New Digital Marketing Arbitrage Investment Strategy Blends Financial Methods With Online Advertising Industry

I've come across a very interesting emerging investment firm, whose flagship fund's name, The Digital Marketing Arbitrage Fund, caught my eye. The firm is calledHarbor City Capital Management. Upon talking to the CEO of Harbor City Capital, JP Maroney, the story of what he's trying to do and how he's doing it, blew me away. Not only are they pulling off a really interesting business model, but there are also a lot of lessons that can be learned from JP's expertise both in digital marketing and in finance. Today I am talking with JP about what digital marketing arbitrage is, what entrepreneurs can learn from it and also what entrepreneurs and investors can learn from how he built Harbor City Capital.

How did you get into this business? What is your entrepreneurial background?

I've been building companies for a little over 25 years now. 90-95% of what I've done over the years has been in the advertising and communications world. Everything I've done over these 25 years has built up to what we are doing now at Harbor City Capital.

Can you explain Digital Marketing Arbitrage in just a few sentences?

In simple terms, every company has almost an unlimited demand for new leads and new clients. The internet has a lot of opportunity but a lot of companies don't have the resources or expertise to fully leverage that opportunity. What Harbor City Capital has done is figure out how to efficiently deliver new buyers to people. and we do it at a cost to us that is less than what people are willing to pay for them. So if you take the average company, let's say they figured out the lifetime value of a new client is worth $25K for them; let's say they are willing to invest $2500 to get a new customer and let's say it takes 5 prospects to get a person to say yes. Therefore, it's essentially $500 per lead that they are willing to invest to get people in front of their message. So we go out and buy online advertising in targeted markets and platforms and generate that lead. Our goal is generate that lead for less than the $500 we are being paid. Let's say it costs us $200 to generate that lead and we are making $500 on it, thats a 40% return to us and our investors. The difference between those two numbers is called digital marketing arbitrage and that's where we generate our profits. Our goal is to do that in scale.

What do you think are your most important daily habits for your success?

As an entrepreneur, the way you produce the maximum amount of success in any business is to be laser-focused on the right things. There are a number of things you can do in any given day. But you have to focus on the things that produce the maximum result. So what we do as a company is narrow it down to wildly important goals (WIGs), which I learned from Franklin Covey. The idea behind a WIG is most companies go out and try to accomplish lots of different goals. We narrow it down to just 2: raising capital and creating ROI. If we can do those, everything else comes together a lot easier. So everyday we get up and work hard. We have an EVP of media, and that's his one mandate: to take those dollars we've brought in and get an ROI. My job as the CEO is to continue to build relationships and bring in new investment dollars. Our entire staff is built around these two goals.

What obstacles did you face pioneering an entirely new business model and how did you overcome them?

Well when you think of investments, a lot of people understand stocks. For example: buy low sell high. So if I were going out there trying to explain an investment strategy for stocks, it wouldn't be as difficult. But we were coming at this with a completely new industry and strategy. It was something that had been done on a small scale. But no one, as far as I know, has done it on this large of a scale, especially trying to build a $100M fund around it. So the first hurdle was being able to explain how the money is made. Once people understand that, it clarifies things. Second is because of the kind of ROI we get, you run up against that thing where people think it's too good to be true. So it takes a little bit of explaining and showing people how we can put a dollar in and sometimes bring back a return of 2 dollars or 3.

Why do you think anybody in the digital marketing space didn't implement this model sooner?

Good question. As I've said, there are some people that have done this in the cottage industry on a very small scale. It might be one guy with a team built around him at the maximum. But no one, as far as I know, has gone out and raised outside capital with a war chest like we do where they can go in and buy all the traffic in a particular area. Part of it might be a barrier to entry where somebody didn't have the capital or connect the dots. I don't know why somebody didn't think of it, but I'm glad I did.

As a marketer, you are very well known for being an expert in lead generation and sales. What do you attribute to your success in this area?

As an entrepreneur, going back to my first company I started when I was 19, I've bootstrapped many organizations. I had outside partners a few times but most times, I bootstrapped. Many companies I've started have also consulted with entrepreneurs who were bootstrapping. What I found was the absolute best investment you can make in your company is the acquisition of new buyers. That one thing, if you keep reinvesting in growth and acquiring new buyers, which is essentially the entire idea behind digital marketing entrepreneur, then the sky is the limit.

What are the most common mistakes entrepreneurs make when developing their lead generation and sales strategies?

Two things that I see all the time:

Creating a solution before you know what the problem is. I see many entrepreneurs who invest time and money into something and then go out and try to figure out who will buy the product, and that is backwards. You need to first go out and figure out what the problem is and what is the pain that people are willing to pay money to solve. Once you do that, selling becomes much easier.

Not speaking your market language- a lot of folks write their marketing copy and they're not connected with what that market is thinking. For example, they go out and start selling drills when what a lot of people want might be holes. You've heard about selling features versus benefits. A lot of people go out there and try to sell the product features when really they should be selling the benefits. People need to know how it will benefit them and solve their problems and then write your marketing language in such a way that it resonates.

When raising capital from investors, what was often their initial reaction to DMA?

Even before I created the fund I started talking to guys in the hedge fund space in New York and around the country. I had the same reaction from everybody. Almost every single conversation I had was, "can you explain that again?" This was a completely new idea. After I explained it the second time though there was always a reaction a little more colorful than, "holy crap". I had more than one person say to me, "you've created a whole new asset class". So once I got past that need to have a deeper understanding of it, they thought, "this is amazing". And they said if you can go out there and make this work for 12-18 months, you will have a line out your door and will be bringing in money faster than you can take it. We are now 11 months into this and precisely that has happened. I literally just got a message that we have another investor who has sent us $150K, and it's just nonstop. Word is getting out.

Where do you see Harbor City being in the next 12 and 24 months?

My original vision for this was that I would rase $1M in the first year to prove our concept,$10M in year 2, $25M in year 3, $50M in year 4 and by the 5th year, have $100M in assets under management. We are now 11 months in, and we will likely surpass our first year's goal by about 100%-150%. We just inked a deal for a $100M round with an initial 5M put in in Q1 2015. We will actually be at $10M in assets under management by the end of Q2 2015. I think we will be at $25M by end of 2015, and I think we will hit $100M within 3 years, maybe less.

How do you see DMA evolving over time? Do you expect to see other firms joining the space?

I pioneered the idea of DMA, but I definitely see more businesses potentially looking at this. It's like the investment fund space: how many hedge funds are there, how many investment banks are there etc. The online marketing space is a $131B industry, and over 60% of that is spent on performance-based marketing-- the area that we play in. Performance-based advertising means advertising that must produce a result as a return on those ad dollars. So we're talking about a really big pot. But I tell people, good luck, because if you're going to chase us, you're going to be running hard.

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