Successful Venture Capital … in the Midcontinent
Aziz Gilani, Class 14
People often ask me why I have chosen to be a venture capitalist (VC) in the middle of the country. After all, the spotlight falls on other areas like Boston and Silicon Valley, and my career path means spending a lot of time in airports. According to Foursquare, I spent the last seven days in airports (it compliments the achievement by saying “That’s pretty fly!”), and I know the Hobby Airport in Houston so well that the TSA agents have started to recognize me. My confidence in my choice and success in the region are baffling to many from more traditional locations.
To me the answer to “why the middle?” is pretty obvious—this is where the opportunities are! The trick is finding those opportunities across a vast geographic expanse with numerous pockets of research and development (R&D) and budding entrepreneurial ecosystems. The payoff of working in this “overlooked” region is significant: Unlike my Kauffman Fellows Program classmates who have to compete on every term sheet with mercenary entrepreneurial teams, I get the luxury of building personal relationships with my entrepreneurs and their teams over a long timeframe. I also get to evangelize startups to an audience that does not encounter them every day—and sometimes have to explain the role of venture capital to the many stakeholders involved. After all of the effort required in finding, educating, and diligencing an opportunity, signing a term sheet is actually the easiest job we do.
In this article, I describe the unique challenges of working in the midcontinent and outline DFJ Mercury’s path to success. As a Director at DFJ Mercury, I have found, diligenced, overseen, and even briefly operated portfolio companies. I grew up in the middle of the United States, being born in Michigan and spending my childhood in Texas. After creating, supporting, selling, buying, and implementing software for a decade, I made the transition to venture capital while attending Northwestern University’s Kellogg School of Management. Joining DFJ Mercury meant moving back to Texas and rekindling my relationships with the Austin startup community (it also meant getting my first legitimate ticket to South By Southwest, which I first attended with my sister in 1997).
An Underserved Geography
Venture capital definitely prefers other regions: The midcontinent only accounted for 10-15 percent of all venture investment in the United States in 2011,1 but it is home to a much larger share of patent filings, R&D budgets, and academic research.2 We call this discrepancy the “commercialization gap” and focus our efforts on finding world-class opportunities that we can form syndicates around to catapult onto a growth trajectory.
Rising to the unique challenges of working in the U.S. midcontinent, DFJ Mercury’s founders started out by getting universities, technologists, and family offices involved in entrepreneurship. One co-founder, Dan Watkins, helped start the Rice Alliance, a Rice University group that promotes entrepreneurship through education, collaboration, and research; my partners Blair Garrou and Ned Hill were early members. Similarly, Blair (also a DFJ Mercury co-founder and my KFP Mentor) was the original head of operations at the Houston Technology Center and the founder of the Houston Angel Network.
Building on these experiences and establishing relationships across a wide cross-section of universities, incubators, seed accelerators, and regional entrepreneurship groups became a foundational element of DFJ Mercury’s strategy—and we have successfully done so with such entities throughout the midcontinent. We welcome the opportunity to spend time with these groups to explain our investment philosophy, current industry trends, and our current interests. In the past month I have spoken to seven groups in four states. Actively partnering with universities (mostly tech transfer offices), incubators (both for-profit seed accelerators and nonprofit incubators), and angel networks has provided a fruitful source of deal flow and has proven to be an excellent way to aggregate opportunities from across the midcontinent.
Incubators and accelerators perform a very valuable service that dramatically improves the ecosystem in our region. DFJ Mercury has seen particular success of late from establishing relationships with for-profit seed accelerators throughout the midcontinent, serving as mentors to their companies and even investing in the accelerator itself.
I put a lot of time into these relationships, usually spending at least one day a week working with one of our seed accelerators. These include Excelerate Labs in Chicago, where I serve on the LP Advisory Board; Tech Wildcatters in Dallas, where Ned and I are mentors; and TechStars Boulder. I plan on spending time at the new TechStars Cloud accelerator in San Antonio, where Ned is a mentor, when it launches later this year. Of note, we are investors in all of these seed accelerators. I also keep tabs on startups at AlphaLab in Pittsburgh and The Brandery in Cincinnati. My partner Blair is helping launch SURGE in Houston, an accelerator for efficient-energy software startups, where Ned is also a mentor—and lassos me into strategy sessions. As a firm, we are also active with the nonprofit Austin Technology Incubator, which helped launch a number of our portfolio companies, including Phurnace Software (later acquired by BMC for a nice return).
Putting the Pieces Together
Having watched this industry grow over the past few years, I decided to devote my KFP field project to seed accelerators with Gianluca Dettori of dPixel in Milan, Italy. For the U.S. side of the study, I enlisted help from Yael Hochberg at Northwestern University and examined funding rates for all the accelerators we could find. We then published a ranking of the top 15 accelerators across the United States so that entrepreneurs could make an objective decision on which accelerator to join based on the previous successes of those accelerators.3 The field project introduced a few accelerators that were new to me and gave me a fantastic opportunity to deepen my knowledge of others. Unsurprisingly, our fund committed to invest in three accelerators after the project, and may invest in more.
The results of this relationship-building work are not always linear. On a recent trip to Tech Wildcatters, I had the pleasure of attending the first board meeting of Koupon Media, a startup we funded from their last class of companies. While there, I sat down with Tech Wildcatters’ CEO Gabriella Draney to discuss the curriculum for their current class, and spent about ten minutes with each of the current companies explaining our investment philosophy and offering to make connections to potential customers or suppliers. That evening I had dinner with a local VC with whom I haven’t yet co-invested but who wanted to get more involved in Tech Wildcatters. I spent the evening explaining how we work with accelerators and walked him through the current class of companies to see if he would be willing to get involved as a mentor. Getting him to mentor startups at Tech Wildcatters does not directly help our fund, but gets another fund involved in seed-stage funding in our geography—which will eventually be helpful for us when we are looking for syndication partners.
A few days later I was in Austin for a board meeting with BlackLocus, a fantastic startup whose history shows why we invest so much time fostering an ecosystem in our region. BlackLocus was founded by a group of students at Carnegie Mellon University who had completed the AlphaLab seed accelerator program in Pittsburgh. We first learned about BlackLocus when they attended the Rice University Business Plan Competition, the largest business plan competition in the world, which we sponsor and help select companies for. During the competition we awarded BlackLocus our $100,000 investment prize and promised to visit the team the following week in Pittsburgh—bringing along the founder of portfolio company GameSalad (a CMU alumnus and graduate of both the LaunchPad seed accelerator in Los Angeles and the Austin Technology Incubator in Austin). While in Pittsburgh we learned that BlackLocus planned on moving to Austin, and reached terms on an investment round. After signing the term sheet, we invited an Austin VC firm to participate in the round.
BlackLocus moved to Austin a few months later and is growing like a weed. The Austin VC firm Silverton Partners has been invaluable in helping hire local employees and even hosts our board meetings. Since funding the company, we helped introduce the founders to Rob Taylor, a talented startup executive living on the west coast who wanted to move to Austin for personal reasons. His last startup, TrueCar, had just raised $200 million from several strategic investors to fuel acquisitions. After rapidly growing TrueCar, he was looking to build another company and is now joining BlackLocus as President and COO.
Our relationship-building efforts are often strategically determined. We invest a considerable amount of time in identifying high value syndication partners, and look for strong local partners within our geography to help source local talent and assist with day-to-day tactical issues. We also seek strong strategic partners outside of our geography to help our portfolio companies build strong business development relationships and provide domain expertise.
We are increasingly seen as the “local hosts” in the midcontinent by a variety of funds looking to use us the way we use seed accelerators—to aggregate interesting opportunities. Recently, I was contacted by a well-known strategic fund interested in an Austin-based startup with which we were very familiar. We helped this fund set up a visit to Austin and assisted in securing meetings with other companies in the fund’s current focus area. After their trip, we compared notes and shared diligence information so that both sides could make an informed decision on investment. Both sides benefit from these relationships, which we seek to build with an increasing number of funds.
Connection to Traditional VC Markets
We do maintain close ties with more traditional VC areas on the west coast: I spend about a week every month on the west coast reinforcing my relationships with potential acquirers, platform partners, potential customers, and talent. I participate in specialized VC programs with Microsoft, Amazon, eBay, IBM, and many others. Our inclusion in the Draper Fisher Jurvetson Global Network also opens doors to several hundred portfolio companies and corporate development groups.
These relationships are a key differentiator for us in the midcontinent, and allow us to rapidly launch our portfolio companies into their desired ecosystems. Lately, several of our term sheets have fomented rival term sheets from local angel groups and VC funds; in every case but one, the startup still took funding from us because they perceived that DFJ Mercury would not only work with them on a local basis, but also help them grow their business with strategic partners. In the one case where the portfolio company did not take funding, the founder went on to join another company in our portfolio.
I also travel to the west coast to attend board meetings for our portfolio companies. We almost always invest in syndicates including a strategic investor that can provide unique assistance to a startup. For example, when we originally invested in Austin-based GameSalad, we invited Steamboat Ventures—the venture arm of The Walt Disney Company—into the syndicate due to their deep ties to the entertainment industry. Steamboat later led the company’s next round of investment and helped introduce GameSalad to several partners; GameSalad’s new CEO, Steve Felter, was previously the COO at Digisynd, a startup that Disney acquired. GameSalad recently opened an office in San Francisco to be closer to several of their partners, and continues to grow exponentially while maintaining a sizeable presence in Austin, with the COO, two of the founders, and the bulk of the development team.
These connections between the west coast and the midcontinent are profitable for us. Normally a multi-office startup is frowned upon, but a large number of our startups thrive with the arrangement. Although most people know about the lower cost-of-living advantages of the midcontinent,4 our biggest benefit comes from the lower turnover of key personnel. Our local presence helps those offices still feel engaged with the strategy, and we tend to alternate board meetings between “home” and the west coast. The combination of lower cost, lower turnover, and continued engagement is something we have found very appealing.
The Future of VC in the Midcontinent
Pursuing VC opportunities in the midcontinent offers many more benefits than elite status on airlines and a first-name basis with TSA personnel—it also means forging deep relationships with top-notch teams in a relatively low-pressure setting. We do this by taking advantage of the fundamental disconnect between the level of innovation and venture investment, which shows no signs of letting up anytime soon; even if university research budgets decreased, we could still absorb several new venture funds without approaching the ratios on the coasts. Our model could also be adapted to other under-invested geographies as long as a similarly connected fund is willing to extend themselves to bridge the gap between innovators, their markets, and strategic partners.
My hope is that more funds will join us in the midcontinent and learn to appreciate what we take for granted. We certainly have the room and would appreciate the good company!
As a Director at DFJ Mercury, Aziz brings significant experience as an operator, consultant, and investor in technology companies, with a focus on enterprise and consumer software. Previously, Aziz was a Senior Engagement Leader with Infosys Consulting where he led the Enterprise Asset Management practice. Before that, Aziz was a Director at ABB Performance and a Senior Consultant at Cap Gemini Ernst & Young working in the Energy Chemicals and Utilities practice. Aziz has a BBA from the University of Texas at Austin McCombs School of Business where he was a TILF Scholar and holds an MBA from Northwestern University’s Kellogg School of Management where he was an FC Austin Scholar, Kellogg Board Fellow, and Chairman of the Kellogg Private Equity and Venture Capital Conference.
1 PriceWaterhouseCoopers, “MoneyTree Report: Investments by Region, Q2 2011,” https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=region.
2 National Science Foundation, “Science and Engineering State Profiles,” http://www.nsf.gov/statistics/nsf10302/.
3 Frank Gruber, “Top 15 U.S. Startup Accelerators and Incubators Ranked; TechStars and Y Combinator Top The Rankings,” Tech Cocktail, 2 May 2011, http://techcocktail.com/top-15-us-startup-accelerators-ranked-2011-05.
4 Rebecca Williamson, “San Francisco vs. Austin Cost of Living,” 22 October 2011, retrieved from the DreamHome Realty Group website: http://www.austinrealestatehomesblog.com/living-in-austin/san-francisco-vs-austin-cost-of-living/.