Tackling Stagnation of Texas Entrepreneurship (Blog Post)

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© edegan.com, 2016

Abstract

A blog post focusing on the status of Texas entrepreneurship and a potential solution.

Blog Text

"If current trends continue, Texas, the second-largest state in the U.S. in terms of gross domestic product (GDP), will be struggling to remain in the top 10 for venture capital investment within the next decade. The reason for Texas’ relative decline is simple: while other high-ranking states are growing their venture capital investment at extremely fast rates, Texas’ venture capital investment has decreased 19% over the past 10 years in real terms." In this damning analysis backed by inflation [www.bls.gov/data/inflation_calculator.htm data] from the U.S. Bureau of Labor Statistics, a serious concern for the future of the Texan economy is laid out.

Venture capital investment is critical to maintaining a healthy entrepreneurship ecosystem. As outlined by Larry Peterson, the Executive Director for the Texas Foundation for Innovative Communities, high-growth companies developed from healthy entrepreneurship ecosystems account for only 2 – 7% of all companies in a given year, but account for all net jobs and GDP growth. He elaborates that in order to preserve the Texan economy in light of dropping oil prices, rather than reducing services or raising taxes, Texas should rather try stimulating growth.

Innovation and entrepreneurship, which are "calculated to drive about 60% of this economic growth," require strong sources of capital, labor and technology, a healthy entrepreneurship ecosystem, to thrive. Texas has low costs, relatively low taxes, moderate regulatory burden, and tort restraint, which add up to a pretty solid economic formula to promote standard business, but unfortunately its not enough to promote entrepreneurship. "Mighty research universities, large pools of venture capital, experienced serial entrepreneurs, large technology companies, and vibrant entrepreneurial resources all combine to provide robust entrepreneurship growth," Peterson continues, outlining the necessities for a vibrant Texan future.

The largest identified lag in these necessities within Texas is capital. While there is "no shortage of capital" in Texas, there are seemingly unnecessary barriers to access, a lack of information, and little government support. In order to avoid appropriation, there are two suggested routes of government supported entrepreneurship without having government funded entrepreneurship. Taking a play out of Michigan's book, a one-time, government-funded State Small Business Credit Initiative, or SSBCI, could be a solution. No direct appropriation is made, but future revenues are used as collateral to raise funds from the private sector. Managed prudently, the returns cover return of capital and program expenses, and can even yield a small surplus for the state. In the SSBCI model, privately managed funds are making investment decisions, alongside a multiple of private capital, usually 4x-20x, invested alongside state funds.

The second apparent option lies in an Economically Targeted Initiative or ETI. This provides a means to leverage state trust funds such as retirement funds and endowments, for the secondary purpose of building a state venture industry. Texas currently maintains more than $200B in such funds, in which which tens of billions are already invested in venture funds but primarily in other states. All of these trust funds are currently empowered to make co-investments with leading venture funds into Texas companies, or give tie-breaker preference to Texas-based fund managers, but there is no systematic disclosure or promotion of this information. By spreading a notion of "Texas-first" to encourage ETI investment into Texas-based entrepreneurship, this overwhelming source of capital could be used to kick-start the Texan entrepreneurship ecosystem.

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