Mercury Fund, a seed-stage venture capital firm in Houston, makes equity investments in what it describes as compelling and novel software and science-based startup opportunities. Recently, Startup Houston sat down with Mercury Fund’s director, Aziz Gilani, to talk about his path to Mercury Fund, as well as the value in seed-stage investing.
Startup Houston: How did you end up at Mercury Fund?
Aziz Gilani: I grew up here in Houston and went to the University of Texas at Austin. While I was at UT, I worked for IBM, and that was really good for me. So this was in 1998, 1999, during the first dot.com boom, and that was a lot of fun. After I graduated, I went to work for Ernst and Young here in Houston, working in IT integration. I had a boss who was unhappy with the acquisition of Ernst and Young’s consulting practice by CapGemini. Me and him just ended up working at a bunch of companies together. We were at CapGemini together, we were at ABB together, and then we helped open the Houston office for Infosys. So we did all these things together, and that was fun. He kind of took a break, and I used that as an opportunity to go to business school.
When I applied to go to business school, the person who gave me my admissions phone call ran a venture capital fund in Chicago, and offered me a job. He was running a fund called DFJ Portage. And I explained, I understand this is a great fund, and I’d like to do stuff with y’all, but my whole life is in Houston. So, that’s where I want to be. And he was like, oh, don’t worry, we have a fund in Houston. And that was DFJ Mercury.
SH: But didn’t you go to Northwestern for business school?
AG: Yes, I went, and I would fly home on a lot of weekends and work for Mercury here. It made a lot of sense for me.
SH: Mercury is focused on the seed stage of a company. Why do you guys take that approach?
AG: So this is a debate – seed stage vs. growth equity. Our entire fund comes from our relationships with universities and seed accelerators. And at the end of the day, in the geography that we’d like to invest in, we’re really good at this stage of development. It’s no secret that when companies become more mature, they end up basing a lot of their operations out of either where their customer base is, or where their talent base is. In a lot of cases, that’s not in this geography.
There’s a definite market need for someone to fund early stage startups in this part of the country. And then for me personally, it’s just not really fun funding later stage companies. I have a lot of friends who do late stage buy-outs, and that’s a lot of spreadsheet jockeying. It’s about trying to equalize the source of your cash flow and the percentage you pay for debt, versus the cashflow the business is producing. That’s not nearly as fun. For me, the funnest part of our business is product-market match. Back when I was at ABB, and back when I was at Infosys, I don’t know how many times I’d bang my fist on a table and say, ‘man, if there was only a product that solved this specific problem we’re having in enterprise software, I would pay a very large amount of money for it.’
The beauty of what we do in early stage is, we solve that exact issue. We’re looking for real problems and real enterprises, and we’re trying to get companies to solve those. By the time you get to growth equity, that problem’s already solved. It’s about trying to find efficiencies in teh sales process, and about trying to get better distribution – which are problems we eventually run into, but that product-market matchpiece, that doesn’t exist for the growth equity stage.
SH: So the creative process, so to speak, is missing.
AG: Yes. I mean we iterate through a series of ideas. Our companies pivot all the time, but that’s ok, because the other thing that makes Mercury special is that we have really deep relationships with a lot of enterprises that become customers. So we’re able to really quickly make a phone call to a CIO or to a CTO and basically say, is this a real problem – is this a problem that you guys would pay real money to solve? If the answer is no, that’s fine – we just have to pivot that technology to problem that people actually care about.
SH: What if that technology doesn’t have any type of market value? Do you tell them to come back later?
AG: We’re very open with feedback to the companies that come pitch to us. We’re like open books to these guys, because it’s in our best interest to see them iterate and come up with something that has a better market match. If someone comes and pitches me and says, “Hey, we think enterprises have this problem,” and I know for a fact that enterprises don’t have that problem, because I’ve talked to a pile of enterprises and they all say, ‘that’s not the real problem, this is the real problem,’ I just tell them – ‘Hey, it would be much more interesting if you could solve this instead of that.;
SH: And do they typically take your advice?
AG: Entrepreneurs are very special people, and they do a job that I don’t think I could ever do. At the end of the day, what makes an entrepreneur amazing is their ability to basically say, that’s a problem, I could solve it, and then they walk through a bunch of walls to solve that problem. Sometimes they take my advice, a lot of times they don’t. But it’s because they believe in their gut they’re [finding a solution] to a real market issue. And I’ve been proven wrong so many times, that I’ve completely lost count. And that’s totally fine.
SH: In addition to market fit, what else do you look for in a team?
AG: I stole this idea from Randy Komisar over at Kleiner Perkins, but I truly believe in it, which is, I think that the companies that you’re supposed to fund are supposed to have unfair advantages. When I say unfair advantages, I mean, every problem you’re trying to solve is being solved by somebody else. That need is being satisfied in some way. Sometimes the customer is solving it for themselves, sometimes they’re using an alternative solution, I don’t know what it is. But there’s always an answer.
What you need to look at is relative to that alternative, what gives your company a structural advantage in terms of solution.
I don’t like investing in companies that basically say, we’re going to work harder than the other guys. Everyone works hard. That’s not a good answer to that question. For me the answer is, hey, we’ve developed this piece of technology that makes this entire problem that everyone has go away.
SH: How do you view Houston’s startup scene?
AG: We’ve been working really hard at that. My partner Blair Garrou is one of the co-founders at SURGE Accelerator, and all of us have been mentoring there since it got off the ground. I think this goes back to the original matching issue I was talking about.
You want a company to be in a city in which you either have a concentration of customers, a concentration of suppliers, or a concentration of talent. In Houston, we happen to have a concentration of energy companies. So it makes all the sense in the world to have a startup focused on serving those energy companies here.
In SURGE, we think we have created a mechanism to get more of those startups off the ground. And I’m really excited by that. I think that’s something that Houston can be awesome at.
SH: Anything you’d like to add?
AG: I’ve lived here for a long time. I really like this city. But it’s really hot [laughs].