Gina: Hi, I’m Gina Luna and this is HXTV, championing Houston’s innovators and entrepreneurs. Brought to you by PKF Texas, CPAs and advisors servicing Houston’s innovators for over 15 years. My special guest today is Blair Garrou, the Co-founder and Managing Director of Mercury Fund. Blair, it’s great to have you on HXTV. It’s long overdue.

Blair: Thanks. I’m glad to finally get on board.

Gina: I think everybody in Houston knows you, but in case there’s someone that doesn’t, let’s start with your background. Tell me about Blair Garrou.

Blair: Sure, so real briefly, I grew up in Boston, Massachusetts, so I’m part Yankee. I then when to middle school and then high school in North Carolina. I went to Washington and Lee for college, and that’s where I met my current wife, Amy Garrou. I met her on the campus there. I went to work for Deloitte, working with tech companies in DC, and my wife got into vet school. I figured I would follow the beauty and the brains and come to Houston, at least while she finished vet school, and then when I got here, I started working in investment banking and was in the energy sector. Not coming from the energy sector or growing up around it, when oil hit $10 a barrel, I found myself and the team pitching a lot of ideas that just didn’t have a lot of merit.

At that point in time, I really wanted to get back into tech. I had been in the tech group at Deloitte, and there was an organization starting called the Houston Technology Center. I started volunteering my time, doing PowerPoints and putting Excel models together for a number of startups. I started working with them and eventually they offered me a job, so I was one of the first paid employees there, and that really changed the course of my career. While I was there, I formed a group of angel investors, which is now known as the Houston Angel Network. I also met an individual by the name of Paul Hobby, that a lot of people know. Paul and some of his friends were putting together a venture fund and he pulled me out to be an associate with that fund.

I like to say that they taught me a lot about venture capital, but they taught me more about operations. You know, Gina, we’ve had this talk before. I learned a lot about venture capital, I think, from empathy, from actually being in the company. One of the things we did at Genesis Park is I would put a business plan together about why we’d invest. One of my partners would take the board seat, and then I would launch into the company in an operations role, whether that was head of marketing, CFO. And then the last company I jumped into was a company called Intermat, where I was the CEO, and helped turn that company around. We sold it to IHS before IHS went public. After that, I had a decision; I could have gone on with IHS and helped with product strategy, which is where they wanted me to focus; or I could join a friend of mine, Dan Watkins, and launch a venture fund.

In the meantime, while I was doing HTC, Dan Watkins had helped launch Rice’s commercialization center, the Rice Alliance, which now everyone knows has the largest business plan competition in the world and puts on a lot of great events here locally. Dan had built a relationship with Draper Fisher Jurvetson. He asked me to join him and we launched our first fund, DFJ Mercury. Over the last 15 years, we still have great relationships with DFJ, but we’re now an independent fund, Mercury Fund, and we have just over $300 million under management. We invest in entrepreneurs that are focused on the issues that plague the industries that are strong in the middle of the country. How do you make industries like manufacturing, and oil and gas, and real estate, and insurance more competitive and more efficient with their coastal counterparts and their global counterparts.

Gina: Talk about Mercury Fund and the evolution from the time you and Dan came together to what you are today.

Blair: Our first fund, we focused very broadly. We focused on life sciences, physical sciences, and software. Over time, while a lot of those life sciences and physical sciences did well or will do well, what we found was it wasn’t congruent in building those types of businesses versus building a business in enterprise software. And so, we saw that the enterprise software deals that we did not only performed well, but those skill sets could really scale up a venture fund. In our previous fund, we moved to being all software, and we also moved from being seed investors to being Series A investors.

What we found was there was a lot of angel investors and smaller VCs who are investing in these companies throughout the middle of the country, but what we were really good at is helping build enterprise software companies. SaaS companies – Software as a Service, Cloud companies, and then something that my partner is uniquely good at, which is data science. One of the differentiators of our fund is not only helping to build these companies, but my partner, about a year ago, brought in our Chief Data Scientist, Angela Wilkins, who was at Baylor, and had worked on the DARPA Simplex project as well as the IBM Watson life sciences project. She started consulting with us, but then she and Dan built a group we call Mercury Data Science.

We find that in the middle of the country, a lot of companies who are working with corporations are trying to solve their biggest problems, and one of their biggest problems is efficiency, and it’s around autonomy. How they use data science and AI to digitally transform their businesses and move it forward. The companies we were investing in, whether they were in Detroit, or Cincinnati, or Denver, or Houston, they had a hard time finding these data scientists. Dan and Angela formed this consultancy, which is apart from Mercury, and they now work with lots of our portfolio companies. It’s been a real differentiator for us.

Gina: Let’s go back in time. Tell me what year it was when you took that volunteer role at HTC.

Blair: 1998.

Gina: 1998. So, those would be the early seeds of Houston’s innovation ecosystem.

Blair: You know, they were. I had to get educated quickly, not being native, and really not being an entrepreneur, either, right? HARC, you know, that George Mitchell had started in The Woodlands, I remember people telling me, hey, the Houston Area Research Council, I believe it was, that was really the first model of anything in Houston. The Houston Technology Center was essentially, ok, let’s not make this be Woodlands specific, let’s do greater Houston area. It was a lot of fun, I met so many people. I was in my mid-late twenties at that point, and the world in Houston was the oyster.

Gina: Yes. I think we’ve seen a real resurgence of energy and enthusiasm around this in the last couple of years. We’ll call it—you and I started the conversation, I think, in 2014.

Blair: Right.

Gina: So, let’s go back to the time when we had that conversation about what was going on in Houston.

Blair: The famous bus ride in Santa Fe.

Gina: The famous bus ride. And talk about what you’ve seen from, let’s call it late 2014 to now.

Blair: I’ll even take it back a little bit more. Earlier, around 2012, I had helped to co-found a group called SURGE. SURGE was an accelerator focused on energy software. Kirk Coburn was our leader and he really built a great platform, which was like a Techstars for energy. When the oil downturn came, the oil and gas companies had a lot of problems they needed to deal with, and they weren’t looking to fund a program like that or be active. And so, Kirk put that program on ice, and I think that’s about the time that we had talked. Right before you and I chatted, we saw something emerging throughout all these cities in the middle of the country where we operate.

There were these co-working accelerators, where what was driving an ecosystem to be successful was around density of entrepreneurs, where they could learn from each other rather than just a university which was spitting out technology or spitting out talent. Houston, at that point, didn’t really have a co-working center. And so, I, along with a couple of people: Emily Keeton, Grace Rodriguez, and then John Reale, started a group called Station Houston. I remember talking to you about it and the Greater Houston Partnership and saying, hey, this is really the wave of the future around how things have happened.

At that point in time, probably about six months later, Mark Toon, a friend of mine, launched Cannon with the exact same model just west of Houston, and both of those models have really emerged at being two of the core ecosystems for growth. The other model that we saw work really well was, if you have startup development organizations, whether it’s a TMC accelerator, or a Station, or a Cannon, they still can’t do it on their own. They need venture capital, they need talent, they need political help and knowhow, and civic help, and that’s kind of when you and I chatted.

Gina: That’s right. We launched, we started some more structured conversation around this topic, I think, in 2016 in earnest, and launched our strategic plan in June 2017. Almost two years ago now, HX has been officially around about 18 months, so how do you assess our progress?

Blair: What was exciting about launching Houston Exponential was the fact that everyone was on the same page. The 20 years that I’ve been here and watching the tech community have its fits and starts, we’ve never had the corporate community, you know, led by the Greater Houston Partnership; the University community, led by U of H, Rice, TSU, and others; the entrepreneurial community; all these groups saying we have to do something. I think our timing was right, right Gina? Because digital transformation started flowing through the energy industries and they wanted change. They wanted us to be more of an innovation hub.

Gina: There was a lot more pull rather than just push.

Blair: A lot more pull. Yeah, because for years we would have these discussions and it would be 200-300 people talking about it but then it became much larger. If you think about it, what Houston Exponential did was it brought everyone together. Accenture was kind enough to come in and give us a report on best practices around what we needed to do. I tell people that report had 40 things we had to do, and you and Bob Harvey said, no, you’ve got to distill it down. Let’s make it 10, people can remember 10.

Gina: Most people thought we were crazy for 10, much less 40.

Blair: If you look at the last two years, we have launched and/or have started five or six out of those 10, and three we have actually completed. Things like launching the strategy center, which is Houston Exponential; launching the fund of funds, which is the HX Venture Fund, which has closed on $30 million dollars already and we will close on more; things like, let’s find an ecosystem center, so a tech and innovation center, which the Ion will become. I’ve talked to many people saying, is HX doing enough? What I try to tell them is this, think of the startup development organizations: Cannon, Station, TMCx, TX/RX. They’re fighting the ground war. They’re dealing with the day in/day out entrepreneurs and understanding their needs. HX is there for long-term viability and vision. The projects we do at HX, you may not see the change in the city for years to come, but it has to be there.

Gina: I think, you know, I talk about it in much the same way. We should do the things that no single entity can do for the ecosystem.

Blair: Can do by themselves.

Gina: And sometimes those things aren’t visible, and that’s okay. Helping create partnerships that turn out great programs for talent, or bringing resources to Houston, all the work I think around that Jamey Rootes’ committee has done on recruiting companies, I mean, they’ve made multiple trips to Silicon Valley and other places to proactively talk about why companies should be in Houston. That’s not necessarily visible, and it’s not something you talk about a lot as an achievement, but it’s really important, I think, to the overall effort of building the ecosystem.

Blair: When you have a Bill.com suddenly appear, or a Nuro, or others open up massive secondary offices, a lot of times people don’t put two and two together, but all of that is going on behind the scenes—or MassChallenge suddenly announces, hey, we are here and we’re taking applications. I think a lot of people will be excited about stuff that’s yet to happen over the next six to 12 months.

Gina: I think there’s a lot of exciting things ahead. Talk about, in your mind, what do you think are the priorities, not necessarily just for HX but for our ecosystem development efforts and to continue the momentum over the next couple of years.

Blair: One in particular was one we talked about nine-12 months ago at HX, and that was talent. I think we underestimated the talent need in these companies. Everyone always talks about talent more from a software engineering or data science perspective, but talent just in marketing, sales, and customer success. When we invest in a company that then is followed on by larger growth equity, $20-$30 million in a later stage round, once that growth equity hits the company, they’re going to go from 20 employees to a hundred very quickly. Where they scale is they scale in marketing, and sales, and customer success. Not as much the software engineer, you need that to start.

Identifying that, and then the work that Patrick Schneidau has done, to work with U of H on the Sales Education Center, and the Leadership Center there, I think has been truly extraordinary. Hopefully we can kind of continue that. I think we’re focusing on talent. I’d like to see more time from the startup development organizations going into education, but with the education of not only the entrepreneur, but around K-12 and college level. Like, how can we make an impact there? We hear about that a lot. But then, after talent it’s capital. If you can build the companies then you have to fund the companies.

It’s exciting to see what’s happening with HX Venture Fund. Helping getting that started and working with Guillermo Borda, who is the Managing Partner there, he and I have talked to over 50 venture funds, 40 of which who have visited Houston over the last six months, not even 12 months, and that will continue. I think one of the things that needs to happen is as those companies visit, we need to drive them through immersion programs to get them active in the community to show that activity is going to be how they get capital from HXVF.

Gina: I think that’s another important role that HX can play is to continue to help drive that activity and make sure when they come here they have a great experience, they see the right kind of companies, the right institutions in Houston and that we continue to build on that momentum. I think as exciting as all these companies or venture funds coming from outside, we continue to see more and more family offices focused on venture investing. Some of the private equity firms are carving off a piece to focus on venture, and then there’s a host that are opening an office here or starting a fund here, and so I think all those things will continue to build over time.

Blair: Yeah, absolutely, all together. I know people will look back and they’ll look at the stats: the PitchBook stats or the PwC MoneyTree stats and they’ll say, how much capital is actually being invested in Houston? One of the things I’ve constantly said there is, that is one data point, but the key thing is at those early stages, a lot of times, angel investors or family offices, they won’t register the data with the appropriate services. We do because we’re a venture fund and they know how to reach us, but all those groups. And so I don’t think we’re going to see the data improve for probably a couple more quarters, you know, for all that to move forward.

Gina: I think that is so true and I’ve seen that often with entrepreneurs and people in the community that I talk to. They’re writing checks and nobody’s reporting that to—

Blair: Well, it’s private, right? They don’t want to disclose that data.

Gina: That’s right. Which is fine. We want them to continue to write those checks and fund those entrepreneurs. So, we could talk all day, clearly, but it’s great to have you. I want to say thank you for all you have done and continue to do for the Houston ecosystem and for entrepreneurs, and I feel like we’re going to be sitting here in five years giving each other a big high five.

Blair: Well, we need to do another bus trip in Santa Fe and look back and say, hey, look and see all we’ve accomplished.

Gina: That’s right. I’ll look forward to that.

Blair: It’s been great.

Gina: And that wraps up my discussion with Blair Garrou, Co-founder and Managing Director of Mercury Fund. I’m Gina Luna, and this is HXTV.