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Development of Research Parks and Innovation Districts in Houston

On May 4, Houston Mayor Sylvester Turner stated his support for building a data science center. The next day, he endorsed plans for an Innovation District. How would these types of development promote entrepreneurship, innovation and economic growth in Houston?

The Basics

What are Research Parks, like the proposed data science center, and Innovation Districts?

Research Parks promote research, technological development and commercialization by creating a high density of universities and research institutions within a small area. By placing many innovative researchers and developers in close proximity, Research Parks encourage growth of new companies and collaboration across fields, driving technology-based economic development.

The Brookings Institution defines Innovation Districts as dense areas that bring together research institutions, high-growth firms and startups through thoughtfully designed and resource-rich commercial and residential spaces.

Research Parks and Innovation Districts slightly differ in their implementation, but both spaces aim to accomplish similar goals; they want to create physical hubs for innovation and entrepreneurial development. Typically, developers build Research Parks on new land, cultivating previously undeveloped space. Innovation Districts, however, use old land. This land was previously developed but is no longer in use.

Silicon Valley is a well-known Innovation District.

Both Research Parks and Innovation Districts are generative and can be helpful in stimulating local economies. Stanford Research Park in Palo Alto and Research Triangle Park in Raleigh-Durham are some of the most well-known examples in the United States. Research Triangle Park is the largest in the country and one of the largest in the world. Stanford Research Park played a key role in the creation of Silicon Valley.

Successful Innovation Districts include Kendall Square in Cambridge, Massachusetts, South Lake Union in Seattle and Over-the-Rhine in Cincinnati.

What Makes These Areas Special?

Research Parks and Innovation Districts are highly productive areas. Innovation leads to new ideas and job creation. According to the Association of University Research Parks, each job in a Research Park generates approximately 2.57 additional jobs. Thus, the more than 300,000 Research Park employees in the United States lead to 700,000 additional jobs.

Innovation Districts can also produce strong results. By placing many innovators in close proximity to one another, they facilitate collaborative interactions. As Innovation Districts vary greatly in size and productivity, an accurate estimate for job creation is unavailable.

Key Factors: The Capital Stack

Layered financial tools known as a “capital stack” are necessary to promote the development Research Parks and Innovation Districts. For a capital stack that attracts investors, an area must have access to multiple types of equity, incentives and debt to provide flexibility to developers and innovators.

Developers may be able to secure planning grants through the U.S. Economic Development Administration to create the Research Park or Innovation District. These are “designed to leverage existing regional assets and support the implementation of economic development strategies that advance new ideas and creative approaches to advance economic prosperity in distressed communities.” Even though Innovation Districts are built on previously developed land, the government still issues planning grants because they “advance new ideas and creative approaches to advance economic prosperity in distressed communities.”

Tax credit bonds are also common debt instruments. Instead of taking on loans, municipal governments sell bonds, which provide tax credits in lieu of interest payments. Some examples are Build America Bonds, Recovery Zone Economic Bonds and Clean Renewable Energy Bonds.

Equity is also an important necessity. Investment can be incentivized from a variety of sources, like New Market Tax Credits. These give tax credits to investors who make equity investments in Community Development Entities in developing and low-income communities. Housing and Urban Development community development grants and state or federal tax relief programs can also incentivize investment.

Key Factors: Social Factors

The final piece of the puzzle to create a Research Park or Innovation District is social organization. In order to facilitate collaboration and innovation, physical, intellectual and social resources need to be readily accessible.

Networking assets—“the relationships between actors—such as individuals, firms and institutions—that have the potential to generate, sharpen and accelerate the advancement of ideas”—are essential for the development of Innovation Districts. The lines of communication between developers, researchers and sources of funding must be open and easily accessible. This synergy is enhanced in Innovation Districts through the close proximity of ecosystem participants and access to shared meeting and collaboration spaces.

The Potential for Research Parks and Innovation Districts in Houston

Many cities have developed Innovation Districts in effort to grow local entrepreneurship and innovation. Turner’s announcement of the planned Innovation District earlier this month mentioned the 40,000 jobs created by Chicago’s efforts to spur innovation. Turner noted, “It is now time for us to be more competitive, to further diversify and expand our economy. What Chicago can do, Houston can do better.”

In 2015, the University of Texas bought 332 acres of land in southwest Houston with the hopes of developing it into a small Research Park. However, in March 2017, UT Chancellor William McRaven canceled the site’s plans for development. The Houston Chronicle cites timing and lack of transparency as the main causes for the cancellation.

However, there may still be potential for a Research Park in Houston. Mayor Turner also expressed support for the proposed data science center, urging the University of Houston to take the lead. The Chairman of the University of Houston Board of Regents, Tilman Fertitta, has spoken positively about this idea, mentioning excitement about the prospect of collaborating with Rice University, Texas Southern University, Texas A&M University and the University of Texas through the development of a data hub.

Bill Gropp, the acting director of the National Center for Supercomputing Applications, recently stated that there is far more demand for Research Parks than there is supply. It is clear that the development of a Research Park or Innovation District would stimulate the economy and create jobs. If Houston wants to take advantage of these opportunities, the time to act is now.

Keep Austin Entrepreneurial

Ranked number one for startup activity in the last two years by the Kauffman Foundation, Austin, Texas is one of the strongest emerging entrepreneurship ecosystems in the United States. Austin’s history of entrepreneurship and supportive government has facilitated Austin’s emergence as an entrepreneurial ecosystem.

Austin’s History of Entrepreneurship

During the 1970s and 1980s, Austin’s entrepreneurial ecosystem focused on computer and semiconductor manufacturing. Efforts by the Austin Chamber of Commerce, such as low mortgage rates for relocating staff and tax incentives, fueled the move of several major companies to Austin: IBM in 1967, Texas Instruments in 1969 and Motorola in 1974. A doubling in student attendance at the University of Texas in the early 1970s increased the educated workforce in the region.

The selection of Austin as the home of the Microelectronic Computer Corporation (MCC) in 1982 accelerated this concentration of high-tech companies. Facing fierce competition from Japan’s Fifth Generation Project, major U.S. companies banded together and created MCC, one of the largest computer research companies at the time. MCC chose Austin instead of Silicon Valley and Route 128 because the University of Texas offered MCC a subsidized lease and the Chamber of Commerce facilitated low-cost loans and reduced mortgage rates for staff moving to Austin.

Austin, Texas

Initially, the Austin ecosystem was primarily large businesses, such as IBM and Texas Instruments. This focus changed after the oil slump and savings and loan crises of the late 1980s and early 1990s crippled the Texas economy. Austin was not spared. It had one of the highest commercial real estate vacancy rates in the country and companies laid off large numbers of employees.

In response, the University of Texas formed the Austin Technology Incubator (ATI) in 1989 to jumpstart the local economy through high-tech startups with high-growth potential. In 1989, Greg Kozmetsky, the brain behind ATI, founded Austin’s first angel network, the Capital Network. These initiatives provided a foundation for growth during the 1990s dot-com boom. Austin companies such as Garden.com, an online gardening shop that raised $50 million in venture capital, and DrKoop.com, an “Internet-based consumer health-care network,” that was worth more than $1 billion, found success in Austin.

In 2000, thirty Austin venture capitalists invested over $2 billion in entrepreneurship ventures. The subsequent burst of the dot-com bubble in the early 2000s hurt Austin. After the 2001-2003 economic downturn, the region experienced major industrial restructuring and a renewal of entrepreneurship.

In 2003, the business community raised $11 million for Opportunity Austin, an economic development program. Opportunity Austin focused on recruiting new businesses, marketing Austin effectively and stimulating entrepreneurship and emerging technology sectors.

Less than five years after the last economic downturn, the Great Recession of 2008 set back many new Austin businesses. While venture capital and small business creation are not at the level they were during the dot-com boom, the rate of startup growth is currently 81.23 percent.

Entrepreneurship in Austin Now

Austin is experiencing yet another entrepreneurship boom. Austin now has the supportive policy structure, mentors and sector diversification required to finally establish a lasting ecosystem.

Austin’s cultural support of local businesses and responsive state and local government policies are fueling its start-up growth. The absence of state income tax incentivizes young professionals to work and settle in Texas. The local Austin government provides services for people considering starting a business such as BizAid Business Orientation and Small Business Program. The Entrepreneur Center of Austin and the Indus Entrepreneurs of Austin specifically provide support for start-ups. The University of Texas’ Herb Kelleher Center for Entrepreneurship, Growth and Renewal connects Austin entrepreneurs with resources.

As a result of Austin’s strong history of entrepreneurship, mentorship opportunities for nascent entrepreneurs are readily available. Austin companies, such as Dell, offer mentorship and accelerator programs. Entrepreneurial hubs, such as Tech Ranch Austin and Capital Factory, serve as an intersection between Austin incubators, accelerators, coworking spaces and also offer mentorship programs for entrepreneurs.

While known as “Silicon Hills,” Austin’s entrepreneurship economy is much more diversified than the computer chip and semiconductor industry that first enabled its growth. According to a 2015 Austin Technology Council report, approximately 14 percent of the $22.3 billion value of Austin’s tech companies came from semiconductors. Computer and peripheral equipment contributed 31 percent. Both Austin-born and transplanted companies focus on the bioscience, energy, clean-technology, water and IT/wireless industries. Austin has an extremely strong tech-focused entrepreneurship industry, but it also has successful media, education and social and craft/lifestyle ventures.

Venture Capital in Texas and Austin

Texas’ venture capital investment has decreased by 19 percent over the past ten years. To maintain a healthy entrepreneurship ecosystem, it is imperative that venture capital investment increases in the coming years.

Austin’s ecosystem lacks capital. In 2014, Austin saw 99 venture capital deals worth $739 million. In contrast, Silicon Valley saw 1,333 deals worth more than $27 billion. While there is no shortage of capital in Texas, there is a lack of capital access, information and government support. The majority of Texas capital is invested in oil, gas and real estate. These are considered by many to be less risky than entrepreneurship ventures. However, as oil prices fall, Texans should consider trying to raise growth and investing in entrepreneurial ventures.

Austin’s most prominent venture capital fund, Austin Ventures, closed in 2015. Phil Siegel and David Lack left to form Tritium Partners to provide capital for startups in Austin. Its first fund of $309 million is a fraction of the $900 million Austin Ventures raised at its peak. Silverton Partners and S3 Ventures have tried to fill the void left by Austin Ventures. However, none of these Austin venture capital funds have the capital or assets that Austin Ventures had.

Entrepreneurial Resources in Austin

Austin has a plethora of resources for entrepreneurs. The annual South by Southwest Festival provides networking opportunities. Companies are taking advantage of the 100,000 college students that graduate each year in the greater Austin area. The University of Texas at Austin boasts the Austin Technology Incubator under the IC² Institute, which has raised almost $700 million in investor capital to achieve this goal. Additionally, the Central Texas Angel Network provides capital and mentorship support for entrepreneurs in the Central Texas region.

What Starts in Austin, Changes the World

Austin’s entrepreneurial ecosystem is moving towards national recognition. Favor, a food delivery app, is an alumni of ATI and backed by Austin’s S3 Ventures and Silverton Partners. HomeAway, an Austin based online rental marketplace, was established in 2005 and acquired by Expedia for $3.9 billion in 2015. In the upcoming years, it is critical that capital investment continues to support new ventures such as Favor and HomeAway. Austin’s ecosystem has the policy, talent and mentorship to be successful, but private and public efforts must continue to ensure its success.