As the first investor in PayPal, Jim Armstrong has seen a lot.
He oversaw the team's addition of some guy named Elon, the numerous advances well-established companies made toward acquiring the company and, eventually, its IPO. Having grown in up in LA and spending over 20 years in the tech industry, his knowledge gives him unique insight into LA's startup ecosystem as it stands today. Built In LA spoke with Armstrong, Managing Director of March Capital Partners, about what he's seen in his career as a venture capitalist.
How did you get into venture capital?
I was doing some work for a company called Tivoli Systems in graduate school when IBM acquired them for $750 million, and I just couldn't believe it. I thought, I'm doing minor league entrepreneurship, so I decided to give myself three years working for a venture capital firm, Austin Ventures, and I will leave. I fell in love with it, like a lot of entrepreneurs do, because there are a lot of similarities.
Growing up in LA, did you ever think the tech scene would become what it is today?
No, especially growing up in Santa Clarita. I knew about some of the old companies, though, but seeing what the area has become is really interesting.
How do exits affect a tech community?
Typically, when any company — and we all love the exception case that proves the rule, Snapchat — gets an offer for $80 million or $100 million, they punch out and they're gone. Whether it's Overture to Yahoo, or Rent.com to eBay, you lose your tech base, and it's only with the changing of the way that work is done, I think, that's allowed Silicon Beach to roar back.
When I first got in the business, it seemed like everyone needed $5 million to start an enterprise software company. Now I see people starting real companies for one-tenth of that. That's led to a proliferation of energy around the startups. The ways companies are organized and actually work is different, and no longer is it imperative that you have big companies to sustain the ecosystem. When that necessity went away, through the virtual creation of companies — we don't need everyone in one place because of new communication tools, open source, AWS, offshore development, that sort of thing — now you're seeing Silicon Beach flourish, at least on the startup side. You have so many pieces of the puzzle that are taking the friction out of it in time and effort.
When Snapchat turned down the offer from Facebook a couple of years ago, what did you think?
Crazy, crazy crazy, crazy. And I was wrong. And hallelujah for people who have a tolerance for risk. When they turned down $6 billion, I just couldn't believe it. I've been wrong before, but I try to be honest and put myself in a board member's position. I wouldn't have forced them — because I think it's always up to the entrepreneurs — I would have counseled them to take the offer. We are in awe of Snapchat; go Snapchat go. Don't sell. The worst news we could get is "Snapchat sells to Google for $23 billion and relocates to Northern California that over time will get sapped of its talent down here."
As an investor, have you been in a situation similar to that?
I was the first investor in PayPal, and we were getting offers from eBay. When I first invested in the company, it was just Peter Thiel and Max Levchin. Elon [Musk] joined later through a merger with another company. At $300 million I agreed no. At $650 million I agreed no, but at $800 million I was a seller. Obviously, this is pre-IPO by about nine months, and one of the other board members, a venture board member, threatened to get nasty and almost litigate if we did take it. They had a much higher valuation than me. I invested at a $20 million valuation, so it was a good investment for me. That helped persuade me not to take it and, and eventually, it went public and got sold to eBay for $1.8 billion. That move by that particular investor created $1 billion in value. Not as much as the $18 billion or $20 billion depending on what the number is that Snapchat is rumored to be valued at.
There was another example of an Irvine-based company enterprise software company, Integrien. Clearstone, my old fund, had bridged payroll a dozen times, so it was always on the run. We owned a lot of it through the process of bridging it when other people wouldn't and bought a lot of their shares under their duress. I begged the founder not to sell — and it was about a $100 million exit at the time — because I could see what I thought was going to be a big company. They had really good reasons to sell. I think the sentence went like this, 'Jim you've been in this for five years, I've been in this for nine years. I'm driving a car that barely works and my kids are trapped in a failing public school. My spouse is incredibly mad at me. I'm kind of indifferent whether I make $2 million or $2 billion right now.' He ended up making more than that, but he went on to VMware to become a billion dollar line of business called VMware vCenter Operations, the nerve center of most data centers today.
How do you handle failure?
I can't escape my failures. It's like a demon. Honestly, it's where I lose sleep. Hindsight is a tough judge, so you have to be aware of that. I have buyer's remorse in every deal I invest in. Even a week past wiring the money. I think it's just my nature. I used to really take it pretty hard, enough so that my wife was scared for my health. I remember when the dot com bust happened, that was my first big splash of water, and until then I had had a lot of easy success, but I never realized how easy it was because the conditions weren't normalized.
I've learned now that it will pass. Have faith and you'll be able to sleep next week. There's gold in all of these decisions. I just had a company that recently sold — I didn't get all my money back, but it was a good exit — I could whiteboard 20 things I could have done differently, and will do next time. I use the term “pattern matching.” Your losses are so full of rich patterns. All the gold is in the failure.
How does your mentality change depending on if a company is pre-revenue or generating revenue?
I wouldn't use the word “revenue,” I'm going to use the word “engagement.” The question is pre-engagement or post-engagement. I think that with a lot of the new business models today — SaaS, consumer internet, marketplaces that are B2B — engagement precedes revenue, and it has to. You can't get revenue without engagement. There's still, surprisingly, a lot of controversy around engagement. I know very few things that have a lot of engagement that you cannot monetize. I know there are examples: a lot of entertainment content, pictures of celebrities on the beach, it's hard to monetize. But if you're doing anything around transactional content, which is a big part of my practice, I try to invest in content you might use to buy a car or a home. That content you can always monetize.
At March, I guess we're more of a Northern California investor, and that's not always a good thing, I don't mean that as some term of endearment, but the biggest difference for me is whether it's a bunch of smart people I believe have technical chops against a market that makes sense, or, they already have something scaling that users love and they're building it into their life. That, to me, is the main difference. Monetization is another risk level, but I'm focused on the engagement, at least from where I invest. Some of my partners invest later in the cycle, and I think they're more P&L-focused.
What is your relationship like with your partners?
We have a really good relationship because we've all come out of different organizations and have learned a ton, collectively. We take our relationships very seriously. That said, we are a classic venture fund: everyone kind of builds their own practice area. We meet every Monday, and every quarter we do a quarterly portfolio review. We all try to bring our relationships to the table, at least weekly, on executives and capital. So if I meet a strategic investor from big corporate that wants to invest, my partners get that info right away and we map it to our portfolio to see if it fits. Or if there's a great executive who just moved to LA or came out of another startup in LA — about a third of our portfolio is in LA — we share that information really quickly.
What stands out to you about a founding team when they pitch you from a team dynamic level?
Don't oversell. The real thing I'm evaluating in a meeting — particularly a first meeting — is: can I work with you? You're kind of assuming you'll all learn as you go, but it's hard to work with someone if you feel like you're being sold all the time. The business is hard enough, but if you have to get through the sales pitch to get to the truth, it's worst.
The second thing is people who demonstrate to me an understanding of how their industry is organized and why it's in a position to accept a startup. I would argue that when I look at the pattern matching of people who raise a lot of money, especially from Northern California venture capitalists, that's the defining trait. You could come to me and say, “Jim, I invented something to make journalists jobs much easier doing interviews and creating content,” that's fine. Then if you said, “now that I've done that, let me tell you where the industry is, what the big trends are, how budgets have moved, how media companies buy new technology and through which channels.” Then you have my attention.
What is the ideal investment?
I think every venture capitalist would answer this the same way. They would say, "What I really want to find is a person who is on their second or third startup." They've had some smaller exits and know their goal is to change an industry. When you hear Evan from Snapchat talk, it sounds like his real goal isn't to become wealthy — he’s already done that — his real goal is to change an industry. A great Southern Californian I think very highly of is Jamie Siminoff over at Ring. He had about two or three nice exits where he built real value for investors. With Ring, you ask him what the goal of the company is, and he tells you he wants to solve neighborhood crime globally. That's why he's doing what he's doing.
Images via March Capital Partners.
Have a news tip for us or know of a company that deserves coverage? Let us know and follow us on LinkedIn.
