has said it will invest $100 million to transform the old Sears building in Midtown into a tech hub.
Silva, Anadarko’s tech strategist, said much work needs to be done in the interim. He has worked with Station Houston to brainstorm a forum in which startups, investors and energy companies could together discuss what’s needed to meet the industry’s technology needs.
“We have to enable it now,” he said. “If we wait until the innovation district is done, it might be too late.”
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