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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: How efficient are private markets? As it turns out, it

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Speaker 2: depends where you look. In areas where VC money is

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Speaker 2: plentiful and there are lots of vcs tripping over each

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Speaker 2: other to fund deals thanks San Francisco, Boston, New York,

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Speaker 2: and other parts of the country where there are fewer vcs,

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Speaker 2: there are enormous market inefficiencies. As it turns out, fishing

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Speaker 2: and ponds overlooked by everyone else has been a great strategy.

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Speaker 2: Inefficient markets can lead two unexpectedly better returns. I'm Barry

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Speaker 2: Ritoltson on today's edition of At the Money. We're going

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Speaker 2: to discuss how investors can identify overlook startups to help

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Speaker 2: us unpack all of this and what it means for

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Speaker 2: your portfolio. Let's bring in Sarria Darabi of the venture

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Speaker 2: firm TMV. She's been an early investor in seven unicorns,

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Speaker 2: including firms that went public like Figgs, Casper, and cloud Flair,

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Speaker 2: and startups like Gimlet and Lightwell that were later acquired

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Speaker 2: by Spotify and Twitter. So Soria, let's begin with the

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Speaker 2: basic premise. AOL founder Steve Case observed seventy five percent

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Speaker 2: of venture funding has gone to just three states, California,

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Speaker 2: New York, and Massachusetts. How does this affect VC investing?

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Speaker 3: About half the time VC firms are concentrated into three

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Speaker 3: metropolitan areas, California, New York, and Massachusetts. As you said,

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Speaker 3: this is just a fact. Recently, some well known LPs,

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Speaker 3: these are Clarkson and Jamie Road reported that only three

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Speaker 3: percent of VC funds have been in more than three

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Speaker 3: percent of unicorns at the seed stage out of eight

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Speaker 3: hundred and forty five that they measured. The TLDR of

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Speaker 3: that insightful research is that seed stage investing remains completely fragmented.

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Speaker 3: WhatsApp was created by Ukrainian dropbox, by an Iranian Tesla,

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Speaker 3: by a South African cloud flare, as you mentioned, by

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Speaker 3: a Canadian woman. And by the way, one quarter of

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Speaker 3: US billion dollar startups have a founder who came here

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Speaker 3: as a student. So we could talk today about some

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Speaker 3: of the exceptional opportunity and really just looking for people

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Speaker 3: who are non obvious to live from a Silicon valley

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Speaker 3: term and coming from geographies or backgrounds that have been

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Speaker 3: largely overlooked.

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Speaker 2: So let's start with geography for a second. So San

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Speaker 2: Francisco and Silicon Valley, Boston and the surrounding areas New

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Speaker 2: York City. If that's three quarters of the funding, that

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Speaker 2: means that huge amounts of the rest of the country

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Speaker 2: are not getting capital. Competition has to be much less there.

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Speaker 2: Tell us about what you see in the rest of

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Speaker 2: the United States outside of those big three VC regions.

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Speaker 3: I'd brought in that to North America and globally. Great opportunity,

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Speaker 3: but you're absolutely right. Areas with less capital and less

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Speaker 3: competition reflect less efficiency and market returns. But these inefficiencies

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Speaker 3: typically mean that startups in the regions can be undervalued

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Speaker 3: and overlooked. So we at TMV have invested in the

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Speaker 3: last decade in very specific and academically researched areas but

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Speaker 3: overlooked verticals as well as overlooked founders, talking about maritime

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Speaker 3: tech in India and Singapore and Greece, and some of

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Speaker 3: our last most particular deals were sent to us by

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Speaker 3: large organizations like MERSK that said, hey, there's this really

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Speaker 3: interesting company, but would you invest in Athens And as

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Speaker 3: a matter of fact, we would as well as we'd

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Speaker 3: invest of course in Boston or Toronto or Austin. You

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Speaker 3: think about some of the best engineering schools in the US.

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Speaker 3: Just to focus on the United States for a second,

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Speaker 3: got Carnegie Melon in Pennsylvania, which produced Dulingo, where our

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Speaker 3: venture partner Tim Shay just ended up five year stint

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Speaker 3: and help them take that business public and it's going

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Speaker 3: to be one of the best AI ed tech companies

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Speaker 3: of all time. But it began on Carnegie Mellon's campus,

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Speaker 3: and notably that wasn't Stanford's campus or Harvard. At TMV,

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Speaker 3: we recently found a terrific AI company in the medical

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Speaker 3: scribe space out of Toronto by two Iranian immigrants, and

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Speaker 3: I'm very happy to share that if you invest in

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Speaker 3: AI in the ambient scribes space, particularly for a company

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Speaker 3: that has a path of profitability as ours does TALLYAI,

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Speaker 3: we're looking at potentially upwards of twenty million in capital

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Speaker 3: next year, the third year out of the run. Typically

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Speaker 3: the valuations are just hyperbolic in the US, They're really insane,

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Speaker 3: And we were able to invest one million US for

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Speaker 3: ten percent of the company just a year ago. That's

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Speaker 3: how sensible the valuations are outside of the major terrains.

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Speaker 3: So we're very happy to ignore San Francisco altogether.

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Speaker 2: So how do you go about looking for potential investments

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Speaker 2: in these other geographies. What's your process like, Well.

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Speaker 3: Our process is one part empirical and one part cowboy,

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Speaker 3: and so you have to kind of go where terrific

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Speaker 3: founders are and you need to seek them out. But

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Speaker 3: also you can reap the benefit of having been in

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Speaker 3: this industry as long as we have collectively to some extent. So,

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Speaker 3: for instance, the last deal I did this month investing

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Speaker 3: significantly into around that injuries and Horowitz, a very well

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Speaker 3: known VC firm out of sand Hill Road, is leading

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Speaker 3: and it's a seed round, but the founder had previously

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Speaker 3: built a unicorn. That founder happens to be an LP

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Speaker 3: in our fund, so we have an unfair advantage there.

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Speaker 3: But the unfit advantage in terms of the relationship, which

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Speaker 3: one might label as cronyism, is really just about having

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Speaker 3: been in this game for quite a long time. We

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Speaker 3: look to our LPs, which don't just include you know,

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Speaker 3: well known tech folks, but they do includes you know,

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Speaker 3: five corporate five hundreds and two pension funds and five banks,

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Speaker 3: and sometimes we get terrific deal flow from these organizations.

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Speaker 3: And sometimes it really just comes down to being in

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Speaker 3: the right building at the same time as the right

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Speaker 3: fantastic founder. And so to that end, the building in

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Speaker 3: which I work now hosts innumerable you know, terrific but

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Speaker 3: sort of out of work successful folks who are dreaming

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Speaker 3: up their next things. And then track Star. Trackstar is

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Speaker 3: a universal API for warehouse Management, a company that we

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Speaker 3: seeded last year. The founders happened to live in the

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Speaker 3: same apartment complex as our Star principle at TMVMMA Silverman.

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Speaker 3: So you really can't imagine adventure where your next deal

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Speaker 3: is going to come from. You have to be open

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Speaker 3: to the serendipity, but you have to be practiced in

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Speaker 3: your approach to deal flow. So for us, that comes

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Speaker 3: down to our tech stack, our CRM, our outreach initiatives

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Speaker 3: to other gps, and also relying on the kindness of

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Speaker 3: strangers and those big institutional vcs who happen to take

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Speaker 3: a shine to you. It's a mixed bag, Barry, But again,

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Speaker 3: you can't create this bag overnight.

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Speaker 2: The cliche is the traditional startup founders or a couple

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Speaker 2: of geeks who attended the same college and grad schools.

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Speaker 2: They create an idea, they put together a pitch deck,

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Speaker 2: and then they get funded. Is that cliche, accurate and

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Speaker 2: what's wrong with it?

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Speaker 3: Well, it's accurate and it's not so one of our

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Speaker 3: LPs at TMV Adam Grant I think he's highest rated

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Speaker 3: business school professor out of Wharton did some research for

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Speaker 3: his book Originals, where he said that actually, you do

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Speaker 3: have better odds if you're starting a business on a

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Speaker 3: college campus as an example, because it gives you access

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Speaker 3: to incredible talent, probably low cost talent, and freedom and

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Speaker 3: space to work on a problem while others aren't really

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Speaker 3: paying attention to it. But then ultimately people come to

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Speaker 3: your back door, be it venture capitalists for demo days.

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Speaker 3: I was recently at the Harvard Business School Entrepreneurship Demo

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Speaker 3: Day led by Julia Austin, who leads the Rock Center

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Speaker 3: of Entrepreneurship there. It's a terrific event, brought seventy different

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Speaker 3: vcs to her campus. But why doesn't every university in

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Speaker 3: the United States have a similarly run program. Harvard just

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Speaker 3: happens to be well tuned to the fact that billion

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Speaker 3: dollar businesses a la cloud flair, a la meta happened

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Speaker 3: to start, and so VC funds have been predicated on

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Speaker 3: that thesis alone. Let's have an index fund just to

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Speaker 3: invest in everything Harvard does. That was the X fund concept.

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Speaker 3: It's a good concept, but one would imagine that that

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Speaker 3: same practice could be applied for every great engineering program,

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Speaker 3: every great business school for that matter, in the US.

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Speaker 3: But it's just about the combination of a concentration of

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Speaker 3: talent and capital. And sand Hill Road, at the end

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Speaker 3: of the day, is really just a strip mall. It's

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Speaker 3: a strip mall where it is. It's a strip mall

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Speaker 3: of money. But it's also lazy fishing, honestly. And if you,

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Speaker 3: you know, think about every great ende program from UT

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Speaker 3: Austin to obviously MIT out of Boston and what they're

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Speaker 3: doing there with the Media Lab, you're going to find

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Speaker 3: some exceptional talent that doesn't have as rate of an

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Speaker 3: immediate access to capital. And there are some funds, Steve

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Speaker 3: Case's Fund, Rise of the Rest being a good example,

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Speaker 3: that are conditioned entirely to seek out those non obvious

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Speaker 3: geos and we're more than happy to co indust alongside.

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Speaker 2: So let's talk about some of those areas. Obviously, Harvard, Stanford, Wharton, MIT,

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Speaker 2: Big four, that's a lot when you're looking outside of

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Speaker 2: those three of four cities, where else are you looking at.

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Speaker 2: You mentioned Carnegie, mellon Is, I think Pittsburgh and Austin

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Speaker 2: in Texas. What other parts of the country are you

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Speaker 2: finding potentially unicorn ideas that could either get acquired or

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Speaker 2: go public eventually.

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Speaker 3: We're not ignoring California. We just think some better valuations

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Speaker 3: are available in Los Angeles or Berkeley for that matter,

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Speaker 3: versus San Francisco. Proper. We have a great company out

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Speaker 3: of Berkeley called Millie and it's an exceptional healthcare business

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Speaker 3: for women dealing with hig risk pregnancies, and their first

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Speaker 3: clinic was opened in Berkeley for the very fact that

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Speaker 3: it's less expensive to operate a business there, one zip

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Speaker 3: code away from probably the most expensive spot in America

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Speaker 3: to operate a business. So we're looking pretty much everywhere.

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Speaker 3: We have a diverse pool of founders and funds who

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Speaker 3: send us deals, but we're specifically not swimming in San

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Speaker 3: Francisco or Palo Alto for that matter, because we think

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Speaker 3: that it's overly commodified and the valuations are just dangerous.

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Speaker 2: At this point, that makes a lot of sense, So

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Speaker 2: this isn't just theory. You guys were early investors in figs.

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Speaker 2: You were an early investor in Casper. You were a

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Speaker 2: subsequent investor in cloud Flair, as well as startups like

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Speaker 2: Gimlet and Lightwell, were these companies from the traditional ivs?

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Speaker 2: Where else are you fishing outside of the well known

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Speaker 2: fishing halls?

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Speaker 3: Well, those examples you cited a couple of them, were

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Speaker 3: you know, Figs and cloud Flare. Three of those four

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Speaker 3: founders came from HBS specifically, so not just the top

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Speaker 3: university in the US, but the top business school or

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Speaker 3: among the top. But Casper. This is a fun story.

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Speaker 3: I met the founders at a concert in Williamsburg, I

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Speaker 3: think in Brooklyn, Brooklyn. Yeah, the band was Blonde Redhead,

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Speaker 3: I can't remember, but it was a good concert and

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Speaker 3: they were setting up their first ever display of the mattresses.

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Speaker 3: And by the way, I'm the first to admit that

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Speaker 3: I think I got in and got out at the

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Speaker 3: right time with Casper. I sold my shares at the

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Speaker 3: Series D, which was their peak val. But I met

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Speaker 3: them because they were giving out free beer for people

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Speaker 3: who would sit on the mattresses while listening to music,

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Speaker 3: and I thought that sounds like fun, and we started

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Speaker 3: talking about venture and I had been in the industry

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Speaker 3: for about five years at that point, and it led

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Speaker 3: to them sending over term sheets the next day and

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Speaker 3: I made a decision with thirty minutes notice, so no diligence.

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Speaker 3: That's how fast it was. With FIGS, I think is

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Speaker 3: more premeditated. That was the first deal I really diligenced

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Speaker 3: with my now partner, Marina Hajipaterras, and I'm very proud

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Speaker 3: of that original memo we wrote, which stated that a

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Speaker 3: lot of people are going to overlook this, not because

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Speaker 3: it's two women, but by the way, first two women

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Speaker 3: ever to take a company public on the New York

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Speaker 3: Stock Exchange, that's pretty powerful. We thought people were going

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Speaker 3: to overlook it because they would assume that it's a

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Speaker 3: consumer business and an e commerce business. And what Figgs

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Speaker 3: does is to this day very well. They make comfortable

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Speaker 3: and functional medical apparel, and we saw it more as

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Speaker 3: an enterprise play, selling into hospitals and giving back to

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Speaker 3: a community that's largely overlooked nurses, primarily. We continued to

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Speaker 3: invest along that thesis today. In fact, my last deal

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Speaker 3: was an AI nurse staffing company called in House Health,

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Speaker 3: led by a founder who previously built a tech unicorn

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Speaker 3: called Stellar Health, but going back to Figs. We saw

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Speaker 3: around corners with that deal, and we wrote in our

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Speaker 3: original memo that this could eventually end up in medspas

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Speaker 3: and dentist offices, which to this day it does, but

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Speaker 3: we also wrote it could be on the boiler room

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Speaker 3: of ships because Marina, my business partner, comes from a

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Speaker 3: two hundred year old shipping family, and sure enough her

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Speaker 3: family is buying Figs uniforms now to give to their workers.

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Speaker 3: And so it's really cool when you feel like a

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Speaker 3: profit or you have some sort of clairvoyance simply by

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Speaker 3: doing your homework.

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Speaker 2: So, when you're fishing in geographies outside of the Big three,

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Speaker 2: or investing in founders who are not what we think

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Speaker 2: of as typical founders, what have the returns been like?

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Speaker 2: What should VC investors be expecting?

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Speaker 3: Well on SPVs in non traditional founders. Before I started TMV,

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Speaker 3: it's one hundred and seventy two percent realized IRR on

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Speaker 3: those SPVs, and so I think most investors would like

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Speaker 3: those returns, and those are collective spbs, But more or less,

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Speaker 3: I think you're looking at the same returns and you're

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Speaker 3: underwriting for venture returns and traditionally BC's underwrite one hundred

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Speaker 3: x for a seed investment, ten x for a series

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Speaker 3: A investment. If you're talking about early stage specifically, we

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Speaker 3: do the same at TMB. You're also underwriting for a

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Speaker 3: forty percent fail rate, fifty percent success rate, and ten

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Speaker 3: percent super success rate. And it's those ten percent of

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Speaker 3: companies that really deliver all of the alpha for any

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Speaker 3: given fund, not just mine.

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Speaker 2: So to wrap up, markets are mostly kinda, sorta eventually efficient,

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Speaker 2: but not everywhere and not with everyone. Venture capitalists who

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Speaker 2: are looking at non traditional founders and in locations away

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Speaker 2: from New York, San Francisco and Boston are finding some

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Speaker 2: fantastic investment opportunities. You can listen to at the Money

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Speaker 2: every week, finding in our masters and business feed at

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Speaker 2: Bloomberg dot com, Apple Podcasts, and Spotify. Each week we'll

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Speaker 2: be here to discuss the issues that matter most to

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Speaker 2: you as an infestor. I'm Barry Rittolts. You've been listening

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Speaker 2: to Add the Money on Bloomberg Radio