Jim Armstrong from March Capital Partners

Welcome to the Puck, a show that explores the evolving landscape of the venture capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Behr, corporate lawyer and president of CMBG Advisors. This podcast brings change makers to the table to discover the inner workings behind decision making strategies and ultimately how they got to where they are today. So I'm just gonna say it, do it in 10 slides and do it in twenty minutes.

Always be compelling, never be comprehensive. On today's episode of the Puck, I'm talking with my long standing friend, Jim Armstrong, cofounder and partner of March Capital Partners, a leading venture capital firm in California. Jim, a veteran of the VC world, shares some really insightful stories about his early day experiences in the LAVC community and tells us where he believes the industry is going. Jim, thanks for being here today. So tell us a little about your fund.

We're a $250,000,000 fund headquartered in Southern California. We have offices in Northern California and Austin, Texas, and we also do a little bit in India. We have some really neat investments in India through a long history of investing there. And, we are the fund that works, primarily more the series a, series b, and beyond, a little bit later stage, or would be called later stage. We will do select seed things, but I've been doing venture capital in, I I was with Austin Ventures from '95 to '98 and then went worked around really one of the first Internet incubators, Idealab and Bill Gross as Idealab Capital Partners.

Did several funds with some great guys at Clearstone Venture Partners. And when some of those people left the business, me and one of the other partners there got together with a couple other folks and started March Capital. So from your vantage point, what do you see happening in technology in California and more specifically Los Angeles? The world has its attention on technology, and technology has a headquarters in Silicon Valley. That said, Los Angeles is becoming a true real ecosystem for a lot of that energy for a couple of reasons.

The Bay Area, as it's become, more frothy, has a downside. A lot of the companies complain that they're engineers the second they have a bad week, a bad month, a bad quarter, they're vulnerable. The salaries are incredible. You can hire great people, but you have a hard time keeping them. A second thing is just the climate and the diversity of Southern California.

Northern California is tech. We've had several people come to us over the last quarter or two who were serial entrepreneurs or even venture capitalists who just said it was a long, wet, cold winter in San Francisco. Right? In the Bay Area, it rained every weekend. What's happening down here with Snap?

What's happening down here with a lot of these entrepreneurs? At one point, being a venture capitalist here, there was rarely a company that was raising venture capital that I hadn't heard about. There certainly would never be a fund that I hadn't heard about. And today, I don't think I could even get close to naming half the funds in Southern California. And never mind when people come in to to bring me three or four things they think are interesting, invariably, I'll say, wow.

I did not know about that. So that to me is the the proxy, the real, metric that should be looked at that says, however you wanna describe what's happening here, it's gaining momentum and it's not gonna stop. Let's go back for a second. You came to Los Angeles in 1998. What were some of the noteworthy things that you saw in your early career in Southern California?

I started my career with Austin Ventures in 1995. Enjoyed venture capital a lot more than I thought I would have. I was an entrepreneur before that and assumed I would just learn a little then go about how they see the world as venture capitalists. They see the entrepreneurial world, and then I would go back to being an entrepreneur. But I loved the venture business and wanted to stay in it.

In '98, I thought LA had a lot of population, a lot of economy, but it really what drew me here was, the first Internet incubator. And it was, a fellow named Bill Gross who came out of Caltech as an engineer and really is an inventor and entrepreneur, and he created something called Idea Labs. And I think he had to create an incubator at that time because there was not an ecosystem, so you had to hold your ecosystem close. So inside Idea Labs, he had counsel, legal counsel. He had a retained search effort.

He had an advertising firm. Everything an entrepreneur would, quote, unquote, need as well as capital. And initially, he did not have capital. And he told myself and a guy named Biloxas, who really gets the credit for founding what I'm about to describe, he said, gee, at the time, the Northern California firms really weren't ready to invest in Internet companies, and he saw the Internet in its earliest days and all of its potential. And so Bill Ocus founded Idealab Capital Partners, and I joined him very early.

And that became one of the all star highest performing funds of all time through through, a couple of cycles. So you said something interesting. You said that Idealab Capital Partners raised money to work with Bill Gross to invest in Internet companies back when California VCs from up north weren't ready to invest. So are you saying that a a lot of the initial funding that went into building the backbone of the Internet would not have happened without the funding from Los Angeles? I think IdeaLabs and Bill Gross and IdeaLab Capital were very instrumental in pushing that.

Right, and so the fund, the first fund was about 100,000,000 and in a very short cycle, the span of two or three years, it had returned $700,000,000 in capital and that's unheard of in venture capital, which has great returns, but it's typically ten, eleven, twelve, thirteen years plus to get the money into companies, have them grow, have them go public, get the money out, have them bought, etcetera. So, like, the Bay Area and all things, it doesn't take long for word to get around and for everyone to kind of shift and move. The anecdote that I recall, Bill Gross saying in meetings, and I was in some of these, people would say, yeah. And, again, this is gonna date me, but it's true. Yeah.

But are people really gonna use their credit cards on the Internet? I mean, that was this is within twenty years ago. We're not talking sixty years ago. This is twenty years ago in 1997. This is the conversation that people are having.

And remember, at the time, you had 40,000,000 or 50,000,000 people on the Internet in The United States, and most of those was dial up. Right? Two fifty six k, not even a megabit. Obviously, there was no video. There was no graphics.

Email was a big thing. The ecommerce companies really didn't have a lot of infrastructure. Web application servers hadn't been developed. Delivery systems and content servers hadn't been developed yet. Those were all early days.

So to relate that to your previous question, LA at the time was known as digital media centric, as it should be. And the thought was LA is going to be the place where content entertainment content goes digital, but it's taken a lot longer than people thought and taken much different forms than people thought. So that's all LA was was considered was digital media. And I do give Bill Crow certainly credit in Southern California, but also driving a lot of the market to say, one, incubation matters, and two, the Internet's gonna be involved for with many other things. And and Bill is still out there creating very innovative ideas at Idealab.

So I'm wondering, Jim, how did these ideas initiated by Bill Gross translate into Overture's groundbreaking revenue model, which then caught the eye of Google and changed the course of their business? I mean, how did this all actually happen? So early days, Google started, as a lot of companies do in technology, with an engagement model. We have a better search algorithm. And at one point, Google's investors were not feeling very good about their investment.

This is the venture capital investors. It's known to be that they were willing to sell their investment at less than they put in to get out of it. And the issue was how would search develop with a with a revenue model. And Overture, or it became Overture, it started as a company called goto.com, where we did the series a, and I was involved in some of the early board meetings. But, again, I give, Bill Ocus credit for seeing that.

It was started on the back of a napkin by Bill Gross, and it's a story worth understanding as we look at some of the models today. Bill sat down in a meeting, Bill Gross, and on a literal napkin said, well, how does the yellow pages work? If you think about the yellow pages, if you go to a page for fitness clubs and you see somebody took a half page ad, you know, top ranked fitness club, you can envision what that place looks like based on the fact they're advertising to you. And then if you see down in the corner, Bill's Gym, one line, you can get a visual picture of what that looks like. So the dollars people are willing to spend to reach you are actually, Bill thought of that as his page rank.

Right? So Google's page rank was how many people linked to your site. Bill's page rank was was whoever's willing to spend money on you is actually the best indicator of the quality of the product and the quality of their budget. And that was the idea on the napkin. He launched it as goto.com, and there's a second great lesson about that company, which has showed up several times in my career and is showing up right now.

And it's the wonderful thing about venture capital, which is at the time, it was common knowledge on Sand Hill Road that search is a bad business. Search doesn't monetize. You cannot make money in search. And I remember in the early days of gotocom, lots of leading venture capitalists saying, Jim, we have AltaVista, we have Lycos, we have Excite, we have Yahoo. The world doesn't need another search engine.

There's no reason for a search engine, and it's shown you cannot make money in search. That is common knowledge until it's not. Right? So I think a great thing about venture capital is everything a really good idea until it's not, and everything's a really dumb idea until it's worth several billion dollars. And I think that humility makes you a better venture investor, makes you a better entrepreneur.

That is the lesson of overture. So, and I'm switching names. Let me call it goto.com by its name it was at the time. That company was able to race to a $100,000,000 in revenue without anyone really noticing. And so at the time, if you had an Internet ecommerce company, you had only one way to get traffic.

You had to cut the deal with AOL. 20,000,000 to be their gold or 15,000,000 to be their silver sponsor. There was no way to go and swipe a credit card and say, well, I'd like to buy keywords. That concept didn't exist. And so goto.com invented that concept, the marketplace for keywords.

They did a so so job with their patents. If they could change one thing, it would be hire better IP attorneys earlier and listen to them because they didn't. And they had some claims, but not all the claims. In the end, Google paid them a $100,000,000 settlement in recognition that they took that as the revenue model. In the end, they sold for 1,800,000,000 to Yahoo, which was a nice exit, but it pales in comparison to the value that Google has been able to create.

So there's many lessons about Go to, but it the predominant revenue model on the web today was developed in Pasadena here in Southern California by smart entrepreneurs and namely Bill Gross and Idealab. So, Jim, you were talking about the notion of whether or not people would be willing or not to use a credit card on the Internet and also kind of the notion of how would things get paid for on the Internet. Tell us a little bit about how you were involved with PayPal. I remember very well a lot of people saying, Jim, do not invest in PayPal. No one will ever trust their money to something called PayPal.

So I was the series b investor, although it was really the series a. Today, you'd call it the a and they had a seed round. They had a strategic investment previously from Nokia Ventures and a very good venture capitalist up there who saw the larger potential. But at the time, it was called Confinity. It was really just Peter Thiel and Max Levchin, who I met with, and it was 100% built on the Palm Trio.

The Trio, which was an early smartphone that didn't take off because it was clunky, too enterprise focused, and the software was meant to beam with the money. So they tried to solve the chicken and egg problem of, hey, you have to have the software to get the money. Because of that, Max designed a software that was highly secure. And in payments, it turns out over time, and this is true, organized crime globally is very quick to seize on any electronic payment scheme. And the fraud rates of all the other competitors were astronomic.

One I know was 100 fraud and PayPal was able to hold their fraud levels or Confinity, the product was called PayPal, to standard credit card fraud levels, I think 7%, 6.5%. But a couple interesting lessons there. One, the product, it took some coaxing by the board to get the management team to embrace letting you PayPal people over the Internet over email. Two, you would think that we would have guessed that eBay would have been the driver for it, but it caught all of us off guard, which is why you're here today in the lean startup method, launch a capability in the market and then listen and watch. As much as you think you, the royal you, saying you think you're, as an entrepreneur or team, think you know what the product is, the data will tell you where it fits.

That was an early lesson in that. I think, at one point, we owned 20% of the company. We invested pre revenue. It was a fantastic success. Where do you see the hockey puck going, and where do you see things evolving in the LA market?

That's a good question. And LA is a really complex environment as is the Bay Area in technology. So there's a couple ways to think about that, Jim. The first is that there's a lot of narratives out there that get pushed top down, and you have to pay attention to those. So the narratives are, let's talk about autonomous cars.

Let's talk about AI. Let's talk about virtual reality. Let's talk about drones. Let's talk about Internet of things. Right?

So those narratives about the coming wave of technology need to be taken seriously. The main reason entrepreneurs need to take that seriously is those narratives are getting into the minds of all the other companies in the ecosystem, big and small, including in the budgets of companies. So whether you think autonomous vehicles are a twenty twenty phenomenon or a twenty forty phenomenon, the more important question is what does Ford think? What does Audi think? What does Tesla think?

What does Google think? Because they're investing in startups and technology. So that's why you have to take those big narratives seriously. And a lot of entrepreneurs are rebels, and they say, well, I don't listen to that, and I don't listen to this, and they should. Now that being said, if you look at from the ground up what's happening in Los Angeles, LA has been a real pioneer in ad tech.

Right? People who understood content, how to think about partitioning content, licensing, the legal side of content, the legal side of licensing of content, and monetization through licensing, and a lot of ad tech technologies happened in Southern California. I'm seeing a lot of new models develop. They're still in small and private, but it's expertise in the area and that needs to be followed. Second is security.

Every day we're reading a new story about someone getting hacked. This has every CEO's attention. No one is going to say, well, it's a really great idea that you can stop us from getting hacked. We just don't have the budget to pay for that right now. That conversation is not gonna happen.

So this is more on the enterprise side, but we've seen some things on the personal side. Cybersecurity is a really big theme. The last thing I'll mention is mechanical sciences. There are a lot in Southern California. There's a growing wave of evidence that hardware is the new app.

When I say hardware, I mean devices. What used to be the case is you would build a device, you'd put it on a shelf at Fry's or Best Buy, and then it would be obsolete in two or three years. But now, every piece of hardware can be updated and it's cloud connected with cloud service models. So whether you think it's Fitbit, health and wellness, health care, IOT, security, there's a new cadre of hardware companies, device companies and it's really just software being delivered via hardware that are popping up in Southern California. So does this mean Northern California entrepreneurs are gonna move to Los Angeles?

The top serial entrepreneurs who are well known and established names are not gonna leave Northern California to come down to Southern California. They have great networks up there. It's a great system. It works. And it works really, really well.

Who is coming down here is the next generation. They really are. We've met several companies lately with top people from top companies that said, look, I looked at the Bay Area. I looked at New York and I decided to just come to LA, to come to Venice. You touched on this a little earlier.

Where do you think the draw to LA comes from? Southern California is winning on lifestyle and culture. Why would someone start a startup in Santa Monica which is outrageously expensive when you can start it in Riverside at 1 5th the cost? It's because the top talent doesn't want to be in Riverside. No offense to Riverside.

It wants to be in Santa Monica for tech talent and that is really where Southern California is winning. It's where Venice is winning. It's where Santa Monica is winning. We're seeing more in the South Bay and in Culver City and in in Los Feliz and Hollywood and Pasadena. And these places are winning because of that.

That's where the sizzle is. It's a mix of tech and the entertainment industry and a different flavor of foodies and culture and San Francisco is a great city, but a lot of startups in in San Francisco are down the Peninsula and it's just different up there. When you think about the vast potential available for entrepreneurs with all the different VCs out there, what do you think it takes for a smart business person to capture the intention of the right VC? That's a good question. Yeah.

I I would say a couple things. I would say the most important thing is and I'll speak specifically to the process of raising money from a venture capitalist. I think it's a little different for angel investors and a little different for private equity, but I do have a few things where I see the biggest mistakes. The first is that always be compelling, never be comprehensive. So I'm just gonna say it.

Do it in 10 slides and do it in twenty minutes. And the reason is, and it's not it's not specific to venture capital, but it's specific to anybody who has a lot of material to go through to make a decision. There is zero chance that somebody says yes in the first meeting. The first meeting is just to say no, and the goal of the first meeting isn't to raise money, the goal of the first meeting is to get to the second meeting. And by not being comprehensive and being compelling, you'll get that second meeting even if it's just because I, as an investor, want to find out more.

Right? And that's where the relationship starts. By the time I get to the sec if I'm taking a second meeting, I've already chose to invest my time. So now I'm trying to get to yes. I really am.

The second thing I would say is, especially for venture capital, bring your ambition and say that upfront why you're doing this. We didn't invest in Ring because it was late, but I remember I think the entrepreneur that does this the best I've seen anywhere, honestly, and it's a Southern California entrepreneur, Jamie Siminoff over at Ring. When I asked him why is he building this company because he's built some other companies with success, without hesitation, it came out of his mouth, I'm gonna solve neighborhood crime globally. I'm gonna network these together. There won't be any more neighborhood crime.

That matters if you're a venture capital investor that needs to have a real option at a really big important company. The analogy that I was taught and by one of my mentors and used is stars and stepping stones. And they're each have to be in context to the other or said differently, they're each out of context without the other. You have to have your star, your ambition. You bring out your star to raise capital, to recruit the best talent, but you have to have your stepping stones.

Here's what I'm gonna get done with this money on this time frame with these milestones, and these are compelling. And as the CEO, founder, entrepreneur, you have to always be thinking about both. We were talking about the vision for solving neighborhood crime. But what's your vision for March Capital? Really, it's about finding the most talented people in the market and giving them capital and the benefit of our experience.

I mean, that really is the broad vision for March. If I bring that down a little bit, we think there's room in the market with the experience that we have as a partnership to create a terrific world class venture fund. We know where we fit in the market and we do do early stage but we're proud of our late stage investing too. You know, we believe we know how to work with people and entrepreneurs. It doesn't mean we're pushovers, it doesn't mean we write checks to everyone, it's a little bit tough love but we have many, many, in fact, I'll say most, almost all entrepreneurs choose to work with us a second time when they come out, and we love working with our serial entrepreneurs.

And all of them would say, I believe, that you added a lot more value than your capital, and I couldn't have gotten here without the help. And part of that knows, we know what we don't know. We don't try to operate the companies from the board level. We help where we can. That's what our mission is, to do these things, and that's what world class means to us.

Next week on the Puck, join us as we sit down with Mark Mullen, a leading Los Angeles venture capitalist who has a diverse and fascinating background, and who's gonna tell us a little bit about his focus on b to b investment opportunities.