The Texas tech cluster

Why it might finally work this time

As y’all might know, I am from Texas. And it has long been a dream of mine to see Texas become one of America’s premier technology hubs. So I’m pretty happy to report that this might actually happen now.

Oracle has moved its headquarters from Redwood City to Austin. Elon Musk is moving to Texas after investing heavily in the state via both SpaceX and Tesla. HP is moving to Houston after investing heavily there for a while. A few venture capitalists and a number of smaller companies are making the move as well. Anecdotally, several of my friends in the VC/tech world are relocating from SF to Austin.

Texas has been trying to become the country’s technology hub for years. The state government is very pro-development (a “development state”, if you will, heh), and all the leaders know that the age of oil is ending and the economy must diversify. In fact, this effort dates back to the 70s, when the first oil bust hit Texas hard. That’s when a consultant named Pike Powers teamed up with a bunch of university, government, and industry leaders to try to lure big tech companies to Austin. If you want to read about how he did it, I recommend his essay “Building the Austin Technology Cluster: The Role of Government & Community Collaboration in the Human Capital”.

Basically, in addition to the usual mix of infrastructure, cheap land, and tax incentives, they tried to make Austin attractive to smart young people, by publicizing and promoting the city’s culture of weirdness, and fun. That culture, immortalized in the movie Slacker, was inevitably diluted by the new arrivals — such is the tradeoff of building a town into a big city. SXSW turned from a music festival into a startup fair; oh well. But a bit of that culture remains, and if you have a chance, I recommend spending some time in Austin.

Meanwhile, Houston is a VERY underrated city, and is changing fast; something I plan to write more about.

But anyway, despite attracting a lot of tech company offices and building up a robust workforce of engineers, Austin failed to become a startup hub on the level of Silicon Valley. My Bloomberg colleague Justin Fox has a great post from 2018 showing how Texas still lags its West Coast rivals in VC funding, startups, and some high-value segments of the tech industry like cloud computing.

But that could always change. Texas’ lack of state income OR capital gains taxes mean that startup founders stand to gain a lot of money from living there. Texas also has much cheaper housing — as of 2016, the rent per square foot of housing in Austin was less than 1/3 of what it is in San Francisco. And it’s not like California has great public transit to make up for that. Meanwhile, the political climate in SF and many nearby towns has become increasingly frosty toward tech companies, blaming them for bringing in workers that pushed up rents.

So, Texas.

Now the question is whether this Texodus will be enough to build Texas — or Austin, specifically — into a tech supercluster to rival the Bay Area or Seattle. To make a tech cluster, you basically need four things:

  1. A lot of engineers

  2. Some big tech companies

  3. Venture capital

  4. Startups

The key to clustering effects is that each one of these players gets something from the presence of each of the others. I made a little diagram in Microsoft Paint to illustrate this web of relationships:

Engineers are the most important, since they provide the workforce for big companies and they also start their own companies. Big companies employ tons of engineers, so you need them in the area. But of course you also need the VCs. For some reason, VCs are one of the most localized industries, preferring to be physically close to the companies they found. This is the piece that Pike Powers and the Austin boosters of the 70s and 80s largely missed. So that’s why it’s important that a trickle of VCs is now moving to Texas. For Austin (or Texas in general) to truly ascend to the top tier of clusters, it needs that trickle to become a flood.

The other piece of this is to make sure that Texas housing stays cheap. Here Texas has two big disadvantages — everyone likes single-family homes, and cities don’t like public transit. That will make density hard, maybe even harder than in SF.

But Texas also has a few big advantages. First, Texas cities really sprawl — Austin is 271 square miles compared to San Francisco’s 47, despite the fact that the two have roughly similar populations. Second, Texas cities tend to incorporate many more of their suburbs — the city of San Francisco only 18% of its metro area population, while Austin has more than 43% and Houston has 33%. That lets Texas cities avoid some of the toxic local politics of the Bay Area, where fragmentation of city governments creates a coordination problem where each little town wants to keep out the poor people by not building housing. Texas also has no Prop 13, and less restrictive zoning codes.

So there’s a chance that Texas might be able to keep rents reasonable even with an influx of tech workers. If it can do those two things — lure in venture capital firms, while continuing to keep land cheap — Texas has a real shot at stealing a chunk of the tech industry from California. And if San Francisco and other Bay Area cities find themselves with less tax revenue when tech companies start to move out — well, that’s the choice they made! That’s why we have states in the first place.

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