Russ: Hi, I’m Russ Capper and this is The BusinessMakers Show. Our topic today, once again, is building Houston into a real innovation ecosystem. And I’m very pleased to have as my guest, Guillermo Borda, the Managing Director of the fund of funds. Guillermo, welcome to The BusinessMakers.
Guillermo: Delighted to be here, Russ.
Russ: You bet. So, we’ve focused a lot of Houston Exponential, and you always kept coming up in those interviews, but share your perspective of how all this started and evolved to where it is today.
Guillermo: Absolutely. I think let’s go to the beginning here, because Houston Exponential is a culmination of the leadership of, really, all the interested parties in innovation and making Houston more innovative and highly successful on a global scale in innovation rankings. But let’s start at the beginning. The Greater Houston Partnership, the Mayor’s Office, the Houston Technology Center, all of the interested parties asked Accenture to do a strategic review of the innovation status in the city. Accenture did an awesome job at interviewing a lot of people, going through a lot of processes, analysis, and they came up with over forty recommendations.
As the process continued, they were asked to narrow it down to ten, and they did so. Out of those ten, they were asked which two out of those ten are the most critical ones to implement right away, and they said, number one is the formation of an innovation strategy office that would be truly the innovation center for the city in coordinating all of the efforts across all the various entities. Number two is the formation of a fund of funds that would invest in venture capital funds, primarily outside of Houston with the intent of brining those venture capitalists to Houston to invest in as many Houston based companies as possible.
Russ: Ok, which addresses the critical review that Houston has always gotten that there’s not enough venture capital here today to really get an ecosystem going, right?
Guillermo: Yes, but we’re about to change that and we’re going to do it with a model that has been highly successful. Specifically, just to give you some perspective, Chris Rizik, who I credit as being the founder of the corporate fund of funds concept in the United States, started a very similar concept in Michigan about ten years ago. It’s called Renaissance Venture Fund. I just returned from Michigan, and Chris and his team were having their annual meeting, and they announced that they had started with a 45-million-dollar fund, which then raised a second one of 79 (million), and are just about to close on their third fund.
They have just crossed the billion-dollar impact, which means that with that level of capital they were able to attract venture capital investment from other parts of the country into Michigan. Because what was occurring, there was great innovation occurring in Michigan but it was leaving the state, so this model that Chris and his team very successfully have implemented, has changed that dynamic completely. Today, you have a lot of investors from both coasts and other places in the country like Austin, going to Michigan and finding some great companies to invest in.
Russ: And that’s what we hope will replicate.
Guillermo: Exactly, and in our fund of funds, Chris Rizik is going to be a member in the investment committee, which is wonderful for us. He is fully committed to this. He came to Houston earlier this year, met with the Mayor, with the Greater Houston Partnership, with all the various parties; Houston Technology Center, etc.; prepped the way very well and then has agreed to join our investment committee. And even more than that really to open source his model fully for the implementation.
Russ: Wow, that’s impressive.
Guillermo: That combined with my own experience in fund of funds and the support of all the parties around this effort will make our effort very successful.
Russ: That’s impressive. I saw Chris when he was in town, his success is unbelievable. But just so everybody understands the way it works is that your first mission as managing director of this fund of funds is to raise funds into it up to about 50 million dollars, right?
Guillermo: That’s right.
Russ: Not to be invested in companies, but to be invested in venture capital firms and maybe none in Texas, is that right?
Guillermo: Yes. So, let me be completely clear about that. So, the goal, number one, of the fund would be to generate a very competitive, risk adjusted, compelling return for our limited partners. We could start in Houston with a much larger fund just because of the size of the city, however, we want to build this platform of a fund of funds in a thoughtful way and in the proper pace. And so, Chris and I believe that that 50-million-dollar amount is the right number to start with. We will be inviting various Houston based corporations, endowments, perhaps some public pension funds, family offices and other institutional type investors to participate in this fund as limited partners.
Then, we are going to aggregate that capital, it will be about 50 million dollars. We will go with Chris, and through our network with various venture capital firms, primarily in Austin, in San Francisco, in Boston, other locations that are known for those bases, and make a limited partner investment in their funds. Very specifically, the way it will work is we will have a day one discussion with them, which means, tell me what you’re going to do for Houston? And say, at a minimum, we need you to come to Houston three or four times a year and participate in some conferences and panels. But importantly, when you come to Houston, we are going to align many companies in your particular sector and have you meet with them and create that dialogue. The intent, of course, is to help those companies get access to some of the best venture capital minds in the country, it’s really inviting them to look at what’s here.
Russ: Now do they look at both, you know, the startup possibilities as well as the companies that invested in them and those relationships in both of those categories?
Guillermo: Yes, This is the model that Chris and his team at Renaissance Venture in Michigan implemented very successfully. A question that has come up, and that may be in a lot of people’s minds is, how can you be sure that that capital is going to end up in the hands of Houston based companies? And the answer is we cannot be sure, because if you have a very strict requirement that these venture capital firms have to invest in Houston, you run into an adverse selection problem.
You have to trust them that they will select the best companies to generate the best returns and meet the objectives of their particular funds. All you can do is to invite them to participate, to make it very efficient, to make it exciting to be here through a variety of other ways, including the connection with the core limited partners of the fund of funds, but also with distinguished speakers in many fields. Whatever it may be to make it very worthwhile that when they are in Houston they feel, wow, this is impressive, we’re going to spend more time here, we’re going to invest more capital, which is exactly what happened in Michigan.
Russ: Wow. So, it’s really kind of like a symbiotic ecosystem without strict terms and conditions of what they have to do once the fund of funds invests in the venture capital firm.
Guillermo: Yes, you may actually run into a situation where we make a limited partnership investment in a venture capital firm, say in San Francisco, and that fund does not end up investing in Houston. That may occur, and that has occurred at Renaissance, however that’s the exception.
Russ: I mean, they might make an investment in them and they might not do anything in Houston, but they still might get a great return on their investment.
Guillermo: That’s right. But all these venture capitalists you see they have a portfolio of companies. Some of them will be maybe they are in fund one, two, three, four. It may be each one of those funds has fifteen companies. It’s a lot of companies in various sectors, well diversified, and they come here and they’ll look at the very impressive lineup of corporations and endowments, and product pension funds, and family offices we have in Houston. They want to connect with them. We will encourage our limited partners to look at those capital funds as a direct investment for them.
But here’s the key, because those corporations could be customers to the companies in the portfolios of the VC funds, and the other way around. So, there’s just a lot of interesting dynamics and dots to connect, but that’s what creates the, we call it the ecosystem.
Russ: Ok so as managing director of fund of funds, you’re kind of, you’re the quarter back, you’re the coach, you’re the leader of recruiting investors in to get it started and then once it gets far enough down there to get to deciding which venture capital firms to invest in. Lots of pressure in that position, isn’t there?
Guillermo: Yes and no. There’s so many people involved to make it successful. But some that have been really integral to the development of this initiative; Gina Luna, Bob Harvey, Blair Garrou at Mercury Fund, JR at Station, Jon Nordby at the Greater Houston Partnership, just to name a few, Dick Williams who is the interim CEO of Houston Exponential. Many others, but the ones I just mentioned have really been integral.
Russ: I heard recently, I think you’ve already landed your initial investor, the lead investor in the fund of funds here, correct?
Guillermo: Yes, actually it’s a lead sponsor position at this point and it is Insperity. As you know, they have been very supportive of this effort. We are very appreciative because they have already funded all the runway capital needed to get to the finish line, to the final close. They deserve a standing ovation as far as we’re concerned for that leadership. Insperity’s business model, connected with what we’re about to do here, makes a great deal of sense.
Russ: I’ve seen them stepping up in lots of the startup community over the past few years, too. But this is a huge step too.
Guillermo: Yes, indeed. And we’re going to make sure that for all our limited partners, Insperity as well, of course, in every way we can that everything we do benefits our base of limited partners, all our supporters, as well as the funds we invest in.
Russ: I see all these rating systems all the time on venture capital firms and their activity, and how do you ultimately decide which one to invest in?
Guillermo: Well, that is a job and a half because there are many successful venture capital firms in the United States. It’s a tough selection problem. If you talk to Chris Rizik today he would tell you that next year he expects to be able to invest in about 5% of the funds coming to Renaissance with his new fund. I expect to see something along those lines. My personal experience through other fund of funds has been more in the 7% range, but it’s a challenging market for them to compete for that capital. You just have to find the right fit. There’s certain sectors of particular interests such as robotics and internet of things and the healthcare side, etc. So, any fund that is going to focus on that is of significant interest. But the competition for the 50 million dollars in terms of LP capital will be significant, and it’s our job to sort through that.
Russ: Well, that’s good for them to be competing for the money. Even when you mention medical, I know that nowadays it seems like there’s some hybrid venture capital firms these days that I think was caused a lot by the JOBS Act, for instance, there’s AngelMD out of Seattle that has a huge presence in Houston now, too. Are they a potential recipient of your investment funds?
Guillermo: Here’s what’s great. We will absolutely sit down with anybody who thinks they deserve to get some of that LP Capital. Whether it’s a brand-new fund, whether it’s based outside of Houston or in Houston, everybody will have an opportunity to be heard, make their case as to why their fund deserves to get an allocation of that capital.
Russ: So, you’ve already mentioned it, and I’ve heard this several times, you were selected partly because you have a background in fund of funds. Tell us about that.
Guillermo: Yeah, so I started my career with Citigroup in New York City, and I spent 17 years with what is now Bank of America Merrill Lynch, and then I also spent another five years with an affiliate fund that was majority owned by Bank of America. Bank of America believed very much in the business of private equity and venture capital investing and they were very supportive of us creating a fund of funds platform in California. In New York we raised capital from the large public pension funds in those states and we’re on our way to try to bring in Texas as well. But then Dodd-Frank kicked in and, as you know, all financial institutions including Bank of America Merrill Lynch were in a position that it was best for them to settle out of those assets, and those particular fund of funds were sold to a large firm in the business based out of Boston. I have had a lot of experience over the years in assessing funds and understand what makes entrepreneurs successful in helping at the board level and otherwise anyway you can. If the underlying companies are successful, the funds are successful, and of course, the different funds are successful.
Russ: Well, Guillermo, I really appreciate you sharing your mission with us, we think it’s really exciting. Do you have a name yet for the fund?
Guillermo: Yes, it is HX Venture Fund.
Russ: Oh wow, alright. So, we want to stay in touch and hear how HX Venture Funds grows and what’s happening and anything we can do to help you.
Guillermo: Sounds great. Thank you so much. We will be delighted to come back.
Russ: You bet. And that wraps up my discussion with Guillermo Borda, the Managing Director of HX Venture Fund, and this is The BusinessMakers Show.
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