Wednesday, May 25, 2016
March Capital Partners' Jim Armstrong On A New, $240M Venture Fund
Story by Benjamin F. Kuo
Santa Monica-based March Capital Partners (www.marchcp.com) has just announced a brand new, $240M venture investment fund, led by longtime venture investing veterans Jim Armstrong, Sumant Mandal, Gregory Milken and Jamie Montgomery. We caught up with Jim Armstrong to learn more about the new fund, areas of interest, his insights into what makes startups successful, and where he thinks the venture market is today.
What is the investment focus for this fund?
Jim Armstrong: It's broadly technology, from consumer Internet, to marketplaces, from Internet infrastructure to enterprise software. Those are broad areas, but we are not doing some deals like we have in the past, in biotech and other areas. I think there are a lot of opportunities across all of these areas of technology, especially as it relates to Southern California.
We know you invest globally, but are there specific kinds of companies you hope to focus on here in Southern California?
Jim Armstrong: In the consumer space, we know it's really a hit or miss business, but the number of shots on goals in that area have been tremendous. I spent the morning at Cross Campus, and saw some amazing things in the augmented reality area. At Idealab, we saw many shots on goal with companies who were consumer focused, and we have found the quality of entrepreneurs going to consumer Internet companies has changed dramatically, which represents a real opportunity. So, you will see March participating in the early stage with consumer companies. When it gets to Internet infrastructure, we've obviously seen a lot of past success around Rubicon Project, and investments in companies like Bridg, so whether it's new ad technology, new ad formats, internet infrastructure, or in helping companies to manage digital marketing, we've found that's a great area for Southern California companies, plus many in Northern California. Southern California, in particular, has a lot of talent in ad tech. On the B2B marketplace side, that area has been an interest of our fund, and has been for awhile. We are seeing a lot of success at SupplyFrame, and also at a past investment of ours at LeisureLink, which has a marketplace for vacation homes.
There's also a great network effect happening in the area of industry clouds, and network capitalism, which is not just marketing poof. That network effect is a subtle but has a powerful effect with all this new technology. You'll see we have several enterprise software companies already in the March portfolio. Enterprises are under a lot of pressure to produce great product under fast cycles. If you look at an enterprise developer of IT team with DevoOs, they have to create applications, manage those applications, and now are dealing with open source, hundreds of different web services, network elements, all virtualized and with containers and new tools. We've had a lot of focus on the cloud and that area, especially as the cloud is hollowing out IT. All of that represents opportunity, as well.
As veterans of the venture business, biggest lesson you are applying to this new fund?
Jim Armstrong: That's a really good question. The biggest lesson is, to bet on the big trends. Sometimes, when you think there's safety to a niche, you'll find that it's tougher to recruit he best people and attract the best capital to a niche business. Big ideas rule the day. The second, is don't back yourself. Early in my career, I would constantly see something, and implicitly, without being aware of it, think “I'll fund this” and think I could fix the flaws I could see. That's when you start meddling in the company. It's all about the entrepreneur. When a venture capitalist says—there's something wrong with this company, and we just need to go in and fix it, you're not being a venture capitalist. You have to help people get better, and not try to fix things. If you think you can fix things, what you're just doing is backing yourself. Follow the big trends, and don't back yourself.
There's been a lot of debate about what the right size of a fund is, and what's too big and too small. Where do you think you are with this one?
Jim Armstrong: I think we're at the right size. I think there is a danger in getting too big, but there's not a danger in getting too small. As we get into the range of $240M, we're not worried about it being too small. There are a couple of things that are somewhat unique to this new fund. It's a global fund, and of the fifteen companies we've already invested in, several are in Northern California and several are in India. We are looking globally, and though I love SoCal, we're not a regional fund, which is important for that size conversation. To me, there are a couple of elements of the fund we're very excited about. One, is this fund is really designed to pile onto its winners. If you thought about our last funds, where we came from, we were very conventional. We'd do a Series A, and participate in the Series B, but when companies hit breakout, we would call a late stage VC and have them price the deal, and do all of that. With this fund, we do not have a cap limit on late stage investments. We can now write $20M, $25M, and $30M checks to existing, breakout companies in our portfolio. Related to that, we are also going to do a select number of first time investments at a later stage. The reason for that, and it's really important, is the bane of this asset class is the generally poor liquidity that venture capital provides. When I talk to LPs, that's always the one or two major pain points of the asset class they talk about. Post 2008, LPs abhor illiquidity. By doing some later stage investments, and not all Series A deals, we should see shorter time to liquidity, on some of the most important late stage investments. That's good for entrepreneurs, because it also allows us to pile on funding to companies that are working well, rather than just investing pro-rata. That also helps our LPs, because it shortens the liquidity cycle in the asset class.
Given your experience with some good winners in the past, what advice would you give to entrepreneurs about how to make their companies as successful?
Jim Armstrong: First and most importantly, is check your ego at the door. When you look over time, what holds people back, including yours truly, is trying to do everything yourself and solve everything yourself. The simple ting you need to do is ask for help. Lots of the time, there is a well worn path to getting things done, whether that's acquiring traffic, raising capital, or team building. We found that there is definitely a pattern of success, but in truth this is one of the most important things we think about every day, which is getting gyour ego out of the way. Related to what I said earlier, is you need to think big and broadly. Especially, since we are in SoCal and not in San Francisco, where although we've had some great companies lately, there are not as many case studies of what a company could be. One thing that we are trying to add, particularly in this region, is thinking about what is the right path to becoming a multi-billion dollar company, what capital structure you need to have, what global capital you need, and what big partners. There is a lot of focus on startups when they are startups, to move to that magic moment when you become revenue and cash flow break even, but that's really a long way from the end of the story. We want to help build smart companies faster, by pooling our advice, and sharing our pattern matching about entrepreneurs. So, check your ego at the door, think big, ask for help, and try to absorb the best patterns from the best companies out there.
Finally, there has been some worries and discussion about where we are in terms of the venture environment and cycle, where do you think we are?
Jim Armstrong: Things are definitely down, and valuations are down at the late stage fifty percent from 2015. But, that's just ebb and flow. I think the environment actually has never been healthier. Everybody who is young and bright is thinking about starting something on their own, or being part of something, and more tha more, even those looking for jobs in a company are there to learn, and absorb, so that they can go out alone. Each and everyone is creating their own equity scenario. That's a sea change. With all of the resources out there, from open source to the cloud, to easy to use development environments, it's never been easier to create something. Third, and most importantly, every existing piece of buying and consumption, whether that's in the consumer or enterprise area, is completely up for grams. If you look at the Fortune 2000, very few have figured how to represent themselves on mobile, but the consumer wants mobile. Consumers and you and I have been trained by Google and Amazon on expectations. Enterprises have to react to that, to serve consumers. The way that IT delivers things, the storage, the database layer, the networking later, the application later, all of that is being reinvented by some major, new player on the computing side. I think the underlying health of the venture market is very good, and I can't imagine a time where things have been more exciting. That said, the funding environment is taking a breather. I see that as a rest stop, after sprinting for a mile, and I expect it to pick back up, because the fundamentals are there.
Thanks, and good luck!