Russ: I’m Russ Capper and this is The BusinessMakers Show, brought to you by Comcast Business, built for business. And coming to you today from Digital Leader Series No. 9, where we bring in a very special guest to be interviewed in front of a very special live audience of digital leaders. I’m very pleased to have as my guest today, the co-founder and managing partner of Mercury Fund, Blair Garrou. Blair, welcome to the show.
Blair: Thanks Russ.
Russ: So here you are, co-founder and managing partner of Mercury Fund. Tell us about Mercury Fund.
Blair: Sure. So, as many of you probably know, Mercury Fund is a venture capital firm. We make about a quarter billion under management, and we make investments in entrepreneurs and innovation that originate in the middle of the US. So, think about us about making investments everywhere but the East and the West Coast. And so, over the last 12 years since our fund has been in existence, we’ve continued to refine our investment strategy. And so what we’re really focused on are thematic investments, and I’ll talk about that in a minute, where the themes overlap the problems that the energy ecosystems in the middle of the country are having. So, think about energy, think about industrial manufacturing, think about consumer package goods, retail. And we try to apply all the innovation going on in SAS computing, Cloud computing big data, and apply to those problems that a lot of the companies that drive the engine of the US are having today.
Russ: That’s a broad spectrum set of categories there. How in the world do you address all of those? I mean, how many partners do you have, how big a staff?
Blair: Yeah, so there’s five partners, we have five additional staff, and over the last decade we’ve spent a lot of time building out relationships in various states. So, we’re as well-known in Michigan, or in Ohio, as we are here in Texas. And a lot of people think we just put money to work here in Houston, but we put money to work in Houston, Austin, but really all across the middle of the US. And then we categorize everything, each partner kind of manages a theme. So, if you remember my partner Adrian Fortino who you interviewed, he manages our theme around intelligent manufacturing. So, how IoT is being brought into the industrial setting to create industrial IoT opportunities. You know, the theme I manage is all around retail and brand platforms for improved consumer targeting. So, all of the stuff that’s kind of icky out there around tracking you all, and all of the things you do, that’s the stuff I invest in.
Russ: Ok, cool. Alright, so, but how do you decide? I mean, in your category that you specialize in, I mean, do you just get carte blanche; if you want to do something, you do it? Or do you bring it back to the partners?
Blair: No, no, I wish. For those of you who know my other partner, Dan Watkins, there’s no carte blanche with Dan Watkins. So, very intelligent guy, like a lot of you, so we’re all, it’s always like metal on metal, sword on sword. We have to challenge each other to bring these deals forward, but all of the deals, what binds all of them is this idea that software, cloud computing, ubiquitous computing is changing everything. So, with that as its base, I don’t think people doubt our expertise as the subject experts say in food and beverage, or retail, but what we challenge each other on is what’s the competition for this opportunity, talk more about the machine learning or the data science that I’ll go into in a little bit. So, it’s tough to get a deal through our partnership.
Russ: Ok. How often does a leader in a category get turned down by the rest of the partners?
Blair: You mean as far as, say me, that wants to do a food and beverage deal (Russ: Ok)? You know, I’ve learned, working with my partners long enough, not to bring deals up that will get turned down. So I probably have a pretty high hit rate, but it’s from all the scar tissue that I’ve developed over the years. Our younger partners, those of you who know Aziz Gilani, he’ll turn a lot of things up, and it’s probably 50/50, but what we’ve learned, much like entrepreneurs, when you’re an entrepreneur and you approach a venture capitalist, you don’t want to be the first time you approach a VC when you need money. You want to approach them early, talk about the deal, kind of socialize it. We do the same thing in our partnership. So, we may talk about a deal for six months before one of us says, “I’d like for use to make a commitment in this company. What questions do you guys need answered for that to happen?”
Russ: That brings back memories when I was raising money. It took forever to do it, and the number of calls was just exhausting, always. I mean, do you ever have people in the middle of all that end up going with another VC?
Blair: You know it happens rarely. Unfortunately, there’s not a lot of venture capital in the middle of the country, which is one of the reasons why we invest here. And we tend not to compete for term sheets, but mostly it’s because we’re in these specialized industries where we believe we have some expertise. So, when we meet that entrepreneur, we’re selling ourselves as much as the entrepreneur is selling us. So, mostly the entrepreneurs that we back, they tend not to go through those long fundraising cycles; it’s just kind of worked out that way.
Russ: Ok. So many of the categories that you talk about, you know if you step back and really take a look at it, you know, you’re kind of talking about disruption. We used to talk about disintermediation, now it’s disruption. But there’s some serious disruption happening these days; would you agree?
Blair: There is, and I think people think of disruption more from the standpoint of how it effects the consumer, like, Uber; the perfect example. Like startups love to talk about themselves of being the Uber of this and the Uber of that. It’s challenging because you don’t see a lot of disruptive startups in the middle of the country. And what we’ve tried to do are find those that will disrupt industrial engineering or agriculture, to name a few.
Russ: Talk about agriculture, though, because you and I had a little discussion about that before and it’s fascinating what’s happening there.
Blair: Yeah, it really is. We invested in a company out of St. Louis called Benson Hill Biosystems. They were a spin out of a place called the Danforth Plant Sciences Center, probably the number one research center for Ag in the US. And what they came up with was a cloud based system to predict crop traits and yields, only using software. So, if you think about Monsanto and Syngenta, they kind of own that seed market, but there’s all of these seed breeders out there, probably 2-300 in the US that if they had the tools, they could compete more on a 1-1 basis. And so this is a cloud based system where they can use all the technology around gene sequencing and ubiquitous computing to run all the mathematical models needed, so that a breeder can tell whether or not a trait will exist in a seed without putting it into the ground. Totally cool stuff.
Russ: Ok, and this is a portfolio company.
Blair: Yeah, this is a portfolio company.
Russ: How long have you been in with them?
Blair: So, we’ve been in this deal for about a year and a half, and about 6 months ago they coined this term, ‘cloud biology,’ which was essentially the biology, really, around anything that’s driven by the cloud. You know, people talk about artificial intelligence, and stem cells and all these types of activities that happen in the lab, I think what people really need to take a close look at is what’s happening kind of behind the curtain in the cloud, because I think that’s where all the innovation is really being driven from.
Russ: Wow. So, ok move over just to IoT and specifically, kind of the conversation I had with Adrian. I mean, IoT has got a lot of subcategories to it now and he’s primarily in the manufacturing category, right? What have you done there?
Blair: He is, and so we have an investment in an industrial IoT company called Cite Machine, and Cite Machine was based out of Ann Arbor; a number of ex-auto executives started the company, and then we put an office in San Francisco to bring data science talent from places like Twitter and Facebook. What they do is they are a cloud platform that goes into a manufacturing plant, and so one of our largest customers is Chrysler. So, we’re in a Chrysler plant and we take all the sensor and all the data coming off of all the machines in the plant; we’ve done that for a long time. We pull it into the cloud, and then we run algorithms over that in order express to all the workers what’s going to happen, not currently, but in the future. We also do this for the largest footwear manufacturer in the world.
Just to put some things in context, a $100,000 proof of concept when we went in to do one plant, it ended up being a tens of millions of dollar deal because of our ability to predict meantime to failure, any type of temperature type of readings, anything you can imagine. So, if you think of manufacturing plants getting this type of intelligence, a lot of people say, well what does that mean for, kind of, Joe Worker? Are there jobs being displaced? I actually think not. I think what this means is, you’re going to see a lot more manufacturing plants being built efficiently here in the states. That’s going to drive a lot of jobs and you’re going to see a lot more manufacturing coming back here to the US, especially with some of the balance you see with the US dollar and other currencies.
Russ: Ok, I’ve heard the converse of that a lot, too. People start saying, what are the workers going to do now? I mean, there’s so much disruption with AI and with IOT, and all of these things in all categories. I mean, do you hear that often? But you don’t believe it, right?
Blair: Well, we do, you know I think there’s a balance, right? I think people need to be re-trained, I think there’s new skills to have, but you know it’s less about what’s being done in predictive analytics, which is that IoT deal, kind of what they call it. And there’s similar types of opportunities in energy, but I don’t know. How many of you are familiar with Bitcoin? Everyone’s heard of bitcoin? So how many of you are familiar with blockchain? Blockchain is the underpinning for which bitcoin was created, right? And blockchain is essentially, think of an open QuickBooks, where everyone is on the same accounting system in the world. So when a transaction occurs in one place, everyone else knows and there’s no need to recreate the ledger for that to happen. Well this blockchain technology is now being used by financial institutions all over the world to figure out how to make transactions more efficient.
And not to get too techie, but when you layer blockchain on top of blockchain, you then can replace standard contracts; you can replace a lot of things that all of us that are in middle management do on a day to day basis. So I worry more about blockchain and that activity. They’re talking about in ten years, companies will be run on blockchain, and the only individuals you’ll need will either be subject matter experts, or part time workers that need to come in and settle a dispute that’s not a 1 or a 0, and not contractual. And so everyone’s kind of focused on the AI and the cloud, and making manufacturing plants run more efficiently. I’m worried about the board coming in and taking over these companies, where you don’t need anybody. I mean this is unfortunately I think the way we’re headed.
Russ: Explain that more. I don’t understand when you said you don’t need anybody.
Blair: You don’t need anybody.
Russ: Ok, well describe a business. I mean, is that where Bezos is taking us with Amazon? I mean, is that an example of that?
Blair: Well, kind of. But this is different. So think of one financial institution that has just a myriad of accountants and bankers and others to clear transactions. Well that financial institution then may clear another transaction with another financial institution. Well, someone eventually has to email or pick up a phone, or basically cross reference an accounting system, because all of those accounting systems aren’t combined. If it’s all one system, then you don’t need people to verify. There’s so much duplication in all the efforts we do in these companies, and so I think of technologies like that as being a little worrisome. It’s less about giving over control, but I just wonder, what do we do all day, right?
Russ: We’re worried now about NAFTA and losing a few jobs there. That’s nothing compared to this.
Blair: No, that’s nothing. So when I look at a lot of these artificial intelligence technologies that make manufacturing plants run better, that make real estate firms run more smoothly, to me that just drives efficiencies to build more business and keep more business here in the states.
Russ: Ok, ok. Tell us about Label Insight.
Blair: Sure. So another area we focus on are CPG brands and retail. There’s one of our companies that’s built a big data asset around taking all of the ingredient and marketing claims off of food labels. And there’s lots of companies out there that have these databases, but this company, Label Insight, did it purposefully around big data. And so now, their data is not only being used, say, by vendors who need to onboard into a Target or a Meijer more efficiently, it’s now being looked at by appliance manufacturers who want to build a smart kitchen. And so they’re talking to a major appliance manufacturer where within two years, you will be able to buy a microwave and a fridge that talk to one another, and there will be certain products you put in your fridge that will automatically have their barcode or their QR code scanned, and so when you take that product out and you put it in the oven, the oven will already know what to preheat it to and how long to heat it.
Major, major issue with like, tv dinners, and other types of things that people cook. The problem with that is it’s only as good as the database behind the actual product label in the food. So this appliance manufacturer came to us and said, hey we really want to do this.
Blair: My other great example is there’s been a number of startups that’s approached us, and how many of you are familiar with Pokemon Go? Right. I don’t know if any of you play it, but a lot of our kids probably play it. The whole thing about Pokemon Go is it is augmented reality. Where I can hold up my smartphone and I can see things superimposed on the reality that we know. Well with this Label Insight database, you can walk into a grocery store, say a Target; you can basically put in all of your food allergies, and it will light up all of those products that are ok for you and your family. I mean, that’s the kind of future we’re talking about, but it can only be done with these databases and a lot of AI work.
Russ: Wow, ok. So, if we have any millennials in the audience, we’ll tell you what a tv dinner is after the interview.
Blair: I think we’re ok there.
Russ: Ok, what about TrendKite? Tell us about TrendKite.
Blair: Yeah, so there’s an Austin based company that we invested in called TrendKite, and they’re trying to disrupt the entire PR industry. So, we use a PR firm, a lot of our companies do, but PR is one of those intangible things that’s really hard to figure out return on investment. So what this company did was, they scraped the web for all mentions about brands, and then they go to brands and they say, we’ll aggregate all your media mentions and give you really nice visualizations, and we’ll actually calculate ROI on your media spend. So when you have a campaign you can actually look and see what the differences are. But the big opportunity there is to make PR programmatic, meaning, with a scrape all of the news mentions, they know who wrote the article, what the web activity was, what your website activity was, so they then can predict what articles for you to write, who should write them, what publication to put them in, what timing to do.
And if you do a lot of that, you can really bring your PR spin down, bring more of that in house, and have a more effective marketing campaign.
Russ: And these guys are in business today?
Blair: These guys are in business today. They’re the fastest growing company in our portfolio, fastest growing SAS software company in Austin; just a terrific company.
Russ: Ok, one more; Coupon Media.
Blair: So Coupon Media, so how many of you shop at convenience stores? Alright, here we go. Big Gulp or hot dog? (Audience: Absolutely, hot dog all the way.) So, Coupon Media is a platform in the cloud that essentially provides coupons and loyalty as a backend to a retailers app. So, 7-Eleven’s app, Cumberland Farms, Speedway, probably 40-50% of the c-stores that you go in, if you download their app and they send you coupons, it’s coming from Coupon Media. Well, the reason this is interesting from a data science perspective, is most of those convenience stores want to track you. They want to track you because they want us to send a coupon to you when you’re going by their store or going by someone else’s store. So, we can tell how many times you stop off, you fill up your car, when you come in, that market basket of what are you actually buying; is it a Pepsi product, is it a Coke product, are you buying beer, are you buying cigarettes?
Then we can basically, if you’re pulling into a 7-Eleven, and Cumberland Farms, which is a NorthEast group that wants you to move away, they may just flood your inbox with coupons, so you kind of go that next step. But the interesting factor though is when they track the data, it’s all anonymized. So it’s less about Ricky here, or Karen, it’s more about the demographic of Ricky or Karen and what they buy, so they can start hopefully putting better things in front of you. But this whole tracking mechanism that’s going on between Facebook, all these mobile apps, you name it, it’s going to make things a lot different in the next 2-3 years.
Russ: Ok, very interesting. I can’t help but be impressed with the breadth of what you guys work on. And I remember, I know quite a few entrepreneurs who, at some point in their life, they decided, I want to be in your business, in the venture business. I’ve not been one, though. I just can’t imagine what the incoming, I mean you have three constituents that are all demanding. You have people trying to raise money, which you must be inundated, there’s probably 20 people that are going to try to stop you before you leave today.
Blair: There were 20 that stopped me before I got on the mic.
Russ: Ok, and then you have portfolio companies that you have to worry about, and then you have investors. But what’s the incoming like now from people with ideas? I mean, is it overwhelming?
Blair: It is. You know, sometimes we average as much as 100-150 new ideas a week coming in from a trusted resource, meaning we have to respond. Many of you in the audience have sent deals my way, and because I have a relationship with you, I want to let you know why or why not it’s a good fit. And we then just have dozens and dozens and dozens a day coming in through email. And so the adage in VC is, you don’t cold call the VC, because we have so many other opportunities to go with someone that we know. So it is just constant. The hard thing, right, I’m 44, I use a lot of technology but I am not a millennial. The hard thing is I get pitched in Twitter, and LinkedIn. I don’t use Facebook anymore because I just got inundated, and like someone would pitch me in Facebook and I would try to respond, and then my mother would pipe in and I was just like, alright, we’ve gotta remove all this.
And I didn’t have enough time in my day to set up all the roadblocks for all your different constituencies. So, I’m old school; pitch me by email, or you know, come in, kind of the front door.
Russ: It seems like though that even though it’s awfully challenging, that you’re still pretty passionate about it and love what you’re doing, is that right?
Blair: Oh I love it. You know, I met an individual here that asked me what do you do with your free time? It’s this. I’m passionate about entrepreneurs, I love teaching, giving back all the scar tissue I’ve learned over the last 15-20 years. It’s a lot of fun.
Russ: Well, Blair I really appreciate you spending some time with us today, too.
Blair: Thank you, Russ. It’s been a pleasure.
Russ: You bet. And that wraps up my discussion with Blair Garrou, the co-founder and managing partner of Mercury Fund. And this is The BusinessMakers Show.
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