Vibhu Sharma and Bharat Kamdar could serve as poster guys for an evolving Houston economy. Based in one of the innumerable office parks that dot the seemingly endless, sprawling metropolis, their 11-year-old company designs sophisticated simulation software, used in training, safety and process management, for the petrochemical industry.
Ingenious Inc. is a marriage of Houston's traditional core, its global reach and the city's designs for a high-tech future. "We're an interesting blend of IT and energy," says Ingenious chairman and CEO Sharma.
The company boasts major clients in Russia, Mexico and Malaysia, as well as in the United States and the founders' native India. By 2008, Ingenious was "significantly" profitable, made Inc. magazine's list of America's fastest-growing companies and fended off takeover offers.
Ingenious, however, also reflects some of the vulnerabilities inherent in the Houston economy, which suffered when oil and gas prices collapsed globally with the 2008-2009 recession. Company revenue fell by more than half in 2009 and was flat last year. While Ingenious expects to regain lost sales this year, return to profitability and begin, once again, to investigate outside investors, it's been touch and go. "There were 40 to 50 peer companies in this city, and more than half bit the dust," Sharma says. "As bad as the dip was, we're happy just to be here."
Houston's many enthusiastic boosters like to boast how the city's recent recession was shorter and less severe than the rest of the country. They talk about the city's economic diversification and inevitably cite the world's biggest medical center complex, America's second-largest port and Johnson Space Center. They maintain that Houston learned from a past overdependence on oil, with severe boom and bust cycles that culminated in the collapse of the economy in the '80s, and avoided a real estate bubble in recent years because it understood the dangers of overbuilding after a disastrous construction spree a quarter century ago. They cite low housing costs and ease of living, world-class arts and an inclusive, welcoming atmosphere.
"There's more here than meets the eye," says Richard Buday, an architect and president of Archimage Inc., a Houston design studio, whose latest project is a series of health-related educational games developed in collaboration with the Baylor College of Medicine. "We're continually reinventing ourselves based on the next new thing." He's speaking of his own business, but he could be articulating a common motif: Houston is a city of impermanence and constant reinvigoration.
True, the region has made very real advances in nonenergy sectors, especially medicine and healthcare. Houston stands to gain dramatically in ports-related business when a new Panama Canal in 2014 enables much larger ships to sail from Asia.
For all of that, Houston's economic saga continues to revolve around and loop back to energy, past, present, future. Capital flows here primarily because of energy. M&A flourishes largely because of energy. Even many startups are based on energy. "In Houston, it's what makes us unique," says local entrepreneur Kirk Coburn. "It's something we're really, really good at."
Coburn is sitting in the offices of the Houston-based venture capital firm DFJ Mercury. He and four others, including DFJ Mercury managing director Blair Garrou, brainstorm around a small conference table. They are forming a for-profit incubator that will focus on what they term "efficient" energy-related startups. Due to open for business later this year, the incubator will seed companies with $25,000 to $30,000 and match them with local business executives. "You get the right mentors, companies will flourish," says Marc Nathan, vice president of strategy with Houston-based digital developers ChaiOne Inc.
He and the others believe that success is largely a question of getting startups to potential customers, so Houston should play to its strengths. "In the energy space, you have a maximum of 5,000 customers, and they're all here," Nathan says. "They're all in one city."
Coburn will head the incubator. A rare seventh-generation Texan, who has to date founded, built and sold three companies related to marketing, golf and broadcasting, he describes how his grandfather, who was in oil, dissuaded his father from the business because of concerns about the future. His father went into information technology instead. "Here I am, back 40 years later, following in their footsteps, going into energy and IT, because that's the future of Houston," he says.
At that conference table, both Coburn and Nathan discuss Houston's openness and its lingering wildcatter mentality. "We don't mind failure, and a dry hole is not the end of the world," says Nathan.
This forms part of the Houston chorus: Get out of our way. Leave us to our own devices. We'll flourish. "Houston epitomizes the renegade cowboy culture," says Aruna Viswanathan, chief underwriting officer with PE firm Clearspring Capital Group. "There's a ton of money driving around in pickups."
Part of this Houston ethos is probably myth, some of it motivational cheer. No matter. A healthy dose of confidence permeates business. People here are much more apt to talk about the tantalizing prospects of shale gas than troubles unleashed by the Deepwater Horizon well blowout and oil spill. "The people of Houston find a way to take whatever comes at them and be successful," says David Peterman, a Houston-based partner at Fulbright & Jaworski LLP. "They're a very resilient group."
This optimism is pervasive. Houston "has all the ingredients necessary to make a city great," says Bernard Harris Jr., the first African-American astronaut to walk in space. "I think this is the best city to live in, in the country, I really do."
A native Houstonian, a physician and a former private space-industry executive, Harris now heads a Houston-based medical-technology-related venture accelerator, Vesalius Ventures. Harris has formed a new company, Argent Technology Ventures, which is now attempting to raise a $125 million venture fund to source medical technology deals in Texas and Louisiana. "We are in a growth mode," he says of both his own operations and Houston as a whole. "We have a lot to offer."
Houston is America's fourth-largest city, with a population estimated at 2.26 million. The Houston metropolis, what is termed Greater Houston, which includes 10 counties and is also known as Houston-Sugar Land-Baytown, now tops 6 million. It expects to add a further 2.5 million people in the next quarter century. This rapidly growing metropolis is also becoming surprisingly cosmopolitan. One in five residents are now foreign-born. While Latinos account for most of those immigrants, the city's Asian and African communities also are large and robust.
"If you want to see what the U.S. will look like in 2050, look at Houston now," says Jeff Moseley, CEO of the Greater Houston Partnership, a combination chamber of commerce and economic development agency. Geographically, Houston isn't so much a city as a mass. "It's the blob that ate East Texas," quips Rice University sociologist Stephen Klineberg, who co-directs Rice's Kinder Institute for Urban Research.
No natural boundaries impede the spread. A series of concentric freeways rings Houston and transports commuters further and further away from the city center. Houston has metastasized into a series of what Klineberg terms "eight to 10 activity centers," large residential communities that are layered with major office, retail and commercial development. Drive from Sugar Land, a southern satellite city, to The Woodlands, a similar city to the north. Houston lies between. It takes two hours.
"It's an elastic city," says Klineberg, who has studied the region for more than 30 years and whose annual surveys are must reading in Houston. "Six hundred twenty square miles. Bigger than Chicago, Philly, Baltimore and Detroit put together. The metro region is larger than the state of Massachusetts."
It's also the least dense city in America. With this kind of car culture, it's easy to bypass and ignore some of its nagging problems. That includes pockets of festering poverty. Houston public schools are 90% minority and, by and large, woefully underperforming. While the city revels in its welcoming openness, and while well-educated immigrants talk of Houston as a kind of professional mecca, tens of thousands of poor, uneducated Hispanic immigrants speak a different language, finding economic prosperity and social assimilation elusive. "We have to find a way to accelerate integration," says Viswanathan. "It does occur, but it takes one or two generations."
Houston's 2009 recession was less severe than experienced in most other urban regions. It was a cakewalk compared with the punishment the city experienced a quarter century ago. But that doesn't mean it escaped unharmed, especially as natural gas prices fell by two-thirds and oil by one-half. Houstonians describe the twin shocks of Hurricane Ike slamming into Texas on Sept. 13 and Lehman Brothers Holdings Inc. filing for bankruptcy two days later. "It was like a light switch being turned off," says F.W. Luedde, a managing director of Houston investment bank GulfStar Group Inc. "On Friday, we had 72 engagements. And then everything stopped."
Houston didn't suffer this time from the kind of massive layoffs that took place in the '80s when one in seven jobs were lost. Many companies this time around were more prudent in cutting workers. But that doesn't mean it was painless. According to Patrick Jankowski, vice president of research for the Greater Houston Partnership, the Houston region shed 121,000 jobs. "There was a ton of shakeout," says Jacoby Garcia, who lost his job as a software manager in oil and gas.
Garcia is now a Houston-based vice president for Optimization Petroleum Technologies Inc., a Beijing-based software provider for oil and gas producers. He says most of his friends who also lost jobs have since found work in the area. Jankowski says the region regained more than 57,000 jobs and is on pace to add between 50,000 and 60,000 jobs this year. "I wouldn't be surprised if this time next year we have recovered all the jobs we lost in the recession," he says.
Much of that recovery is energy based. "Energy is hot again," says J. David Kirkland Jr., a Houston-based partner at Baker Botts LLP.
Houston has fared far better than most other major metropolitan areas. It boasts lower unemployment and greater opportunities than all but a few major American cities near its size -- Minneapolis-St. Paul, Baltimore, New Orleans and Dallas come in with better numbers. That economic prowess is something the city seems to take for granted. "I hear that unemployment is 8.4%, and I'm surprised it's that high," says Mac McConnell, senior vice president and CFO of DXP Enterprises Inc., a century-old Houston-based equipment distribution company. "We're not used to it."
While Houston is notorious for a lack of zoning and unfettered development, some recent efforts have focused on the urban core. Over the past decade, the downtown has been revitalized with ballparks and green spaces and the start of high-rise residences. Ambitious plans for a $3 billion light-rail system now in the city center aim to eventually link the near suburbs.
There are some Texas-sized economic activities that have nothing to do with energy. The Houston Medical Center is a massive state-of-the-art complex of 49 hospitals and medical facilities financed initially by '60s and '70s oil money. Combined, they employ close to 100,000 and vie with one another to construct multibillion-dollar additions. "It's bigger than downtown San Diego," says Klineberg.
If there is a nonenergy economic focus for both growth and technology, it's healthcare. Multiple public-private efforts are under way to commercialize some of the basic research that comes out of the center and use that as a springboard for new medical technologies.
Many talk of strides made over the past decade in getting a medical technology infrastructure in place, but they bemoan a lack of commercial success. Viswanathan says 35% of Clearspring Capital's deals are now medical-related but adds the region suffers from the lack of either a major pharmaceutical or a medical devices company.
While the number of Houston-based funds is growing, the city remains woefully underfunded when it comes to venture capital. "The innovation coming out of here is tremendous," says Harris. "We don't have the life sciences and venture capital firms to fund that innovation."
DFJ Mercury's Garrou traces this venture deficit back to the dot-com bust in 2001. In the late '90s, five venture funds opened offices in Houston, and angel investing ramped up. When the bubble burst, a lot of investments were wiped out. Garrou says that when DFJ Mercury began to raise its first $21 million fund in early 2005, "it was extremely difficult." A second $70 million fund, now 50% invested, was "a little easier, but still difficult. ... It's a difficult town to raise money not in pure energy or real estate." He says for most investors, it's "still a head-scratcher why a technology fund should be based in Houston."
Garrou says his VC shop has "commercialized four medical-center technologies" and seriously looks at three or four more each month.
Houston hasn't performed nearly as well in other economic realms. Successful consumer products companies are rare. The construction industry remains depressed. The city lost out after hometown hero Continental Airlines Inc. merged with United Airlines and decamped for Chicago.
Still, according to the Greater Houston Partnership, 49% of the Houston region's primary-sector economy is energy related. That's down from a staggering 87% in 1986. However, that percentage drop doesn't begin to tell the whole story.
To start with, the overall economy has grown tremendously in the past quarter century. Houston's gross regional product last year was $404 billion, almost double 10 years ago. Energy and its components constitute a much larger universe now than they did a quarter century back. That's reflected in the Houston economy itself. "Energy is writ large and multifarious," says Geoffrey Walker, a Houston-based partner at Andrews Kurth LLP. "As energy has grown, the definition has evolved and expanded."
Energy is technology-intensive. Sometimes it's difficult to determine where energy ends and technology begins. For Houston, energy encompasses everything from software to satellite communications. Thousands of smaller companies that service the industry stand in the shadow of Houston-centered oil and gas behemoths like ConocoPhillips Co., Marathon Oil Corp. and Exxon Mobil Corp., or engineering giants including Halliburton Co., Baker Hughes Inc. and KBR Inc.
Take Neohydro Corp. Dean Themy founded the wastewater technology treatment company in Utah in 2006, with an eye on Rocky Mountains-related shale gas and the hydraulic fracturing extraction process. When natural gas prices plummeted, Rockies-related gas production fell off the cliff as well. Themy traveled to Houston in 2008 and, he says, discovered that when it comes to energy-related services, "this is the center where all the decision making is made. We have to be here," he believes. "This is the Rome of oil and gas."
Revenue at Neohydro totaled $800,000 last year. Themy expects $2 million in revenue this year and predicts $20 million in revenue and $10 million in Ebitda in three years. "This is a great place to be if you're raising money," he says. "This is where you want to be if you want to exit."
Houston has more manufacturing jobs than any other city in America, and most are energy-related. Ditto supplies and distribution. DXP, for example, distributes pumps and other maintenance and repair equipment. While it doesn't consider itself an energy company, more than one-third of its business is energy-related, says McConnell.
"Energy isn't just exploration and production," says Kevin Lewis, a Houston-based partner at Vinson & Elkins LLP. "It runs the whole gamut: cleantech, alternative, pipelines, processing, refineries." Of Vinson & Elkins' 800 lawyers, 400 are involved in energy, Lewis says.
To witness the range of Houston's energy-related activity, just head southeast from downtown, past the new Reliant Park, the state-of-the-art football stadium that dwarfs the Astrodome next door. Further east, petrochemical refineries belch smoke and contribute mightily to Houston's dubious honor as the smoggiest city in America. But at the nearby port, tarps cover giant windmill blades, a testament that Texas is also the nation's leading producer of wind power.
To emphasize the obvious, energy is a worldwide endeavor. Yet Houston has managed to not only remain at the center of the sector, but to actually consolidate its hold on the global energy business. "Over time, Houston has become much more dominant in energy, even though it's not as much a part of the overall Houston economy," says Baker Botts' Kirkland.
Actual exploration and production could take place anywhere. But the brainpower is Houston-based. Moseley cites three-times-weekly charter flights from Houston to Luanda, Angola. In November, Continental Airlines will begin scheduled service from Houston to Lagos, Nigeria.
Energy-related transactions are more and more global as well. Marcia Backus heads Vinson & Elkins' energy practice. She describes recent work on three separate deals. One involved Korea National Oil Corp., another India's Reliance Industries Ltd. The third was the sale in December by Occidental Petroleum Corp. of its Argentina assets to China's China Petroleum & Chemical Corp. for $2.45 billion. These days, "every single deal on one side or the other is foreign," she says.
The sheer size of energy deal volume is staggering. According to the Houston-based research firm PLS Inc., global M&A in oil and gas totaled a record $211 billion last year, encompassing more than 850 transactions. For the first quarter of 2011, 174 transactions totaled $52.4 billion.
It's impossible to say just how many of these deals touched the Houston community, although it's a fair bet that Houston dealmakers -- especially its law firms -- were involved in most of the bigger ones. The city's deal-related infrastructure is geared up for such global activity. "Energy is a bigger piece of the deal economy in Houston than it is of the Houston economy as a whole," says Kirkland. "There's a lot of capital intensity. There's a lot of buying and selling."
Many law firms and investment banks have been bolstering their Houston-based presence. A number of private equity firms have set up shop in Houston to pursue energy-related deals. (See related article.)
Because energy is so capital-intensive, high-stakes deals seem commonplace in Houston. However, Houston's middle market is active as well. GulfStar Group, for example, is probably the biggest Houston-based investment bank, and it's firmly in the middle market, with transaction values between $25 million and $300 million. About two-thirds of its business is in energy power and infrastructure, says Luedde.
While Houston prides itself on its central role in the world's energy-related economy, capital is anything but homegrown. Houston lost most of its high-flying banks during the disastrous real estate boom of the '80s. Prosperity Bancshares Inc. stands as the largest Houston-based banking group. It ranks 86th nationally.
A lack of a local banking base isn't a problem, at least when it comes to energy, say those in the field. "Texas has always been a net importer of capital," says Luedde.
Big banks all have a large Houston presence; some such as Barclays plc and Morgan Stanley base energy lending in the city. Last month, Winston-Salem, N.C.-based BB&T Corp. announced it had hired a six-person, Houston-based team specifically for oil-and-gas-related lending. J.P. Morgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. all have their names attached to imposing buildings as well.
The demise of big local banks a quarter century ago is just part of a collective bad memory that seems to guide and caution Houstonians. A swaggering Houston was awash in oil money when oil prices collapsed in 1983. By 1987, one out of every seven jobs in Houston in 1982 had disappeared. Klineberg calls it "the worst regional recession since the Great Depression." Houston residents, at least those who were around at the time, recall those days vividly. "In 1985, there were 50,000 foreclosures," says Garcia. "I know. I was one of them."
The city took a good half-decade to bounce back. It began to make a conscious effort to diversify as it re-engineered energy-based activities. Timothy Unger, another Andrews Kurth partner, talks about the survival mentality in the mid-'80s. "The saying was 'stay alive to '85,'?" he says. "People did all kinds of other stuff. They didn't have a choice."
Even after the city regained its economic bearings and began to prosper once more, caution prevailed, especially in real estate. "Because so many investors were hurt so badly, it took a long time for that black eye to heal," says John Holland, executive managing director for South Texas and Louisiana for CB Richard Ellis Group Inc. From his company's offices high up Williams Tower, the tallest building in the glitzy Galleria section of Houston, Holland surveys downtown Houston and the Houston Medical Center to the east and then turns to point out several clusters of office buildings to the north. "I can't think of one subarea that's overbuilt."
Those down years made an indelible mark on Houston. A rogue company like Enron Corp. aside, Houstonians became more risk-averse, whether in real estate or energy, city denizens insist. Parents, they say, actively dissuaded their children from pursuing the kind of education that would lead to oil and gas. Now, as the older generation of energy-related workers reaches retirement age, a whole new technology-heavy, highly educated cadre is taking its place. Garcia says it's known in the business as "the great crew change."
This isn't your father's oil patch. For all sorts of reasons -- its physical location, climate (despite unbearably hot summers), a need for trained engineers, nurses and doctors -- Houston has proved a powerful magnet for immigrants, the latest wave of migratory growth. "Virtually all the growth during the oil boom years was Anglo, pouring into the city from all over the country," Klineberg says. "After the oil bust, the Anglo population stopped growing. All the growth the last 30 years has been non-Anglo growth. This biracial, southern city, dominated and controlled by white men, has become one of the most ethnically diverse cities in the nation."
Houston has become a far more international-looking city, especially since the lack of zoning makes a jumbled urban landscape all the easier to create and transform at will. West of the city, for example, the Masjid El-Farouq Islamic Center and nearby Dar-us-Salam Islamic Bookstore stand just around the corner from the ZZ Top International Fan Club, a tribute to Houston's most famous and long-lasting rock 'n' roll band.
Or drive a stretch of Hillcroft Avenue, in the southern part of the city. Strip malls stand as a paean to Indian consumerism: Bombay Sweets, Maharaja Jewelers, Patel Brothers Grocery Store, Laxmi Sarees. (Efforts by local merchants to change the street's name to Mahatma Gandhi Avenue were unsuccessful; they settled last year for Mahatma Gandhi District.)
"You think you are back in New Delhi," says Harish Jajoo, a retired Houston city engineer.
The regional workforce reflects this polyglot, says Gary Ilagan, a Houston-based immigration attorney. Ilagan serves a number of oil and gas clients who source their professionals from "all over the world -- Europe, Asia, Africa, Latin America. It is so diverse."
Ingenious employs about 50 people worldwide, says Kamdar, who serves as president. Its 25-person Houston operation includes employees from Vietnam, Colombia, Mexico, Syria and Venezuela. All, save three, are engineers, most with expertise in oil and gas.
Jajoo, Ilagan and Kamdar all live in Sugar Land, a graphic example of Greater Houston's evolution. It began life as a sugar plantation and refinery. Until the end of the '70s, Imperial Sugar Co. ruled Sugar Land as a company town. (It issued its own script until the '50s.) Developers built tree-filled master-planned communities beginning in the late '70s, which proved enticing to a population looking for safety, bigger expanses and a reasonable price tag. Unocal Corp., Fluor Corp. and Schlumberger Ltd. followed the populace and moved into the city in the '80s. Malls blossomed in the '90s.
The city now competes with the Galleria, The Woodlands and other satellite enclaves to attract major employers. Still highly oil and gas dependent, Sugar Land is attempting to diversify its corporate base as well, says Regina Morales, the city's director of economic development. Last September, financial counseling services Money Management International Inc. consolidated several offices around the country and moved 350 of its 1,500 workers nationwide into a Sugar Land building vacated (and eventually foreclosed on) after Chevron Corp. acquired Unocal. "It's made a huge difference," says Jean Law, Money Management's vice president of administration and compliance. "Turnover is practically down to zero."
Sugar Land is now an affluent city of 85,000. Some 35% are Asian, drawn to the stellar public school system. (Jajoo, a longtime resident, is running for city council. If he wins next month, he would become the second South Asian on the seven-person council.) So many doctors now live in the area that Sugar Land has emerged as a major satellite medical center. Imperial Sugar shut down its refinery in 2003. On that site, construction of a new minor-league baseball stadium has just begun.
Back at their offices, Ingenious' Kamdar and Sharma talk of their journey from Mumbai to Houston, how the two started in a 100-square-foot executive suite, how they attracted the interest of the U.S. government in their product, then other American companies, and how they had to expand internationally to stay in business. Now they've opened offices in Mumbai, Jakarta and Bahrain and have targeted the emerging markets' many energy giants. In the next room, they say, are representatives from a Russian company building an $8 billion refinery. "We operate from Houston," says Sharma. "We serve the globe."