Even small business is bigger in Texas

  @FortuneMagazine May 22, 2013: 8:56 AM ET
inner city texas
NEW YORK (Fortune)

When you think of Texas businesses, large corporations like Exxon Mobil (XOM, Fortune 500), Dell (DELL, Fortune 500), and Texas Instruments (TXN, Fortune 500) are generally the first that come to mind. But over the past few years, from the inner cities to out-on-the-range, smaller firms have been stirring the Lone Star State economy.

As more entrepreneurs flock to the state, experts are pointing to a combination of growth-friendly conditions that have small businesses growing in, and messing with, Texas.

According to U.S. Census results for July 2011 to July 2012, Texas had the top two largest growing metro areas (Dallas and Houston) and three (Midland, Odessa, and Austin) of the top 10 fastest growing Metro areas in the country. This swell in population corresponds to a matching surge in small business friendliness, according to a recent survey by online contracting service Thumbtack.com, conducted in partnership with the Ewing Marion Kauffman Foundation. Not only is Texas listed as one of the five friendliest states for small business, but Austin, Houston, and San Antonio are included among the top five cities.

Similarly, Texas' representation in the 2013 Inner City 100, an annual ranking of the fastest growing urban businesses in the U.S., is larger this year than at any other point in the program's 15-year history. "If you look at the 11 companies on our list from Texas, you can almost track that to the growth industries," says Mary Kay Leonard, the president and CEO the Boston-based Initiative for a Competitive Inner City (ICIC), which annually amasses the collection of dynamically performing urban firms. "They're a great case study about how a regional or state economy can actually be leveraged by, and for, inner city firms."

A friendly Texan welcome

"I would say, without question, Texas is the best large state in which to do business in general, and for small businesses, in particular," says Tom Castro. A managing director of New York-based IMB Development Corporation, Castro has owned businesses in both California and Texas over the past 25 years, and moved from Los Angeles to Houston 14 years ago, with the state's prime business conditions --including its lack of state income tax, few land-use restrictions, and low costs -- being a big reason why.

According to Castro, Texas's nonexistent income tax is an especially valuable tool in recruiting outside talent to the state. "I would show them in black and white, if they were making $100,000 or $80,000, just by moving to Texas at the same salary, they could put 15%, sometimes 20% more in their pockets," he says.

And as industries like biomedicine and social media pick up steam in Texas, startups can attract top talent using that benefit. "Human capital is at an all-time high in demand," says Nina Vaca, the founder and CEO of Pinnacle Technical Resources, a Dallas-based, IT-focused staffing firm for the Fortune 500. "If you're in IT and you're good, you have a choice of where you can go," says the former Inner City 100 winner.

For example, San Antonio-based InGenesis, which was ranked fourth on this year's Inner City 100, staffs for the healthcare industry and recorded $57.5 million in revenue for 2011, the year for which the 2013 winners were studied.

Of course, large corporations certainly take advantage of this tax benefit, as have Dallas-area giants like AT&T (T, Fortune 500), and Houston-based energy firms like ConocoPhillip (COP, Fortune 500)s.

Texas' population growth has certainly aided small business success. According to the census, the state's population swelled 3.6%, or nearly 900,000 people, from 2010 to 2012. To match this growth, home construction has kept pace through the recession and slow recovery, allowing a variety of industries to flourish. Aspenmark Roofing & Solar, a Dallas-based provider of commercial and residential solar arrays, didn't stall during the housing industry's rough patch. Instead, the ninth listed firm on this year's Inner City 100 brought in $6.5 million in revenue in 2011.

The growth has been fueled by domestic migration to major hubs like Dallas and Houston, as well as international migration of middle and upper-class Mexicans looking to start anew in the U.S. According to the Center on Budget and Policy Priorities, international migration accounted for 17.7% of Texas' population boom from 2010 to 2011. In particular, the immigrant population is a valuable demographic for entrepreneurship because, according to research by the Kauffman Foundation, foreign-born citizens were nearly twice as likely as native-born people to start businesses in 2012.

Small business, big challenges

Through the years, successful Inner City 100 companies have sprung up alongside what ICIC's Leonard calls "anchor institutions." "Anchors are located in or near inner-cities, and make a conscious outreach to do more business with local suppliers," she says. These large entities can range from universities to factories. One Texan example is Houston's MD Anderson Cancer Center. In particular, the University of Texas treatment and research center has focused on diversifying its supply chain with local, minority-led businesses, says Leonard. "It's good for MD Anderson's business, and it's also good for the small businesses."

In urban environments, where roads and bridges are -- ideally -- well-maintained, it's easier for anchors and small businesses to connect. But across the entire state, it's not so simple. Castro points to Texas' shale oil development at the Eagle Ford formation. Creating a massive amount of jobs and attracting billions of investment from around the world, more than any other industry, this literally fuels Texas' economy.

"It's not just the people who work on the oil rigs, but the truck drivers and people who work in manufacturing and logistics for all of the inputs that go into developing an oil field, pipelines, and other infrastructure to move the oil and gas out of that field to industrial facilities and processing plants," he says. And on 2013's Inner City 100, that translates to at least four Texas firms, including Houston-based Pipe Wrap, an oil industry repair solutions provider, and Dallas-based XTra 21 Express Trucking, which transports construction and heavy machinery.

But to support the oil industry, companies like these are putting big rigs on rural roads that were meant for lower, lighter traffic. "Because you have all this equipment being moved into these rural areas for the oil and gas drilling, they are getting 20 or 100 times as much use today as they were five to seven years ago," says Castro. And because of the lack of revenue generated by things like income tax, roads like these are suffering. "Texas will have to invest more in infrastructure to keep up with the growth," Castro adds.

The lax posture can cause problems that stretch beyond Texas' roads, as evidenced by the April 17 fertilizer plant explosion in West, Texas. A spotty inspection history has authorities still piecing together who or what is to blame in the tragedy, but if a lack of enforcement or regulations are ultimately to blame, it could be a heartbreaking reminder of ways that hands-off government can have a harmful impact on small businesses, communities, and families.

"The state government probably has too few people making sure that facilities, like the one that exploded, have safety standards that will protect the population," says Castro. "It all translates into a cheaper cost of business, and at some point that catches up with you." To top of page



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