Russ:  Hi I’m Russ Capper and this is BusinessMakers USA Live brought to you by Insperity, inspiring business performance.  Coming to you today in front of an audience in Milwaukee of innovators and business leaders and I’m very pleased to have as my guest the Co-founder and Managing Director of Mercury Fund Blair Garrou; Blair, welcome to the show.

Blair:  Thanks Russ, good to be here.

Russ:  You bet.  Let’s start at the top, tell us about Mercury Fund.

Blair:  Sure, we are an early stage venture capital fund.  We are headquartered in Houston, which is kind of an oddity because you don’t think of venture capital when you think of Houston.  We have an office in Ann Arbor, Michigan – one of my partners is there – and we invest in early stage startups throughout the whole middle of the country.  And so when another one of my partners, Dan Watkins, and I founded the fund about 15 years ago our thesis was entrepreneurship isn’t a coastal pursuit.  Innovation happens everywhere, entrepreneurs happen everywhere, what if there was a branded venture capital fund that focused on the middle of the country and there have been many over time.

And then over the first 5 years of our development when we first launched it was really to focus on Texas and the Southwest but what we found was – and if you remember back in 2007, 2008 everything going on up here in the rust belt – corporations were thinking about innovation; entrepreneurs were thinking about disruptive technologies – and we found there was less venture capital available for those great entrepreneurs in the Midwest than even the Southwest.  We expanded our model and now we’re the only VC we know of that looks at the entire middle of the country as a region; we call it the mid-continent.  So we invest everywhere from Houston all the way up to Cleveland, as far east as Pittsburgh all the way to Salt Lake City.

Russ:  What percentage of your portfolio today is outside of Houston?

Blair:  Outside of Houston?  98%.

Russ:  How much outside of Texas?

Blair:  65%.

Russ:  Wow.  So have you done a deal yet in Milwaukee?

Blair:  We have done one seed deal in Milwaukee.  As you know we’re active with the Rice Business Plan Competition down in Houston where you do interviews.  It’s the largest business competition of its kind, $1 million in prizes and there was a great MBA team who was commercializing some technology out of University of Wisconsin, Milwaukee.

Really interesting wearable tech where it could improve someone’s grip by wearing a bracelet which essentially would send tiny little shockwaves through and they were using this for people that were losing feeling in the tips of their fingers, usually the elderly, but they found that it could really work for sports needs too; golf players found their handicap was dropping and a number of other things, so we seeded that company.  We didn’t follow on because they ended up going down a direct-to-consumer route and one thing about Mercury is all of our investments are enterprise software and so that’s one of the pieces.  But we’ve been actively looking for our next Milwaukee deal and hopefully we’ll find that on this trip or another.

Russ:  That was a good story, it explains why you have such a hard handshake when I shake your hand every time.

Blair:  That’s a good grip right?

Russ:  Right, it’s great.  So let’s talk about this thing the mid-continent, I find it interesting that you focus on it; we’ve been focusing on it too.  Everywhere we go there’s just a beehive of activity about entrepreneurship but we still get referred to as flyover country.  There’s still all of that Silicon Valley Palo Alto stuff and the Boston stuff, I hope you succeed royally in lighting it all up as I imagine our whole audience does too.  How did it get this way?

Blair:  It’s not that it happened on the East and the West Coast but I think it started with really progressive thinking universities.  You had MIT on the East Coast, you had Cal Tech and Stanford on the West Coast and the way they compensated their professors or their students for coming up with these innovative ideas was just much, much different than how more conservative universities did it throughout the middle of the country.

And so you had all this tech commercializing out in Boston, in Silicon Valley, and just success begat success over time.  It doesn’t take too many successful startups for then others to say hey, there’s gold in them hills, I’m going to go out there and move my company there.  You see that with the West Coast all the time.  And one thing led to another and there have always been interesting entrepreneurial pursuits in the middle of the country but just the culture has been different on the coasts and that’s been that way for probably close to 50 years now.

Russ:  I’ve heard you talk before about how a major success or two in a market really also spawns off lots of successful people that have lots of money to invest, which is pretty cool and I want you to talk about that, but even before you do our hometown – Houston, Texas – has the world’s fastest, most successful technology startup in history – Compaq Computer – but nothing happened.  So sync up with that.

Blair:  Compaq, started by Rod Canion, the fastest company to get to $100 million in revenue, just absolutely revolutionary.  If you look at Dell Computer as well, another great startup in Austin.  But when it comes to hardware startups, for whatever reason hardware startups don’t spawn as many entrepreneurial individuals as software startups or biotech startups.  And a lot of people think it’s because in a software startup you have all these software engineers that are writing code, they’re doing it very, very well very, very quickly, and that’s the core element to launch another software startup; in biotech you have the bio-engineers.  But with hardware there’s a lot of line people, much like you have in a manufacturing plant, that may not have entrepreneurial pursuits.  They’re doing one thing very well but it’s not necessarily broad enough to be innovation and pull forward.

Russ:  And so does that mean you don’t – Mercury Fund doesn’t look at anything with hardware?

Blair:  We don’t, now some of the software that we look at and what we’re really focused on are entrepreneurs that are creating enterprise software that makes the industries that drive the middle of the country more competitive and efficient.  And a lot of that is data science, it’s all SAAS and Cloud, but sometimes you may have a proprietary sensor that you put in the manufacturing plant to pull data out, but ultimately that data will get run through software and hopefully algorithms to make the entire process more intelligent.

Russ:  As you heard probably before you came up here Amber was giving a little preview of my background.  In my entrepreneurship days man it was a different landscape entirely.  What we went through, I don’t know if it’s better or worse, but today I understand a lot of people say you don’t even have to write a business plan.  Is that true?

Blair:  Business plans have gone away and I think for the entrepreneurs in the room you realize that.  And I think what’s happened now is this whole idea of iterating and failing fast and that kind of comes in the planning and preparation you do for your business.  And so from a venture capitalist perspective what we want to see is a working prototype, we want to see someone actually paying for the product that we can talk to and then we just need a PowerPoint, 12 to 15 slides detailing various things.

But I think what’s interesting is when you get that PowerPoint created and you show your market size we then want you to dig into how you calculated it.  When you show your team we want to dig into all the bios and entrepreneurs usually send us over to LinkedIn.  So there are those business planning elements but the formal pursuit of writing a business plan and then going out and raising money and not actually just building the product, trying it out and saying hey, this works, that’s been the big shift I think in the market.

Russ:  But does it still take a startup entrepreneur to have the same commitment to pitching to multiple VCs?  I mean we did over 100 and it was tiresome and difficult and the rejection rate was high.  Does that still happen?

Blair:  It does.  I think it happens the later rounds that you’re raising because there just aren’t a lot of what’s called a Series A investor or a Growth Capital investor.  In Houston we’re really one of the only Series A investors, I think there’s only 5 in Texas.  With the farther north you get, outside of Chicago, it’s less and less and so you have to pitch a lot of people who don’t know you, who aren’t in your community and have no one to go to to vouch for you.

And I think that vouching for an entrepreneur is key.  I think that’s why you see so many deals happening on the coasts; you can’t walk into a coffee shop or a corporation and not see somebody working on a startup on the side.  Everyone knows everybody so it’s very easy to do due diligence, but you just have to talk to a lot of people in order to make it happen, even angel investors in that first seed round.

Russ:  I just remembered so well it was painful.  We would get all psyched up time after time and go in there with this attitude that man, we’re just gonna kick ass but we always knew we had to convert to kiss ass real fast too.

Blair:  Let me ask you this, out of those hundred pitches – I mean think about Gladwell’s 10,000 hour rule, every entrepreneur has to go through that.  And for us if we find an entrepreneur that we like but they don’t pitch that well, then we’re worried about that next round.  We very quickly have a conversation saying hey look, you got our money not because you pitch well but because we actually dig into the tech and talk to the customers.  But what about that next group that may not live in your hometown or may not be in Madison or Milwaukee where we’re looking at deals?  What you went through I think is that total entrepreneurial process of iterating and finding the right fit.

Russ:  Cool.  I picked this up actually in discussions here before we even got up here today that there sort of feels like there’s some similarities between the status of entrepreneurship and the ecosystem here in Milwaukee and the way it was in Houston 3 years ago.  And although I don’t see your name in the paper very much, everybody that’s talking about all of the success that’s rolling forward – that knows what they’re talking about – know that it was Blair Garrou that did it.  So share with our audience what you saw, what your team saw at Mercury, what needed to be done and how you’ve pulled off what looks like a major success story.

Blair:  I think if you think about the city, the more we learn by coming to cities like Milwaukee or Chicago or Cincinnati, and the more we saw of best businesses practices models – what worked and what didn’t – then we were able to tell almost 2 to 3 years in advance where more great startups would be that would fit our model.  So we were able to come in, build relationships with the community like I’m kind of trying to do here in Milwaukee, and say hey you know what, there’s going to be some really interesting things happening here.  And I think from our perspective we’re really interested in the industrial software that’s happening here; we think there will be a huge buyer’s market for that over the next 4 to 5 years and that’s a big thing.  So with Houston there were a lot of startup development organizations in Houston but things just weren’t happening.

And we looked at the models that were successful and we just found that a lot had been given to us and so what we had been doing over the last 3 to 4 years is saying look guys, there is a better way, if you look at an 1871 in Chicago or a Centrifuge model in Cincinnati or a Galvanized in Denver, and so we’re just trying to bring these best practices model to Houston, train other people up on them.  We’re actually putting people on planes and sending them to the Midwest, learning how Midwestern cities have been trying to figure it out since 2008, and I think some are farther than others, but what I’m seeing in Milwaukee are really similar activities.  And one of the most exciting things that we’re trying to do is launch a corporate fund of funds.

We think that is one of the singular most entrepreneurial-driving and innovation-driving activities that a community can do; when you get your corporations to invest in a fund that then goes out and invests in 15 Mercury funds.  Because it’s not only those funds which will come to town and invest dollars in the startups, but all the VCs that are pitching that fund of funds will have to act like they’re part of the community and they’ll be doing community work and they’ll be doing speaking events and mentoring startups.  So you’ll get 80 to 100 VCs coming through a system where before you may have had a handful and that’s a big, big piece of I think what’s happening.

Russ:  So this fund of funds concept is really interesting when you think about it because you think about VCs and investors and stuff, they always want to just invest and be as secure as they can that their investment’s going to do exactly what they’re trying to do, but the first investors that come into a fund of funds, all they’re doing is putting together some money that’s going to go invest in venture capital funds, outside of probably your area, with no guarantee that they’re going to come back and pay attention to what happens in their city, right?

Blair:  So there was a model that was created about 10 years ago called the Renaissance Venture Capital fund and a guy named Chris Rizik invented this model.  There were lots of corporate fund of funds or state-driven fund of funds where they give Blair Garrou $10 million, you have to put the $10 million to work in the state.  Those funds do not perform very well.  What happens is you end up getting VCs who need the capital to survive and they put the money to work immediately in the best deal they can find and Chris said that’s not what we want.  Less the money being put to work, we want the know-how of these venture capitalists from all over the U.S.

And so to get Chris’s money he said put me a business plan together – or a PowerPoint – and he said tell me how you’re going to be active in the community.  How are you going to go to the universities?  How are you going to go to the co-working center and do office hours?  How are you going to interact with groups?  Show me that you’re active and then actually do it.  And he would watch as people did this for 6 to 12 months and then he would go and he would talk to the Eds or the Troys and he would say well how did they operate a generator?  And Troy would be like they were awesome and he’d be like investment.  Well how’d he operate at that startup week and Ed is like unbelievably bad, okay no investment.

And so he worked with the community leaders and so what happened was we received some money from this fund of funds.  We had already done an investment in Michigan, but from $3 million that came into our fund from that fund of funds we ended up investing close to $20 million in our fund in Michigan and that $20 million led to close to $70 million in those companies.  And Chris’s first fund that he put to work in Michigan was a $40 million fund and it has caused $1 billion of capital to flow into the state over an 8 year period.  It’s just an incredible model when put to work.

Russ:  Well the pieces that have come together in Houston are just significant now; there’s a strategic group of leaders from the partnership and from the city government called Houston Exponential that are guiding it and trying to do the smaller operational things and there’s a fund of funds, do I have that right?

Blair:  You do, you do.  And what we’ve found – and I think Chicago is probably the best model for this – is when you can get the mayor and the city and the corporates and the startup community not fighting one another but all walking in the same pathway because they have the same drivers, right?  And the driver is jobs; all of us are creating jobs.  Jobs is the number one driver for any of this, right?  Corporations want to hire more people because if they’re hiring more people that means their making more money.  The city wants to have more money through jobs and higher paying jobs and then startups want to drive jobs.  And so that job growth quotient, and there are all these things that kind of lead up to that hopefully we’ve got the right elements in Houston to be successful and I think we do.

Russ:  Cool.  So let me put you on the spot, let’s say somebody is in the audience right now thinks it’s a great job, we need Blair up here to help us a little bit more, would you come back?

Blair:  I definitely would come back.  We are paying it forward like these other cities have done in teaching us and hopefully we can show these best practices and line people up in order for people to learn and go out and do great things.

Russ:  Okay.  This might be redundant to what you’ve said already but before I let you go let’s say somebody is in the audience, they’ve had this idea – maybe it’s further along than just an idea – that might fit into your sweet spot IOT for industrial enhancement, what should they do in general?  What advice would you give them?

Blair:  I think the first piece of advice is we only invest as Mercury after market validation; so that usually means about a half million to $1 million in revenue, maybe 3 to 6 customers.  A pilot with an enterprise is fine, it doesn’t have to go to full enterprise deployment, but what we like is we have people go to our website, all of the investment themes that we invest in are clearly detailed – it’s not opaque – and if you think you have a deal which fits one of those themes just email us.  I’m Blair, Blair@mercuryfund.com.  We like having dialogs during the seed stage process because if we can help you and you’ve raised a fund and you’ve done successful then that’s almost like the beginning points of a marriage.  And so we would have many people reach out to us and if it’s not the right fit for us we know a lot of other funds that it might be.

Russ:  Really cool.  But also isn’t it true that previously, back in the beginning of the fund, you did do seed?

Blair:  Oh yeah, our first two funds we did 30 or 40 seed investments and what we found was that seed investing – we weren’t good at driving market validation and we found we were building companies before there was a company to build.  And what we find we’re best at is after product market fit has been established and there’s a couple of corporates, we’re really good with these software and SAAS companies allowing them to scale and getting them positioned the right way and using our networks and all of our scar tissue.  I mean we haven’t done it the right way by far, we fail along with the entrepreneur.  When an entrepreneur fails we feel it’s part of our failure too.

Russ:  Okay.  Well you didn’t fail tonight, I thank you very much for sharing your story with us.  Let’s hear it for Blair Garrou.

Blair:  Thank you very much Russ, appreciate it.

Russ:  You bet, you bet.  And that wraps up my discussion with Blair Garrou and this episode of BusinessMakers USA Live, brought to you by Inpserity.