Tuesday, February 5, 2019
Interview With Jamie Montgomery, March Capital Partners On The Firm's New Fund
Santa Monica-based venture investor March Capital Partners (www.marchcp.com) announced last week that it has raised a second fund, worth $300M. To learn about the new fund, we sat down with Jamie Montgomery, one of the fund's co-founders, to hear about March Capital's strategy and the new fund.
Tell us a little bit about the new fund?
Jamie Montgomery: It's interesting, as you grow, you get bigger and more focused. We found out what we're really good at, and we're drilling into those areas. We started March Capital in late 2013. We did our first close in the summer of 2014, and over the first nine months we raised our fund and started investing. Fund I was fully deployed by June 30th of 2017, and we went out to raised Fund II, which was a wet close, where you invest as you close. That can be good or bad, because that means you end up having to explain everything twice to your investors. Fund I was really focused on AI, and what we now call big data and machine learning, and we focused on the cloud and Internet infrastructure, plus made a couple of investments in India and in gaming. That fund turned out really well, a top quartile fund and very well performing fund. Some of our big investments there included VeloCloud and Crowdstrike, and two based in India, BillDesk, kind of the Paypal of India, and CarTrade, the AutoTrader of India. We sold Velocloud to Vmware, in the software defined network (SDN) area. Those investments have really broken out. Fund II will also be similarly concentrated. We have 80 percent of our dollars in enterprise deals, and as they break out, we double and triple down. We probably haven't done as many investments in Southern California as we'd like, but that goes through different cycles.
Speaking of cycles, where are we in the venture cycle today?
Jamie Montgomery: If you study cycles and study economic history, and I've had that privilege, there are short cycles and long cycles. The long cycles are what we call after the Russian economist, Kondratiev cycles. These might be 50-year, or 20-year cycles. We have the long cycle, which is the evolution of data-driven businesses, and the whole innovation economy. Those are the 20-year cycles of the cloud, and AI. Then, you have 10-year, economic cycles, where you get a cross current. The economic cycles interact with long term cycles to create a cross current. What you have to do, is look at each company individually, and understand how would this company do during an economic downturn. Are they selling into operating budgets, where they are creating major cost savings? If so, they will be adopted. Or, are they selling into CapEx, which will be cut in an economic cycle? That's what we've found in discussions about the long wave or short wave, basically, which means there is always a lot of uncertainty and turbulence. The one thing that is sure, is that things are unsure. When a recession hits at some point, and it always does, how are your companies positioned for that? If they have several years of cash, can control their burn, are doing something important, then you have to see what budget they sell into. That's something we ask before we make an investment, and in each of our Monday meetings—is this company doing something important? There are lots of things that get blown out in a recession.
Looking back at the winners in the last fund, what did you do right with these last investments?
Jamie Montgomery: Conviction in our winners. We have a concentrated portfolio, with four companies with about half the money invested. They're all big winners. If you concentrate your investments, people love you if you get those investments right. On the other hand, if you concentrate, and get it wrong, you get a different reaction. Our strategy is to get into a company, sometimes early, in the A, B, or C round, in a theme or entrepreneur we really like. We want a sector when it's very young, which usually means there are not a lot of choices. Then, if you like it, and it starts to break out, you double or triple down on your investment, and then find a home for it. For the kinds of investments we make, where there are always great engineers and technology behind it, if it ends up it's hard to get that to market, you can always sell it for 1x, or half your money, or 3x. It really doesn't matter in the big picture that much because your returns are dominated by your bigger positions. If you're getting $2, or $4, or $6 on those other investments, who cares. For those losers, you either get your money back or close to it, and then you concentrate on your big winners, and you will end up with an outstanding fund. Of course, we have a different focus than, say, a consumer focused fund, where there is a lot more volatility. There, you end up having big winners but a lot of losers. But, for companies we investment in, those are always useful to big businesses. Something like a CrowdStrike might be worth more than a Snapchat, in the end.
What drove you to specifically start looking for companies in the area of AI?
Jamie Montgomery: Sumant deserves the credit here. Sumant found a co-creation studio up in Palo Alto, which was working in big data, AI, and machine learning, and was applying it to different verticals. At this point, AI is table stakes. If your company was mobile, or cloud based before, now it has to be AI-enabled. AI itself is baseline technology, which cuts across all companies. It's not the compelling factor in itself. What we are looking for, are large problems that can be solved by applying AI to them. Those are areas like cybersecurity, or fraud prevention, or feeding the next billion people on earth, improving the future of the workplace. Then, at that point, it's all about the entrepreneur and the team.
For entrepreneurs, which areas are you most interested now?
Jamie Montgomery: We're very interested in the future of work, and what that looks like. We haven't backed anything in healthcare yet, and we're looking there, and Gregory is doing a lot in the gaming area and particularly mobile gaming. We're always looking for great entrepreneurs, but we tend to come in later, and put more money than others here, and we'll spend a couple of years looking at a company before we do it. We love good entrepreneurs, and hopefully we'll be able to showcase some of them among the 140 companies we have coming to our summit in March.
Thanks, and congrats on the new fund!