Leading through noise to find the right signal

In this episode of The Committed Innovator, serial entrepreneur and investor Wes Nichols speaks with McKinsey innovation leader Erik Roth about the building blocks of innovation that help start-ups get traction and scale. Nichols started MarketShare, the marketing resource allocation software solution; today he is a partner at March Capital, the growth-stage venture capital firm that focuses on enterprise technology companies. This is an edited transcript of their discussion. You can listen to the full episode on your preferred podcast platform.

Erik Roth, McKinsey: When I met you, you were creating MarketShare. Now you’re investing for one of the more successful growth equity funds here in California. Tell us about the journey from founder to investor.

Wes Nichols, March Capital: Even as a little kid, I remember going into stores and seeing things that were being done poorly, and thinking, “Why don’t they do it this way? Why don’t they improve this?” So I’ve always had the DNA to try to innovate and improve things. I was fortunate enough to grow up in a household of an entrepreneur. My dad is an architect, and I had a front-row seat to the pros and cons of that. I was also very drawn to data, and applying data and analytics to figuring out problems is the same as driving revenue or growth—you have to have a right number of combinations of things coming together, but you have to have the data to make those decisions right.

Erik Roth: As an investor, what are the things you’re looking for in a company that give clues they’re thinking about a problem in the right way?

Wes Nichols: What we look for are not only innovative ideas that we think have the ability to be mission-critical but also to create a global platform. We look for founders who’ve done this before, or have teams that worked well together before. And also for leaders who have had some adversity in life. That pattern, from a founder’s standpoint, is really important, because it helps create determination to see their venture through. There are lots of days where you’re doubting why you’re doing this. You have to find people who can power through that.

Erik Roth: Talk about why you started MarketShare. What was the problem you were trying to solve?

Wes Nichols: I sold my first company to Omnicom Group, and then became a global CEO of one of their businesses, where questions about allocation and measurement started coming up more and more. This was in an industry that had been doing backward-looking, media mix analytics in Excel spreadsheets, where it takes six months to gather the data and then another six months to run models. So you’re looking at insights a year later. I saw the opportunity when digital marketing was emerging and CEOs of big companies started asking our team, “If I had an extra dollar, where should I spend it? Should I put it into brand building? Digital marketing? Price discounts?”

You have lots of revenue-generation levers, and it’s very hard to understand how those things actually interact when you’re measuring on a silo basis. We started talking to academics and found a few who specialized in building resource allocation models, a solution that helps allocate how you spend your resources to drive revenue. The big question that then came up was, How do you create this for marketing and sales dollars?

This is a complex question. The data you need is spread throughout an organization, and it’s usually a mess. So we started building models for clients, and it soon became apparent that this needed to be a stand-alone company. Companies needed an equivalent of a GPS system for resource allocation, and none existed in software form.

Erik Roth: Once you have the problem and some people who can solve it, how do you scale it?

Wes Nichols: Part of it is asking, What are we trying to build? I wanted to build the Waze of resource allocation: you type in your destination, and it gives you turn-by-turn instructions, including what your budget should be, where the resources should go, and then, if something pops up along the way, maybe competitive change or interest rates going up, the system redirects.

Erik Roth: How did you identify your first customer?

Wes Nichols: The first client is always the bravest. If you think about the stasis that exists in most companies, the comfort in doing things the way things have always been done, the idea of doing anything where you’re sticking your head up a little higher than average is very scary. So finding a handful of companies that would embrace something like this was job number one. We found a few: a large grocer, a large software company, an automotive company out of the UK.

Erik Roth: What is it like to convert that first sale?

Wes Nichols: It’s a lot of pressure. I remember my partner and I putting together our first proposal and figuring out what to charge. We said, “How about $379,000?” And they signed the agreement and sent it right back. I felt like we knew what the cost would be, we knew the margins we needed. Really we were using the money from clients as venture capital. My partner and I had co-funded the business for the first few years, which is what allowed us to keep as much equity as we did—we were able to take a lot of the risk out of it early on. We worked very lean, but we delivered. We knew how to build the software. It was rudimentary, but the client understood that. We weren’t overpromising, and they were willing to take the risk on the journey because they needed this.

We had one client, a chief marketing officer at a large bank that had a board populated by hedge fund people. She’d never been able to have a successful meeting with the board because she couldn’t talk their language, until she was using MarketShare’s tools. Then she was able to talk about return on invested capital and about all these financial nuances applied to marketing that blew their mind. They had no idea they could actually equate that soft and fuzzy stuff of marketing into P&L language.

The fact that our product helped our clients’ careers was important. If they were willing to take the chance on us, we would move heaven and earth to make this work for them and overdeliver.

Another piece of our success was taking a land-and-expand approach—global companies don’t want to deal with 50 different solution providers, so once you get into one global company you then expand to Canada, or the UK, and that let us go after even larger clients.

Erik Roth: Once you scaled MarketShare, what was the process of realizing you needed to exit?

Wes Nichols: We decided that we could probably start to plan an IPO—we had enough predictable revenue, the company was software based, it was growing very fast, and the margins were good. But at the same time, some of our partners, large software companies, started to approach us. I’ve been on a couple of public boards, and I did not want to run a public company. So we started looking at going down the path with these software companies. But then we realized that MarketShare’s DNA is about neutrality and objectivity, and we felt that if we became part of another company that could benefit from the outcomes of the models, we would lose that neutrality.

We also knew that cookies—the digital currency that the industry uses to measure customer behavior—were going to disappear, and that the way these analytics work would need to adapt. Through one of our investors, Neustar, the data analytics company, came up. It was a medium-size public company that started as a Lockheed Martin spin-off, and they had incredible identity-level data that wasn’t reliant on cookies. They were looking for a solution that would be an application that would sit on top of their data, and we were looking for data that could help fuel our software that was not reliant on cookies.

Ultimately Golden Gate [Capital] took the company private. I went onto the board, and then a new CEO came in and did a great job of straightening things up and getting rid of some “stray dog” assets. About a year ago, the MarketShare and Neustar identity data piece was acquired by TransUnion.

Most of the team at the time of our exit is still there, which is important. We wanted to find a home that would allow the team to continue to see growth and upside. The company is at least three times what it was at our exit, and it’s really exciting to see it have a new home.

Erik Roth: Today you’re an investor, advising lots of companies. How do you know whether they have found a valuable problem to solve?

Wes Nichols: Part of it has to do with the founder. You can be exposed to lots of different signals, but if you’re not listening and absorbing and seeing the patterns emerge, and then applying a level of creativity to figuring out if there’s a solution there or not, then you’re missing the boat.

Part of what we have to do from an investor standpoint is assess how they [the founders] frame the space they’re in. How are they thinking about the market need? Are they solving a big enough problem, or is this just a point solution that should be part of a larger company?

Erik Roth: How do you advise founders and companies to think about the journey to get to the second year and the point where they might land in the sweet spot of an investor?

Wes Nichols: What I learned with MarketShare was that there would be several years of growth and lift, and then you hit turbulence. You get through that, and it’s clear for a bit, and then you hit more turbulence. Looking back, I see that the turbulence indicated we were breaking through to the next level of scale. It was painful. We had to adapt each time.

One of my favorite quotes is from [Arthur] Schopenhauer: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. And third, it is accepted as self-evident.” That resonates with me because we had so much trouble getting people to believe that what MarketShare was building was actually possible.

If you think about innovation and entrepreneurship, entwined with each other like that, it’s a pretty insane idea. You’re creating something no one’s ever seen before, that no one thinks they need, no one has budget for, and everyone’s scared to try, at least in big companies. At that point, failure’s not an option.

Erik Roth: What else are you looking for?

Wes Nichols: Obviously, focus. Relentless focus. I’d say maybe a psychotic level of focus is important. Otherwise it doesn’t happen. If you’re trying to launch a business and you also want a lifestyle company, then it’s DOA. It’s just not going to work. It is an all-or-nothing exercise.

Part of it is building relationships. It’s not like an ATM where these companies walk up and all of a sudden need capital. We are building relationships a year or two in advance of when they might need capital.

You have to be really good at judging people, and doing background checks, and looking at their team, and being close to it. One of the things I learned from my public board work that I think has made me a better investor board member is this notion of NEFO: nose in, fingers out. If you’re a director you have to have your nose in, knowing what’s going on in these companies and their teams and what they’re facing. But you’re not trying to drive it. I’m not reaching over and grabbing the wheel. I’m just trying to understand what the issues are and to be a resource when they need some help.

Erik Roth: A founder needs to be able to say, “Here are the next three steps,” and then know when to say, “And when you’re on step two, it’s time to add the next three steps and move the goalpost forward.”

Wes Nichols: A mentor of mine used to say, “Change the people or change the people.” And that’s hard sometimes, particularly because they’re the people there from the beginning, and they’re your coworkers and friends. But to get to that next level, sometimes difficult decisions have to be made. I’ll give you an example from the MarketShare days. We had been focused on a particular analytic model and complex solution when a new area came up that I felt we needed to be in. I kept bringing it up to our product group, and they kept saying we should stay nose to the grindstone with the ongoing complex product.

So I went to two of our clients and talked to them about this idea, and they both said, “That’s exactly what we need,” and we signed a $1.5 million contract with them as alpha clients. I brought it back to the product team and said, “We now have clients demanding this new product.” We built it, and now it’s 85 percent to 90 percent of the company’s revenue. Sometimes you have to drive that transformation in a forceful way. The product team had what I call their low-beam headlights on, and sometimes you need to toggle between the high beams and the low beams to see what’s going on up the road.

Erik Roth: How do you handle that as an investor?

Wes Nichols: That’s definitely an area where we try to be the go-to resource when they need to think through, “Is this time to get a new chief revenue officer?” or, “My cofounder was great at the beginning, but this company’s bigger than they thought it could be and now they’re not pulling their weight.” These require difficult conversations. It’s much rarer to say, “That founder needs to step aside.” When you look at private companies or start-ups that have gone public, 70 percent of them, when they go public, are led by the founder. Sometimes venture capital firms like to bring in a hired gun, but I don’t agree with that, unless it’s really necessary, or the founder decides they may not be the right leader for the future. There were many days I was wondering whether I needed to do that. We’d gotten big—we had 800 people around the world—and I was traveling nonstop. You start to wonder, “OK, maybe someone else could scale this better.”

Erik Roth: What did you do in those moments?

Wes Nichols: It helped that I had mentors. Also, talking to clients, or prospective clients, was an incredible source of human intelligence. Pulling that data together and using it for pattern recognition to identify where we should be headed as a business was really important.

Erik Roth: Generative AI [gen AI] is one of your focus areas, and this is also an area where filtering through noise is critical. Oftentimes a new technology ends up chasing problems for a while rather than solving them. Are you seeing that with gen AI, or are you seeing a shift where the problems are starting to shape the technology?

Wes Nichols: The way I look at it is that you need to be solving a big problem. If your solution happens to be powered by AI, great. If it happens to be powered by generative AI, wonderful. That’s a whole other scale of opportunity. But the core issue needs to be there—is this solving a business problem that is a critical need? And is it something that can ultimately be scaled to a global platform?

Erik Roth: Looking at generative AI broadly, what’s your sense of what’s different and where the opportunities are?

Wes Nichols: Right now we have a confluence of data, compute power, and new mathematical methods that make this all possible. We couldn’t have done this a few years ago. As Marc Andreessen said, software’s eating the world. And now we’re seeing AI eating software. If software 1.0 was the interface with the computer, and software 2.0 was mobile-first and the cloud, software 3.0 is where we’re at right now. With AI, especially machine learning and gen AI, we’re seeing a new wave take over. I think this is as important as the microchip or the internet. And we’re just at the beginning.

Erik Roth: Where do you think this goes, and what’s going to drive it? There is a lot of hype and tons of capital being poured into the gen AI race, and start-ups all over the place in this area.

Wes Nichols: I equate it to the early stages of MarketShare, where we would build POCs [proofs of concept]. Clients could test it out and we could see who’s brave enough to deploy it. Then, once it proved itself, it became essential, and then it became something that people would realize was career-shortening if they didn’t use it. I feel like we’re going to start to see that happen as we see software 3.0 really focusing on a couple of areas. Cost reduction is an obvious one, as is speed to execution. The way it’s being used to help with coding and reduce complexity is powerful. There are lots of different applications for it that are very real-world, which we will probably see move from POC into institutionalization soon.

Erik Roth: Wes, thank you for taking the time to talk to us today.

Wes Nichols: Thank you, it was really fun.