Dallas Startup Ecosystem Makes Major Strides In 2015

By Christy Torres • December 4, 2015

Dallas Startup Ecosystem Makes Major Strides In 2015

12/4/15 | Hanah Cho | Dallas Morning News

Dallas is a big business town. It has one of the highest concentration of Fortune 500 companies in the country. The region boasts a long lineage of entrepreneurs who found their fortune in oil and gas, real estate and semiconductors. And it has money — lots of it.

Today a new generation of innovators, young upstarts and others is trying to put North Texas on the map as a startup hub, rivaling other cities such as Austin, Miami and Boulder, Colo.

This year alone, the entrepreneurial ecosystem has exploded with activity — everything from a new local venture capital fund to attracting national attention to launching notable initiatives. To be sure, the Dallas-Fort Worth startup ecosystem has its shortcomings.

It’s missing a large, early-stage investor base. Some say Dallas lacks the sexy, consumer-facing startups that populate tech meccas like Silicon Valley, New York or Boston. And while being big is a point of pride in Texas, the sheer size of the region — all 9,200 square miles — can feel disjointed.

Still, you can’t shortchange the major strides that the community has made in the past year.

Consider the inaugural Dallas Startup Week in the spring that drew more than 2,500 people. Planning for next year’s free event started the moment the first one ended.

Or the launch of Emerge, a new seed accelerator program from Tech Wildcatters in a first-ever partnership with the Department of Homeland Security to develop wearable technology for first responders.

Or a public-private initiative in the city’s West End to use communications and data networks to turn Dallas into a “smart” city. The partnership continues the redevelopment of Dallas’ downtown business district, which has become a hub for North Texas startups. Numerous accelerators, startups and coworking spaces are located there.

Meanwhile, city leaders from Denton to Anna are backing tech initiatives with money. The Denton City Council, for instance, approved $220,000 this year to help launch an innovation district near downtown, which will include a coworking space.

“The best way to describe [2015] is a rolling snowball,” says Molly Cain, Tech Wildcatters’ executive director. “What I’ve seen happen is momentum in the entrepreneurial community.”

Trey Bowles, chief executive of the nonprofit Dallas Entrepreneur Center, describes the explosion of entrepreneurial activity in the region during the last year or so as a “rebirth of innovation,” coming several decades after entrepreneurs such as Ross Perot made their mark.

“There’s an emergence of innovation from people who were not part of that group,” Bowles said.

Craig Lewis, founder of Dallas-based Visage Payroll, echoed a similar sentiment: “It went from the cheerleading stage where everybody said Dallas could be a startup community to you’re starting to see valuable companies form and people are getting legitimate pieces of funding; maybe not massive rounds but strong rounds. What’s more interesting is a lot of us are building strong businesses, substantive businesses in comparison to the fly-by-nights you see in other ecosystems.”

After self-funding his startup, Lewis has raised $600,000 so far, with more than 80 percent of the money coming from Dallas investors.

Bowles and others will highlight the startup community’s accomplishments this year at the third annual State of Entrepreneurship hosted by the DEC on Dec. 9 at the Hilton Anatole. The Dallas Morning News is a financial sponsor of the DEC but is not involved in sponsorship of the event.

The event will showcase the region’s entrepreneurial support groups, funding and other resources by discussing the life cycle of an entrepreneur.

Rise of the angels

Despite the flurry of new events, programs and notable fundraising this year, the Dallas region is falling behind other metro areas, including Austin, Houston and San Antonio, when it comes to new entrepreneurs and businesses, according to this year’s Kauffman Foundation index of startup activity.

Dallas-Fort Worth-Arlington fell two spots to No. 15 this year among 40 major regions from a year ago, raising some ire among entrepreneurs, who argue the data has yet to catch up with the startup activity they’re seeing and experiencing here.

In the same vein, venture capital investment has not kept pace with some of the booming activity in North Texas, according to data from several sources.

For the last decade, Dallas has trailed Austin in venture capital investments. Through the third quarter of the year, venture capital firms committed $153.7 million in 29 North Texas startups, according to data from PitchBook. Meanwhile, Austin saw nearly six times the amount of venture capital dollars with $891 million in 109 deals during the same period.

In contrast, angel investors have become a strong force in Dallas. Angel investors, typically wealthy individuals who provide seed and early-stage capital, plowed $213.5 million into 35 startups in the first nine months of this year, according to PitchBook data. That’s nearly three times last year’s total angel investments of $73.4 million in 42 deals.

The region’s more than a dozen accelerators, too, are filling the VC funding void. Tech Wildcatters and its sister health care accelerator Health Wildcatters as well as retail technology accelerator RevTech are among the top five investors in the region, according to PitchBook.

“The biggest change over the last couple of years is that they’ve become a big filter for lots and lots of deals to get reviewed by a number of people,” said Joel Fontenot, managing partner at Dallas venture capital firm Trailblazer Capital, which sponsors RevTech and invests in Texas startups. “Those deals, once they’re in an accelerator class, they get capital first.”

Bettina Bennett, founder of user engagement platform Whichbox, says that while it’s becoming easier to raise seed money, “it is still a real challenge to find local follow-on capital for that first $1 million or plus to take those ideas to the next level.”

VC on the comeback

There are signs that venture capital could rebound in North Texas.

Dallas-based Hangar Ventures is raising money for a new $50 million fund to invest in tech startups. Irving-based Naya Ventures, which launched its first $50 million fund in 2013, has begun fundraising for a second one.

Other investors, such as private equity and family offices, are also showing interest in early-stage tech companies.

Hubert Zajicek, chief executive of Health Wildcatters, says he’s starting to see investors traditionally focused on oil and gas and real estate come around.

Recently, he met with a person representing a West Texas family that expressed interest in early-stage health startups to diversify its investments.

“This person didn’t know who we were or what an accelerator was or barely knew what an incubator was,” Zajicek said. “I had to explain everything to him and that’s fine. He didn’t play in this world. They’ve come to recognize health care is going to be one of the areas that will continue to represent significant growth.”

Health Wildcatters’ first two classes have collectively raised more than $12 million in funding after leaving the program, Zajicek said. Just a few weeks before pitch day in November, the accelerator’s third class met with some 20 health care venture capital firms.

‘Be the best Dallas’

While being a big startup ecosystem can be an asset, the region’s size also poses challenges because “a gap in one community is not necessarily a gap in the other,” said Hayden Blackburn, director of IDEA Works FW, an incubator in Fort Worth.

Downtown Dallas, for instance, has seen a recent emergence of code camps to educate developers but such programs are lacking in Fort Worth, Blackburn said.

“When we look at gaps in the ecosystem, it is not only about making sure we have the programs and resources available to entrepreneurs that need them to scale but also that the resources are located where more and more startups can access them efficiently,” Blackburn said.

Groups like IDEA Works FW, the DEC, Tech Wildcatters and others are working to fill in some of the missing pieces of the startup puzzle here. Earlier this year, Tech Wildcatters, for instance, launched the Corporate Innovation Network to connect the region’s big companies with startups.

Some two dozen coworking spaces have sprung up in recent years to create mini-entrepreneurial communities throughout the region. And major events like 1 Million Cups and the Big Dallas Open Coffee Clubs — essentially weekly meetings to pitch your startup and talk tech — are held in various cities throughout North Texas.

For all the efforts in recent years, the North Texas entrepreneurial community recently got a ringing endorsement from Dallas Mavericks owner and serial entrepreneur Mark Cuban.

Cuban, who has invested in several Dallas area startups through the ABC reality showShark Tank, described the region as “easily one of the best places for entrepreneurs to get started.” His comments came at the annual meeting of the North Texas Commission in the fall.

Is there anything missing in the Dallas startup community? “I think more exits would be great, but other than that, it’s fine,” Cuban said in an email, referring to scenarios in which startups go public or get acquired, reaping wealth for investors and founders.

So instead of comparing Dallas with Silicon Valley or any other city, entrepreneur Lewis put it best: “We don’t have to do it like other startup communities. We just need to be Dallas. There’s just one Dallas. Let’s just be the best Dallas we can be.”

Hanah Cho is a freelance writer who lives in Allen.