Tracy Gray — The 22 Fund

Tracy shares insights on manufacturing, why exports matter, industry 4.0, and the state of diversity in venture today.

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Tracy Gray is the founder and managing partner at the Twenty Two Fund, EIR at LACI, the Los Angeles Cleantech Incubator. And she first got into venture almost 20 years ago after getting an MBA from Columbia and Berkeley.

I’m not sure if that’s awesome.

The twenty two fund is growth venture capital for manufacturing companies to scale into international markets. Tracy, I’m super excited to talk about why the U.S. needs to build our export capacity and also to hear your perspective on the venture business.

Well, Minnie thanks for having me. I appreciate you wanting to hear from me. So what people a lot of people in the United States don’t understand trade and globalization and exports. Many times I’ve talked to people say, well, we focus on exports, import export. What part of exports did you not understand and really do not understand the difference? So most economies around the world, their economies are based on exports, and that means selling goods made in your country to another market outside the world.

And that is because it creates jobs and it’s a great economic development tool. And that is why most countries around the world do that. Now we are very domestic oriented. Internally, fate focused only one to three percent of our companies, small, medium and large export. We’re where Germany is like forty two percent of their economy is based on exports. And they and all the companies that made it to the last recession, Brazil. India, Russia.

Germany, France, when they made it, they made it through because they’re the foundation of their economies and exports, ours is consumerism and so we depend on each other buying from each other. And if we’re in a recession, who are we going to who’s going to have money to buy buy your products? No one. So exports is just business one to one. It diversifies your offering into different markets so that when one is down, you still have places to sell to.

And so why don’t they export? Well, I think it’s just culturally, America doesn’t think outside of our borders. Oh, yeah, that’s true. It’s a cultural thing. We don’t we just think we’re we think we just need to sell to each other. And there’s a big enough market. We’ve been the biggest, biggest market in the world for so long that we haven’t realized the rest of the world has moved ahead of us. And now, you know, the last administration was trying to close in close and close our economy even more.

And it just doesn’t work so that it’s more culturally how we are not sure that makes sense.

And like anything else, if you don’t see it happening in your neighbor, a neighboring company, you might not know it. But there must be other reasons, like if I’m if I’m making something because the twenty two fund is focused on manufacturers. Right. So if I’m making something, you know, I would think there’s regulatory environment. There’s other things that I need to navigate in order to export.

I worked with the Brookings Institute when I was an adviser to the former mayor, Antonio Villaraigosa, looking at why don’t we export, why don’t our companies export?

They started in L.A. to look at this and then they spread across the country to different market, different regions to try to get us to export more. And what happened was a lot of it was fear. Hmm. Was fear of being taken advantage, fear of not speaking the language, fear of not knowing the laws, fear, fear, fear. And then once you got past the fear, if you fixed all the fear within the value chain of exports, then there was no capital, the end of it, than you need, you need to know the regulations on this side of the pond and then regulations in the other market.

And that’s part of the fear you have to. And to do that, you have to have partners in the next market. So what we do is we try to mitigate all those risk and all those fear throughout the value chain of exporting through our strategy and through our partnerships. So fear is a big part of it. Hmm, OK. Once you export to one country, it’s easier to export to other countries because you take care of the regulations on our here in our country.

Duplicate that, you know how to do it. Then you can start going to other markets and just worry about the regulations in the initial markets.

So do you have any sort of playbook you would recommend in terms of, you know, start selling in Canada because they’re our neighbors and they’re an easy market? Or do you have anything like that?

Or just just you have to do the market analysis to see if they want your product.

Right. OK, and there’s plenty of services to do that. We just our companies don’t know it because they’re either non-profits or it’s government. So there’s no marketing to tell you how to do that. And people. So partly what we do on an advisory level with our fund is we help you connect. You connect all those dots to where you need to do go to understand what you have to do to export. And then, like I said, we have partners in every region around the world right now, I think for Australia, but we kind of do there and they help you enter.

They’ll do your market research to see if your product is right, who you should partner with, what regions within Europe is best for your product, what parts and China might be best for your product. All the things that you need can be there, services to do that. And our capital is used to pay for those services. Right.

OK, so tell me about your capital. What sort of companies are you looking at and what sort of capital needs are you talking about?

So we make sure that we meet the company where they are. So we invest equity, some debt with warrants and revenue, share whatever works for that company where they are.

There’s a lot of these companies aren’t, you know, white dudes on Silicon Beach or Silicon Valley who understand who are around the ecosystem investing and they understand what equity is. Some of these companies are like, you’re going to take my business that I’ve been growing for 20 years and you’re going to take a part of my company. They don’t want that. 

And I think that’s the way a lot of capital is going, especially capital from women and people of color, because we understand that we’re not we’re not all thinking that same way.

Can you just give me the the basics of what Industry 4.0 is.

I can give you the basics because it’s my partner who can give you the details of it. But it pretty much is using technology to make these processes more efficient and more profitable. It’s efficiency, right? So a lot of people are thinking, oh, A.I. and robotics, that’s going to make things more efficient, efficient, but it’s going to kill jobs. It just changing jobs. And that’s what 4.0 is going toward, is making us more competitive with the rest of the world who’s already on this.

And we’re we’re a huge manufacturing industry here and we don’t realize it, but we’re an old school manufacturing.

And so a lot of it part of what our capital also does is the advisory’s to help these companies. When I made up this term uptick, along with up skill, their workers, we uptick their processes data and frame this a little bit for me and sort of the macro world.

We’re living in covid. There’s a lot of a lot of jobs that are actually going away right now. What I mean is that just what people are saying are the jobs are changing? Well, I feel like it’s maybe it’s small businesses that are shutting down and that sort of stuff is what I worry about, I guess.

Yes. But we also have a two point four million open positions that can’t be filled because of lack of skills. Point four in the man just in the manufacturing sector. So this goes back to jobs are changing.

Small businesses are manufacturing and those are the ones that can grow and they’re usually in underserved communities also lack the capital because all they get is a bank or some kind of other predatory capital. So jobs are. Are changing. I want to get people to understand that it is changing jobs, not losing jobs, but have to we have to work with the workforce development organization so that they don’t do the old school kind of job training, but they need to be educated on where technology is going.

Mm hmm. Mm hmm. Interesting.

And and you and I talked briefly what I said something like, you know, do you consider yourself an impact fund at all and maybe feel free and feel free to correct me or tell me your thoughts on sort of impact nowadays?

Well, I can be people get mad at me because I think I, I grab onto words and correct people around words. But words do matter because they create a mindset. Right. So, I stopped calling myself an impact investor because a lot of the impact investors tend to silo themselves in one area.

Right. So you’ve got the climate change moment that the gender folks, you got the racial justice folks, you’ve got the economic development folks. But what people don’t understand for women and people of color, we’re hit in all of that. 

So I’ve been calling myself and our firm holistic investors, women and people of color, we’re not they always see us as the victims of some of this stuff. But we are the ones that are come up with the solutions. So we are the innovators behind this because we know what’s happening very closely in our communities.

Tell me how you sort of got to this in terms of you were working for Mayor Villaraigosa and what were you doing there? And how did how did you like working in government? Well, I was you know, I don’t want to say I was fortunate that I was very autonomous, so I was a senior adviser, advisor for international business and marketing. So I just was able to go around the world and do my job.

And my job was very externally facing. But if you have a job or you’re doing a lot of policy and it’s internally and it’s, you know, it’s like. Power corrupts, mm.

How do cities how does the government approach this international business angle?

Well, governments understand that first foreign direct investment needs to come here FDI. You’ll hear that term needs to come here where people are investing here and we need to export only now Art. And they understand that and a lot philosophical level. And it’s really important to most.

Governments from the state to local, but they don’t know. That you have to connect it to business, like you have to work with the businesses. And you can’t just tell them this is a policy we’re going to do because we think it’s right and expect business to say, yes, we’ll line up because that’s going to help us to be in partnership. So really has to be greater public private partnerships.

Mm hmm. Leverage both to get things done. And we tend to just get on our own side like businesses wants government to stay out and the government wants to tax business. We just have to look at it very differently. 

What is a good public private partnership? Like, I, I don’t that phrase doesn’t fill me with. Oh, that sounds like a functioning group.

Well, I mean, one example is the Los Angeles Clean Tech Incubator. That’s where I was going. Tell me about that. Great.

That came out of the it was birth out of a policy Antonio Villaraigosa office and grew from there. And it is paid for by so the the building itself, which is if you’ve never been to it, it is the one of the most beautiful places you’ll come to in the tech world in Los Angeles, if not in the country. Beautiful building. The Department of the DWP owns that building.

And then they have different private capital coming in to run the incubator, and then a bunch of different industries from transportation to energy. They’re all coming together, working on policies and working on policies that help the startups. And the startups can help government be more efficient. So that is what I mean. I don’t really know the programs that Laci works on. And I have not been to the building and I have been told is beautiful.

But, you know, is it is it incubation of startups? That’s what I’ve seen. But then also policies yes, it’s how you leverage policy to help the clean tech industry or whatever people are calling climate tech now and vice versa. How does innovation help cities and governments and how does it lead toward economic development?

Their goal is job creation or L.A. County. And so they’re coming. They come together and see that there’s policies you can pass to do that, that help these these innovators and vice versa the government has is picking winners and losers, whether we want to believe it or not, in the in the private sector.

They are doing that when when these venture funds get pension money, that’s all public money and the pension funds are choosing these certain look and feel to put their money into. Whereas most of the pensioners look like you and I, yeah, they’re giving their money and making rich white men richer. Right. So the government does make bets on winners and losers. They’re just not doing in a way that’s helpful for everybody. And I’ll get off my soapbox because that’s my thing.

No, I’m completely actually. Let’s stay on that soapbox for a second because, I mean, my lesson of life as I grow older is that you have to follow the money and follow the money. And then you get to what really moves me on. The big pension funds do move the needle and they are still traditionally just fighting for allocation in the top. You know, whatever names that you’ve heard of in Silicon Valley right now, 80 percent of their capital investment capital goes to white men.

Or more. I mean. Ninety five. It’s in the nine. Yeah, yeah, exactly, do you feel like I mean, so I said this in my introduction, you first started in this industry 20 years ago.

It hasn’t changed. When I started in venture capital, six percent of the venture capitalists were women. No, 10 percent. It’s now five I looked at recently. It’s five point nine percent are women. And how is that possible when we know how many more women want to come into this industry? Yeah, that possible. Yeah.

I mean, I think there’s some horrible statistic that you might know, but it’s like there’s like 50 black women who’ve raised more than a million dollars.

It’s something like like thirty seven. So black women get point zero zero six percent of venture capital. 

And that’s not statistically possible that the rates we are trying to come in without systemic sexism and racism and structural barriers, putting your most positive hat on this systemic problem? What where do you think are the big levers? What’s the sort of constructive feedback here that you think will really move the needle?

Well, the biggest problem is the due diligence process for a lot of institutional investors and LP’s. It is the bias is baked in, it’s baked in. I’ll give you an example so they’ll say, OK, you’re doing your first fund. We need a tribute, a track record to you, huh?

If there’s only one less than one percent of the venture capitalists are black and brown people power. And you can’t get into the funds to get that track record. How are you supposed to get that track record and start there? So then they say, OK, you might have the track record, but have you work together?

Well, if I can’t get in there to get the track record, how are two of us going to be able to get to work together? And then they’ll use words like, you have to be professionalized or institutionalized or investment ready. Well, that’s coded language. And what does that mean? What lens are you looking through? If I’m an outsider that never let in that ecosystem and I’ve been outside of all this time, I think I have some idea of what it looks like. But do I really? And you’re going to base your investment on the fact that I haven’t been in that industry and something that can be easily fixed, my back office and all my fund administrator and all that.

But you’re going to say, no, I’m not institutional ready? Now, if that’s what happens and I am our back off and let me clear, ours is ours is very sure.

And is Monica Monica? Is she your partner? One of my partners. Monica Doti. Yeah, because I listen to her on the Harvard Business School podcast.

Right? Yeah. You first woman. The first one that was Women Investing Women. Yeah. The Women’s Venture Capital Fund in the middle of the recession. She raised the.

Yeah. Now you guys are about as amazingly, you know what investible institutionalized. Right.

When do you feel like if something’s not working, when you put that on yourself and say, oh, you know what, this is valuable feedback, like I’m not looking institutional enough, like I should take that as feedback. And when you say, you know, fuck that, like it’s it’s something wrong with the system because I struggle sometimes, like, I want to hear the feedback.

I’m a Buddhist. I’m a Buddhist. And so I strive. I try to start with compassion and I try to put myself in their shoes. You know, they they don’t know what they don’t know and they’re so comfortable where they are. So if I have to show up in the rare suit I have now, if I have to show up in a suit and put my hair up because dreadlocks scare people, sometimes I’ll do that if I have to to raise my fun.

But I’m not. I have to be authentic. I think if you just start with just be authentic, you should be able to fit anywhere. Look, I started as an engineer on the space shuttle program, how nonblack woman with dreadlocks is that?

I know how to be in those rooms. And I did that a lot as a young woman because we all had to. But I just it’s exhausting and I just don’t want to I’ll show up who I am taking you take it or leave it.

No, like, leave it, I have to say.

OK, OK, I have a lot of people that’s funny.

Anything else, like you have a bazillion things on your background, like your trusty at Cal State Dominguez Hills. Oh yeah. Yeah. Because I really didn’t know anything about the hills until they asked me to be on their foundation board when I was a treasurer. But what I love about them is they are only there. Their mission is to serve the people in the community next to them and then 60 percent of their students are women, the majority are black and brown.

One of the things that that really got me there, Tony, how they work with the community. And they said we started with high schoolers and we bring them on to the campus and then we realize high school’s too late.

Let’s go to junior high. And then they were like junior high was too late. So they have programs all the way to kindergarten. All around them, then they then they said, well, these students have parents that are working multiple jobs they don’t have and they don’t have transportation to come to our campus, we need to go to them. And so they created these mobile fab labs with all this technology and they go to the different schools and the kids work on things.

And one of the schools is a home is the majority of kids are homeless and they are bringing technology. So they’re just doing things very different than any other campus, USC in the same neighborhood and USC walls themselves off right out of fear, right? Dominguez Hills campus is wide open.

When you go there and they’re in the same neighborhood, so it’s all your mindset. And so that’s what got me. And every time I go there and I see the work they’re doing, I literally end up crying every single time I’m in tears because and, you know, in a lot of their students are homeless themselves or living in their cars. Study of all the CSU system, it’s really criminal. But these kids are just like, I want an education.

So if I have to live in my car and I want to get food is and when I’m on campus, I’m going to do that. And so I’m like, why do they have to do that? I didn’t have to do that just to get an education. So I would help bring money and capital to them so that these students can get take that off their back and just learn so you can imagine what’s happening for them right now, you know, there in parking lots where they can get on to some kind of wi fi so they can do their homework.

Yeah. Well, anything else in your background, like there’s so much to cover. It’s great or anything else about the twenty two fund? Look, I’m so excited it exists and you’re leading the charge. Oh, you are.

You did ask about the type of companies I can tell you. Tell me about that. One of the companies that I love and I won’t say the name because we still haven’t made the investment, but it’s a hydrogen and electric trolley system, meaning they are they make trains without overhead wires. And you don’t have to dig into the ground and uproot the utilities so you can bring in these trains cheaper. It’s for those last mile destination. So example they’re doing that, the transportation for the World Cup, Qatar.

Oh, cool.

They are there about twenty, twenty five years old. It’s a lot. Next man start started it in Chatsworth. So it’s like it’s in the lower income community.

It’s a brown man, you know, it’s clean, which are really about if you ever go to the grove, you know, that little trolley that takes you around in the grove, you know, but I know of it.

That was their first version 20 years ago. Oh, awesome. Electric. Yeah. So that’s the kind of like we want sustainable, clean manufacturing companies that can grow jobs and they’re innovative and that’s what we invest in. But then, we’re industry agnostic. It’s just as long as you’re making something.

Yeah, that’s great. Well, I, I learned a lot and it’s like very convincing that we should be focused on our exports and not just consuming so much here.

Your investments, if you have any manufacturing investments and you want them to grow internationally, now you know where to go.

Fantastic. I’m so glad you’re here. I’m so glad you’re doing what you’re doing. And I appreciate getting to know you better. You too. Thanks.

I’m still humbled and honored for you wanting to speak to me.