Fred Groce, Principal at Storm Ventures and founder of Blck VC, shares authentic stories of startup investments that succeeded and failed. He describes how to identify the X-factor in a founding team. He also talks about his initiatives to double the number of black VCs.
Fred Groce, Principal at Storm Ventures and founder of Blck VC, shares authentic stories of startup investments that succeeded and failed. He describes how to identify the X-factor in a founding team. He also talks about his initiatives to double the number of black VCs.
I mean, he is an incredibly engaging individual. And his ability to grasp a concept and bring it down to a fundamental that is universal, that we all understand is a skillset quite frankly, a lot of us don't have.
[00:00:15] Gopi Rangan: You are listening to The Sure Shot Entrepreneur - a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision. Fred Groce is a venture capital investor at Storm Ventures, a Silicon Valley based venture capital firm. He invests in early stage B2B software companies.
He's also a co-founder at BlackVC, a community built to empower African American venture capital investors. Welcome to The Sure Shot Entrepreneur, Fred. Tell us about yourself.
[00:01:03] Fred Groce: Well, first of all, thank you so much for having me. I'm ecstatic and excited about our conversation today. Look, my story begins with a fact that a lot of people don't know about me, which is that I was the product in many ways of an upbringing that was constantly shifting.
And what I mean by that is I was moving around a lot growing up. I went to something like eight elementary schools, two middle schools, three high schools. And that experience, I think, fully shapes me from the perspective that to be successful across all that constant shifting environments, I had to learn really quickly how to build rapport and relationships with people quickly.
Unless I want to be sort of the shy kid on his own in the corner, which anyone who's met me and spent more than five minutes with me knows that's not who I am. And it's funny because looking backwards, when we think about like what makes us who we become and how those skills develop and become useful in careers, I often reflect back on that moving experience because it's informed for me this ability to engage and build rapport with founders rather quickly and building relationships with other venture firms, which is a key part of what I do day to day. And I think one of the key things that has allowed me to so far thrive in this ecosystem. But look, when it comes to who am I at the end of the day, I'm a principal at an early stage B2B fund.
I love investing in the B2B world because I fundamentally believe we're solving problems and inefficiencies and trying to pull that together.
[00:02:31] Gopi Rangan: I'm really curious. How does one spend time in eight elementary schools? Elementary school is just like a couple of years.
How did that happen?
[00:02:41] Fred Groce: Look, that is a good question. So my dad was in the military but sort of before I was born. Anyone who has a family member that's in the military will tell you there's this experience of sort of being able to let go of an environment or an ecosystem where you live and step up and sort of pick everything up and move to another ecosystem pretty quickly.
It creates sort of a shifting Viewpoint and perspective on what home is. And that created a big change in my parents mindsets on what home was, um, and home was the nuclear family for us. Right? And so we would move pretty frequently, depending on where jobs were more opportunistic for my parents. Because we grew up relatively low income, we didn't have a lot to lose to do that. So it was easy to sort of pick up and move from one ecosystem to another. Certainly it had a shape on my experience without a doubt. As a child, I was of a perspective lean into it because you couldn't control it. I could either be upset and sad about the fact that I was leaving friends or I could lean into the fact that this is an opportunity to make new friends consistently, gain exposure, learn more about country.
Whether that was living in Oregon or Ohio or Texas, those helped shape, I think, my worldview to this day. And I think it also helped shape my viewpoint as an investor overall.
[00:03:57] Gopi Rangan: The military brat community is, it's quite close and it's actually great that you had that exposure. And I've spent some time with veterans and I know that the world is definitely a much better place because of the service that your dad provided and other veterans did as well.
Thanks a lot to your dad and all other veterans. Besides your dad, is there anyone else that inspired you, had an impact on your life and your career?
[00:04:23] Fred Groce: It's a great question. I had the privilege and the luck of getting placed with a freshman roommate whose dad, a gentleman named JJ Singh had gone to GSB, had founded companies, had been a prolific angel investor in businesses.
And he became a personal mentor of mine throughout the majority of my career. And it's little questions he would ask along the way that transformed my viewpoint of what I wanted to do myself. I landed at Stanford thinking law school was the answer. But I realized quickly that my interest was actually more on the business side, more on the early stage startup ecosystem.
When I was sort of leaving my first job post college, I was evaluating what I wanted to do and I thought," okay, I'm gonna go work for a startup." I went to this mentor to walk through like the challenges I had making this decision, I had three job offers at the time. And he asked one question that changed the rest of my life, which is, "Why have you not thought about becoming a venture capitalists because what you're struggling with at the end of the day is an inability to feel comfortable understanding the underlying assets and the likelihood of their success.
And that is exactly what a VC is paid to do and will learn to do. And whether or not you're going to be a VC for the rest of your life, if you can go become a VC for a period of time, that will help you along your journey. And oh, by the way, you are uniquely positioned to become a VC because you've got Stanford on your resume, because your first job at a school oversaw a number of Stanford University incubator and accelerator programs.
So you're clearly tied into the community. At the end of the day, you're also a person of color. Increasingly, VC firms are going to start to think about how do they bring in more diverse teams so that they can continue to win because diversity is becoming a foundation for building a good business that can win in the increasingly competitive and diverse market that we have today."
And it transformed my life; which is why I tell people all the time, it's important to have mentors, and it's important to learn how to become a good mentee as well, which means you have to come back with feedback loops. You can't just go to a mentor and try to extract information and then never provide information back.
And learning how to be a good mentee is equally as important.
[00:06:37] Gopi Rangan: Well, this is great. You thought of hitting the books and becoming a lawyer, and instead you dabbled into the startup world and eventually chose to become a venture capital investor. What kind of entrepreneurs do you like to work with?
What do you look for in entrepreneurs? And what stage do you invest in?
[00:06:53] Fred Groce: So I invest in the early stages. So I'd say about 80 percent of the time I spend is looking at series A opportunities and businesses that found product/market fit, which means they've got a handful of paying customers all buying the product for the same reason, fundamentally, and now looking to sort of build out a go-to-market that has positive unit economics that can scale.
Right. And that's really what I sort of specialize at here at Storm, is helping companies build scalable and efficient go-to-markets themselves post the investment. And then I spent about 20 percent of my time at the series C. And those investments, I'm generally looking for founders ultimately that have experienced the pain that they went out to go solve; because at the end of the day, one of the things I've noted over the last four and a half years of being a venture investor, those founders that went out to solve a pain they felt previously in a role, they tend to be able to understand and intuit what the product needs in a way that a founder that's leveraging, for the most part, customer testimonials or user notes and conversations and research, they just understand it at a level that's just deeper. That leads those individuals to get to finding product/market fitfaster, at least that initial product/market fit.
And then we can come in and really support them with extra capital and the knowledge that we have around building go-to-markets in the B2B world to help scale and build out a company that can ultimately drive to positive returns. I'd say the other piece that I'm always looking for is founders that aren't necessarily actually based right here in the Bay area.
I spent a lot of time looking for talent in Atlanta, Chicago, Los Angeles, New York. And that's ultimately because since I moved around so much as a child, I know there's great talent everywhere in this country. The challenge for us as investors is hunting and finding those individuals and then investing behind them, ultimately. The Bay Area doesn't have a monopoly on talent and great ideas. What the Bay Area has though, is a monopoly to some extent on high value networks. But the beauty is we can always incorporate others into our networks. We can always pull them in and support them. Venture funds are uniquely positioned to sort of accelerate that and provide that given that I think a great venture fund has generally developed and maintains a phenomenal network as well.
[00:09:09] Gopi Rangan: I see that you look for a few specific things like product/market fit and those are technical things and you're willing to go outside Silicon Valley, which is very refreshing to hear. Most VCs don't do that. How do you ask questions to get the information you're looking for?
Maybe you could give an example of one or two companies you engaged with.
[00:09:28] Fred Groce: Yeah, so I think on one hand, I'm always looking for an underlying passion and that passion could be because they've experienced that pain themselves prior. And so they know how, painful going through or how painful your life is as an employee with that problem not being solved to this day.
I'm looking for that a lot of the time. I'm oftentimes looking for people who have something to prove, right? And so this is like the proverbial chip on the shoulder and it translates to some sort of hunger, right? It might be that they're just proving something to themselves, right?
Or it might be that they're trying to prove that the naysayers out there that didn't invest in them, they want to prove them wrong. Or they could be that they just want to build a market defining business. But I'm always looking for this sort of X factor that goes above and beyond their grasp of the opportunity.
I'd say one of the things I'm always looking for is a level of depth and sophistication on how their business operates. So that could be a depth and understanding on the financial side of the business and how they speak to it. That could also be a depth and understanding of how they speak about sort of product market fit and how they, diagnosed the fact that they found it or they haven't and how they're thinking about finding it, but it also could be sort of a depth and understanding in how they're building their existing sort of go to market, and how they're engaging with users. What I found is that the ability to grasp their business in a very detailed way. is usually a really good signal that they're going to be able to determine what is the dashboard that they need to run their business long term and be successful. And so when I look to invest, those are all the things I'm looking for. Sometimes, not every investment makes it as we all know. And sometimes it takes a mix of variables across all the different areas that I previously sort of walked through to make and build a successful business. And so to kind of give an example of a business that we've invested in or that I've led here at Storm and what it was that caught us and made us super excited is a company called Praisidio, which is led by two founders, Ken Klein and Vahed Qazvinian.
And Vahed is actually the individual I got to know for many years, actually via looking at a previous company that he was one of the founding technical leads, and I was actually passing on that deal that built the relationship. And we were just impressed by his technical understanding of the problems he was trying to solve as an engineer himself, but also his understanding of customers, right? And and the importance as an engineer to spend time with customers in the early days that you build a product right. And when he then found and got connected with his co founder, Ken, who is just an amazing CEO and leader and go-to-market leader.
We just thought they both had the necessary ingredients. They both had something to prove and they all both had the talents and the skillset to go out and achieve it. And so we were ecstatic to leave their seat and invest behind both individuals. And it was just this coming together of all these variables that I was mentioning, and they were going after a big space in the enterprise risk management ecosystem, particularly for understanding sort of your employee base and what is the probability that someone may be thinking of leaving or just may not be engaged in that work product.
That ability to understand how engaged your workforce has never been more important than it is today, where people are working from home. the beauty of their product is it's about setting up meaningful conversations between managers and employees, right?
We need org tools that allow us to better engage and support our employees more than ever before. And Praisidio is out there trying to do that, which is exciting. We're just so ecstatic and lucky to be able to back founders like, like Ken and Vahed.
[00:13:10] Gopi Rangan: You mentioned X Factor. That's such a fuzzy thing, but it's so important and it's different for different people.
And the example with Praisidio is very interesting; how you met the founders . What was the X factor and how do you describe it? Yeah, the situation.
[00:13:24] Fred Groce: Yeah. So I'd say Ken's X-factor as the CEO is his ability to sell. I mean, he's an incredibly engaging individual and his ability to grasp a concept and bring it down to a fundamental that is universal, that we all understand is a skill set, quite frankly, a lot of us don't have and, and that I admire, um, because I think if you can distill something to its purest form, that is the, the form in which we as humans like to engage and then we leave those meetings and we remember them. They really sit with us. Ken has this superpower. Vahed was one of the brightest machine learning experts I've ever met, hands down. And so to become machine learning expert, to have a PhD from Michigan, to have done data science at Google is itself just a skillset and a background that I think is just universally impressive.
But when you speak to him and you build a relationship, he's one of the most authentically honest and open and kind individuals. That is a quality I think my entire team was just excited to see and our ability to build this relationship with Vahed, even after we had said no to investing in a previous company that he was leading, I think also showcases the fact that we could build a partnership together with him and Ken over the long term that could go through the ups and the downs. It felt like we had that with both Ken and Vahed.
[00:14:50] Gopi Rangan: You mentioned failure, which is in the venture world, there are many more failures, many more startups that don't meet the expectations that you set when you start out.
A very few of them actually really, really make it. How does it compare? If you could pick an example of a company that really didn't go as well as you thought, was the engagement any different? What the kind of questions that you asked, were they any different or the kind of entrepreneurs that built the business? Was there any difference?
[00:15:17] Fred Groce: There absolutely was. So my first investment as a VC was in a company called Simple Emotion. And I would argue that it's one of the investments that I've learned the most from today. And I'm, and I think it's probably because the challenges there really showcased to me the things that, you know, I now look for when I invest, um, today. The fundamental mistake I made, which I think is one that a lot of people make is Simple Emotion was the example of a really incredibly bright team of founders who had a technology they built, in this case, a sentiment analysis system using acoustic modeling for voice to determine sentiment on text and people's speech patterns versus using text to speech sort of system where you translate the spoken word to text and then run sentiment analysis based on where words sit and the types of words being used.
And the idea was huge and we thought it was great. We start to see more voice applications in the consumer world. We believe that it'll start to happen in the enterprise. What I mean by that is these founders actually originally built this technology to help make it easier for parents of autistic children to engage with their children and understand what their children are saying. That was sort of the project that they had worked on when they were in college together. And they were taking that technology and now applying it to business and enterprise use cases, but that's team hadn't spent time in the enterprise yet. We invested in them right out of Stanford.
And what it taught me was the importance of having experienced the problem personally within the enterprise before building a technology to try to solve said problem. But also it taught me the importance of sometimes getting exposure just to the enterprise because there isn't a lot of intuition necessarily that is inborn in us as humans on how do you sell and build a go to market.
This team struggled with that. I think it was because that go to market component wasn't fully baked. We ended up really having a hard time. But at the day, I think I personally learned a lot about it. And as part of the reason I say why it's so important to look for people who've experienced the problem that they're building technology for versus just pure technologists who built something nifty and great looking for a problem.
And while that doesn't say that can't be done, certainly there are plenty of examples where that's been done. I think it's just harder to ensure success with.
[00:17:39] Gopi Rangan: Has this experience changed the way you ask questions and you approach entrepreneurs?
It absolutely
[00:17:45] Fred Groce: has changed. I now spend a lot more time sort of trying to understand why this current use case of the technology is the best, why this is the team who has the ability to sort of build a go-to-market and a product around it and why they are the best in the world to be able to solve it right versus just a good team could solve it and really trying to unpack and understand that I'd say it's also reinforced in my viewpoint, the importance of having a diverse set of founders in the early days.
And when I say diverse here, I mean, diverse backgrounds, right? In the sense that that early investment was a team of pure engineers. And I think I've really learned to appreciate the value of having sometimes a non-engineering co-founder or an individual who's willing to step away from product and engineering to help drive elements of the business side.
And that doesn't say that the CEO needs to be doing some of that work themselves, because certainly you can build a company where the engineering or technical leaders are the CEO, but it has shown me the importance of really having individuals around the table that that can not only build the product, but also can sell the product and can build the business strategy around the company overall as well.
[00:18:56] Gopi Rangan: You mentioned diversity a few times already, but this is such an important topic, and I think you're one of the best people to comment on this. What is your assessment of venture capital and where we are today? How is it welcoming or not welcoming founders from diverse areas, like minorities and women and others.
[00:19:16] Fred Groce: Well, first of all, I'm glad you asked the question because diversity is something I spent a lot of time thinking about and talking about, not only because I'm one of the co founders of a group called BLCK VC, but also because, look, as a black investor in the United States, I think there's never a moment where diversity isn't in my mind, whether that's because I'm the only black person in a room or the only person of color in a room, or because I've got individuals looking to me to help solve societal problems, which is its own sort of psychological tax, I think, that Black people, particularly in tech right now are facing in the context of the killing of George Floyd and how the tech community is responding to that. But going to your question, look, it goes, at least for me, without saying any venture is one of the least inclusive and diverse spaces that I've personally ever experienced as an individual.
But certainly I think that you could find as a working professional and that goes into tech as well, because I don't think you can really look at tech as an industry without also thinking about venture capital and how that's playing into it because VCs are at the day zero of company formation.
We're the ones that set in a lot of the infrastructure that will drive to either a more or less diverse company long term. And the data is just atrocious, right? I mean, less than 2 percent of venture professionals are black in the United States. Less than 1 percent of VC backed deals are led by black individuals in the United States.
And that doesn't make a lot of sense, right? The problem that venture has both in terms of its own workforce being diverse, but also in terms of how it finds and how it invests in potentially diverse founders or quite frankly not diverse founders right now is because so much of the system is predicated on networks, and those networks are inherently not diverse from the get go.
And there hasn't been enough attention put to diversify people's networks. The reason is that it's hard to do. If you want to suddenly have a more diverse, whether that's because you want to engage more Indian Americans, whether that's because you want to engage more African Americans or Latinx individuals, you've got to put a lot of effort into sourcing, building network ties, finding the leaders in those ecosystems to drive deal flow that's quality.
And the reality is it's easier not to do that, to just leverage the network you already have that's already working. But the problem with that is that it doesn't optimize for diverse organizations necessarily, and it can inadvertently ostracize these communities then. Because those networks have become the main way in which VC firms hire their next class of analysts and associates.
And those networks are the way in which all deals get sort of found. There is no cold intro dynamic in venture capital that works. And so warm intros are the way this entire system is predicated and built off. And if you do that built on existing networks, well, then by its very nature, you won't get a diverse output.
And that's the problem, right? We at BLCK VC are trying to solve for that by saying, Hey, look, we spend a lot of time in tech and as a community focused on how to diversify our workforces at the big tech companies. And how do we provide more resources to black founders? But we haven't looked at, like, are we solving the financial part of the equation as well?
Are we diversifying venture capital to make it easier for those diverse now founders who have gotten those resources to gain access and access to those firms so they can get invested in so they can actually have a fighting chance to be competitive in an extremely competitive market? And the answer is we've not done that.
And we need to begin to do that because it's the only way for us to move forward, I think, as a community. The good news here is we can do it. it's very doable. I mean, we've only got just around 300 black investing professionals. If we can double that number in this country, double the number of opportunities to access other diverse communities and networks, which can have a significantly positive impact on changing the way our industry is sort of trending towards.
[00:23:22] Gopi Rangan: Now, venture capital, like you mentioned, is a very unique asset class. And as VCs, we meet entrepreneurs at the point of origin, and we pick winners. We decide who gets funding, who doesn't get funding, who gets the support, who gets resources. And that kind of sets the path for the future of these companies.
If we want to make a change, we need to start at the beginning. And I think venture capital is in a position of power. But it's very difficult for a disadvantaged entrepreneur who doesn't have the resources and doesn't have the network, doesn't know who to ask and doesn't have the opinions and the mentorship that helps him or her build the story before even going to a venture capital investor.
And meanwhile, other entrepreneurs were born with all of this, or maybe acquired it through means that were easy to access. It's very difficult to compete. And my hope is that one way we can make that happen is by providing this type of information in the voice of decision makers through this podcast will level the playing field; will make it easy for entrepreneurs of all types to learn.
What is BLCK VC doing to foster that relationship? How can it help create a better network?
[00:24:31] Fred Groce: We do a number of things to develop and foster the community and the network. First we run a program called Breaking the VC, focused on enabling, supporting black individuals who are trying to get a job.
It's not trivial to process because trying to get a job in venture looks like no other thing in the world, right? We exist in a world where applying online, using websites like Indeed, reaching out that way, it has been the way to, in many ways, get jobs, right? Lots of folks do that.
And that works for large corporations, right? You've got to apply through their main channels. But venture capital it's very much a cottage industry, right? Every firm, even the large farms don't really have that many employees, right? In Storm, we've got, you know, five investors and maybe 10 employees altogether, right?
So we're a small shop, even though we've got close to a billion in the management across all of our active funds and investments, right? And so, I think people need the tactical tips on how do you structure a process and how do you navigate it? Right? And so we do a lot on that front, but then when it comes to how do we engage in support founders, a big part of it is our belief is that when we can advocate for growing the number of black investors that will help engage and better support those founder communities because they're now become more entry points into firms that people have within their own networks, right?
I mean, I have a large black network and that's largely because of the fact that I have access to my own community. I am part of organizations that focus and help develop and foster community development of black community. And so I've got this rich network and that's true for so many others out there.
And so we try to build bridges between those communities, whether that's doing events where we're bringing founders, VCs, limited partners together to create that sort of interconnectivity but also connecting them sometimes with corporate executives at large companies. And so we do a lot of events with the black employee groups at big tech companies, because our viewpoint is that if we can create more intermixing teams communities, you have more probability of finding a mentor or finding that first angel investor that exists, that's willing to take that bet.
And then during this time right now, with COVID happening, we're doing a lot around trying to disseminate information around PPP to communities of color. Trying to provide resources on like, how do you navigate the changing business environment, events targeted at those kinds of questions. Because it's becoming clear that founders that are black and LatinX, they're not getting access to the same sorts of advice and resources that other founders are getting access to, particularly they've gotten investment from any traditional venture capital firm. And that has been true, particularly with PPP dispersals, those who had access to attorneys and venture firms, they were able to gain access to dollars when it made sense and at a rate that was much faster than a lot of communities of color out there were able to, because they just didn't have the relationships again with the banks to drive that. And what we're trying to do is say, "Hey, look, that information needs to disseminate and reach those founders. We can be a platform to do that because we built the largest black venture community in the United States."
And because of that fact, we're able to speak up authoritative way that helps support and engage those founder communities.
[00:27:40] Gopi Rangan: Well, this is fascinating. We covered a lot of territory. The most important topic for today's discussion is diversity, and I really like the way you're approaching the problem.
You're trying to help entrepreneurs build a network and starting with BLCK VC. We need more of that. And I hope the world becomes a better place and more entrepreneurs come through the system as a result of that. Thank you so much for sharing your thoughts and insights. I know how busy you are.
Thanks so much for spending time with me today.
[00:28:10] Fred Groce: It's been an absolute pleasure and thank you for having me, and excited to continue to do the work out there and find great founders and try to drive our ecosystem to become more diverse and equitable and increase the access for founders everywhere, no matter the color, no matter the gender.
We just wanted to invest in great founders that are hungry.
[00:28:35] Gopi Rangan: Thank you for listening to The Sure Shot Entrepreneur. I hope you enjoyed listening to real life stories about early believers supporting ambitious entrepreneurs. Please subscribe to the podcast and post a review. Your comments will help other entrepreneurs find this podcast.
I look forward to catching you at the next episode.