(Ep.49) The Acquirers Podcast: Dan McMurtrie – SuperMugatu – Long/Short Equity, Bangladesh Venture Capital, And Millennial Dating

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In this episode of The Acquirer’s Podcast Tobias chats with Dan McMurtrie. He’s the Founder of the Long/Short hedge fund Tyro Partners and Bangladesh VC fund – Anchorless Bangladesh. He’s also written maybe the modern male millennial version of Carrie Bradshaw’s Sex and the City paper. He’s the artist formerly known as SuperMugatu. During the interview Dan provided some great insights into:

  • Why Did 500,000 People Click On A Paper About Online-Dating Advice – Written By A Hedge Fund Manager?
  • Turnarounds In Big Brand Names Provide Significant Investment Opportunities
  • There’s Considerable Advantages In Setting Up A VC Fund In Bangladesh
  • Find High Quality Businesses Using A Cigar-Butt Analysis
  • A Lot Of Active Managers Can’t Make Big Bets Because ‘Career Risk’ Dominates The Industry
  • Don’t Short Frauds And Don’t Short On Valuation – Short On Competition Based Thesis

References in this podcast

The Dating Market: Thesis Overview (Tyro Partners)

Hedge Fund Alpha: Cycle or Sunset? (papers.ssrn)

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Full Transcript

Tobias Carlisle: All right, mate are you ready?

Dan McMurtrie: Yep.

Tobias Carlisle: All right, let’s do it. Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today runs a Long/Short hedge fund and a Bangladeshi venture capital fund. He’s also written maybe the modern male millennial version of Carrie Bradshaw’s Sex and the City paper. He’s the artist formerly known as SuperMugatu. It’s Dan McMurtrie and we’re going to talk to him right after this.

Automated: Tobias Carlisle is the founder of Principal of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.

Dan McMurtrie: Thanks for having me on Toby.

Tobias Carlisle: How are you Dan?

Dan McMurtrie: Very good. Really appreciate you taking the time. Big fan of the show.

Tobias Carlisle: My absolute pleasure. Let’s talk about Tyro. Your Long/Short hedge fund first. So you cover four themes, consumer, healthcare, industrial, technology. Can you just take us through a very high level why do you focus on those themes and what’s interesting about each of them?

Dan McMurtrie: There’s a few angles you can take on that. I think one of them is there’s a lot of dispersion in all those sectors, so there’s trading opportunities. There’s also a lot of dispersion in financials, but we don’t have a specialty in that, and also you generally need a lot of leverage to get a high nominal return. We really want to focus. A lot of things you can spend research time on when you’re doing bottom-up fundamental research, and so our way to think about what we’re going to devote time to is by focusing on two things, big secular trends that we think are going to really drive how economics are occurring throughout a value chain, and then the value or supply chain itself.

Dan McMurtrie: We think increasingly industrials, technology, consumer and healthcare are blending together. There’s that very popular meme about every company needs to be a tech company now, and to some degree that’s true, and at other degrees, it’s not. But it does mean in certain times when technologies from one industry or the other are moving into the other industry, it’s going to change the competitive positioning of the market a lot and that is very important, particularly as you look at public versus private deals right now.

Dan McMurtrie: We spend a lot of time looking at private in addition to the public and so we just think there’s a lot of overlap there. We see common themes, we see common drivers and we think there’s a lot of synergies between covering those spaces. There are certain things within those sectors we don’t cover. We tend to cover specific sub-sectors, so we don’t do science-based biotech, for example, within healthcare, but a cashflow based healthcare business or a healthcare sector special situation we’ll participate in.

Dan McMurtrie: We also tend to not do as much SAS. We’ve covered them, but I just have never been able to get comfortable with the valuation, so it’s never going to be a huge bet for us I don’t think.

Tobias Carlisle: Yeah, it’s hard to plug in those growth rates and I think that that’s been a differentiator over the last few years. Folks who’ve been able to accept those growth rates and employ them have done very well. When you’re looking in say, consumer, so could you just give us a flavor of how you think about consumer?

Dan McMurtrie: So in consumer and tech, well in the others too, but in consumer and tech specifically, we spent a lot of time really trying to understand specifically what motivates the customer purchasing decision? What does that company customer relationship really look like? A lot of the times it’s a little counter-intuitive or there’s some nuance that you miss if you’re just reading research reports. So we spend a lot of time going and talking to customers, talking to salespeople. We like to go to conferences that are not finance conferences. So if we can find an industry specific conference we’re going to go to that.

Dan McMurtrie: We really like turnarounds of strong brands. A big position for us in the last year was Papa John’s and we think that was an interesting situation because you had a massive footprint, a brand that was extremely popular sometimes for bad reasons, but had been run very poorly compared to comps, and we know a lot of people in the franchise business and it was a situation where the bar was much lower than the market really expected.

Dan McMurtrie: So we really like turnarounds. We really like strong brands where there’s something about the customer consumer relationship that is unique, and we really like repeat purchases more than a high ticket price items. There’s things like Peloton and companies like that, that I think are great businesses that people done very well in it. I’m not as comfortable underwriting those situations personally just because I think it’s such a small number of absolute customers and a competing product or a new story or something like that could potentially permanently impair the business.

Dan McMurtrie: I don’t think that’s as risky with a company that sells 25 different types of candy bars or something like that, it’s a little easier to underwrite, and so we tend to avoid some of these high ticket price item companies. We haven’t participated in things like restoration hardware or Peloton or any of the luxury names so much, just because that’s something that we don’t understand as well, but we tend to focus on things that we think 90% of the population is buying that we think is really popular. We also really like situations on long and short side where we think there’s a big perception gap between kind of New York, Connecticut, hedge fund people and the rest of the world.

Dan McMurtrie: So there’s a point in time where a lot of hedge funds were saying and the sell side was saying that everyone in the United States is going to be shopping in a whole foods and we just were looking at income and wealth and we’re like, that’s not possible, and so those are types of situations, and a lot of the times I think, on an average stock, on an average day, we do not think we have an edge. A lot of what we’re looking for is really doing our research first, completely independent of what we’re going to trade and then waiting for the market to make some sort of mistake.

Dan McMurtrie: So usually it’s some scary headline, then you peel it back and it’s really not anywhere near as bad as people think or you get an incremental piece of information that really increases the probability that your thesis is correct and the market doesn’t incrementally price kind of that probability change. So those are two things we really focus on, particularly in consumer because these are very emotional names and there’s a lot of retail money and there’s a lot of, people go from this is the greatest brand ever to this brand is dead and we’ll never come back in a month, if very frequently.

Tobias Carlisle: Consumers or investors?

Dan McMurtrie: Both. Consumers tend to be, I think that’s probably the high ticket price item thing is a little scary to me is I think in certain consumer categories you see big shifts in terms of what people are buying. In others, the street will freak out. But then if you actually think about it and you look at some of these businesses, a nightmare quarter is 6% lower sales, which might actually be 3% lower volume with some discounting. And so if you think about what is, is that franchise really impaired permanently? Is this a dead business?

Dan McMurtrie: I think that’s a little bit of a jump from kind of a 3% volume decline and yet the street makes this assumptions very, very frequently. And so when you have a setup like that on kind of the sentiment side where people are really freaked out over something that is not a material volume shift where there’s a clear short term issue and particularly if there’s a management team in place or a new management team in place that has a very tangible plan and course of action that they’re actually going through and executing tangibly, we really like to get long those situations and we like to short kind of the opposite.

Dan McMurtrie: We like to short most situations where people start to assume everyone’s going to have this product and things like that, and you have to be careful because there are Netflix’s and things like that where that’s a really dangerous bet but that comes back to really understanding what that customer purchasing relationship is and kind of where is the sentiment of people in the industry and people buying the product versus where the street is. And so a lot of the times our big long and short positions are something where we think there’s been a marginal shift up or down in the business but the street has completely over-exaggerated that, and usually that’s amplified by a positioning issue. I don’t think that most stock price moves are really entirely fundamentally driven, particularly on like a one day, one week basis, and so our approach across the board is to really try to understand certain businesses, the pizza business, something like that.

Dan McMurtrie: It’s not… Pizza hasn’t changed and I don’t know how long. I mean, Domino’s has rolled out an app and done a great job with fortressing and all of that. But I don’t know of a really a new pizza other than adding incremental pieces of chicken onto different pizzas in a long time. So when we see Papa John’s go from, I don’t even know where to 40 and then it rallies all the way to 60 on an M&A rumor, at 40 it’s a pretty obvious buy if you’re not getting scared about the situation, and at 60 when they’re assuming it’s going to get bought out, you could run whatever M&A math you want. There’s no way that thing was going to get bought there for over 60, 65 bucks. So you really didn’t have any upside after it was a clear sell, and then it went right back to 40 and meanwhile with that stock, management had laid out a plan and a timeline.

Dan McMurtrie: It was very clear what needed to happen, and the street kind of every month had a new narrative for how this Papa John’s turn around was working or not working, and when they first announced it, they needed to come out and they needed three months till they had their franchisee meeting. And so you can’t turn around a franchise based business unless you get the franchisees to buy in.

Dan McMurtrie: And so in the course of the part of the plan where we have to get with our people and get everybody on board, the streets sort of generated, I don’t know how many narratives and so we’re just following the business and so it’s kind of like 80% of our time is following the business, and then we check in on what the street’s doing, and I have no idea what the streets talking about half the time when some of these names, because I’m like, I’ve been talking to people at the company and the industry franchisees and they have no idea what the street is talking about and sometimes the street’s right, but we really like those situations where we think there’s some big dramatic psychological game happening in terms of how people are trading an aim and associate that’s amplified by a lot of positioning and sort of agency risk on money managers parts that’s causing those pricings to be wider. And that’s kind of how we cross kind of the fundamental view with the, when we actually trade.

Tobias Carlisle: Yeah. I think you pointed out that the last great innovation in pizza might’ve been sticking some garlic salt onto the marinara sauce.

Dan McMurtrie: Yes. So this is a true point, and it’s still online. When Domino’s, right now everybody loves Domino’s, but people forget that for a long time that was not the case and it was not a good performing company. And one of the first things if not the very first thing-

Tobias Carlisle: The box and the pizza tasted roughly the same.

Dan McMurtrie: … Yes. So one of the first things that happened when new management came in is they issued a press release, they did some calls on things and the press release, which is still online on kind of an old version of the Domino’s website, basically says, “Our pizza sucks and we’re going to reinvent our recipe and all of this.” And what they did is the classic trick that every amateur and professional chef know. A lot of people in my family are chefs, my uncle runs restaurants, things like that, and you add garlic salt. So they put garlic salt on the crust and they made a couple slight tweaks and then they started going to college campuses and offering aggressive discounts because they’re like, college students will buy $5 pizzas and they just ran, and I was a beneficiary of those $5 pizzas. As anyone’s with a video feed will see. And then I think six years later Papa John’s just made that exact same press release, which it was so funny to me. I was looking up side by side and they’re even worded very similar. It’s this-

Tobias Carlisle: Well, it worked.

Dan McMurtrie: … We’re slightly change the sauce and we’re going to put garlic salt on it.

Tobias Carlisle: So when you’re constructing your portfolio, your long and short, but I gather from what you’ve sent through that there’s no explicit pair trade, but are you sort of by limiting yourself to those four themes or those four sectors do you have an ad hoc kind of a pair trade hedge when you’re putting those long and short positions on door. Do you think about it in those terms?

Dan McMurtrie: Kind of. I mean I think we are trying to basically, I don’t believe in alpha. I think everybody’s capturing some beta and it might be a beta we can’t quantify explicitly or something like that. But I think there’s some factor you’re trying to trade, even if you’re a bottom-up fundamental guy, which might upset some people. And so for us, there’s some trend we’re trying to capture a return stream from and there’s some pricing dynamic that’s happening that allows us to get, we think a little bit of extra gearing on that. And from that perspective we want to look at when we’re taking a position, what are we actually hedging if we short it.

Dan McMurtrie: I think the regression calculated beta of a name may not change that much, the valuation and the trading dynamics may change significantly. So if you’re using one, two, three, four, even five factor models, especially in small and mid caps, you may not notice that the liquidity profile of the stock has changed dramatically and it’s going to trade very differently going forward. So it’s hard to just, especially in small and mid caps when you already want to be relatively concentrated, we tend to take five to 10% long positions at cost.

Dan McMurtrie: You can get into a lot of trouble, and we did, I think early on in our track record thinking you can perfectly net these things and so what we generally done is we’re a lot slower about taking positions. We’re a lot more conscious about what’s the absolute gross positioning we have and not so much about just pairing them, because a lot of times you find a clever pair, this company’s doing well, this company’s doing poorly, but the pricing and liquidity and the short interests have already really priced that in.

Tobias Carlisle: Sort of the obs of that, yeah.

Dan McMurtrie: Yeah, you can get hurt really badly betting on the winner and shorting loser, especially on a one, three, six month timeframe and your IRR ends up being terrible. It eats up a bunch of margin. So if we want to take a big position going from how you go bottom-up to top-down portfolio construction, we typically want to have around 15 long positions and there’ll be some starters and some pull positions. When we start it’s going to be a two to 4% long position. We have certain criteria around how much risk weighting we want in each name, we are comparing that against what’s in the book already and also what the rest of our watch list is doing.

Dan McMurtrie: So most of our trading behavior is motivated by something else in our watch list becoming a better risk-reward, better quality for price, something like that. As we move up towards a max at cost position of 10%, we need to get a lot more serious about looking at what else is in the book, particularly what liquidity risk we’re taking? What beta risk are we taking? What bottom-up risk are we taking? So things really need to be right for us to have a max position on it. And a max position, there’s a very big difference between having one, 10% position or if it’s doing well and you have a 15 or a 20% position, there’s a very big difference in having one of those and having five of those, right? And so we need to think a lot about how we’re sizing that. And so as we approach a 10% position and multiple 10% positions, we’re generally going to want our gross to be lower.

Dan McMurtrie: As I said, it’s really hard to actually robustly quantitatively hedge a 10% position, especially if you have multiple of them. So generally the approach is going to be if we had six, 10% at cost positions gone, that might be almost all of the long exposure we have, and so we want to really think about whenever or we’re getting more concentrated, we want to pull gross back or we’ll also look at can we use options? Can we use other structures to hedge the underlying to specific risk scenarios we’re seeing? But we think it’s pretty dangerous to just try to say, “Okay, well, I have 15 positions. My beta is this. I’m going to short that much S&P or something like that. Or I’m going to have a bunch of 3% small shorts that I think are going to net that out.”

Dan McMurtrie: I think you really need like I think a John Hampton, Jim Chanos, so the people like that do a really good job of having an adequately diversified short book against their long book to where it actually works. But unless you’re really shorting 50, 100, 200 names, you can get in a lot of trouble with that. And so on the short side we’re going to tend to have-

Tobias Carlisle: Just before we go onto the short side, let’s talk about your longs. Let’s talk about what’s an ideal of long at 10%? What does that look like for you?

Dan McMurtrie: … Sure, so an ideal long basically all the fundamentals stuff needs to be, we got to like the business, we’ve got to think it needs to be at a discount to some sort of fire sale liquidation value. We use sort of different valuation techniques depending on the situation, but also discount to where we think worst case scenario is one type of valuation, then the other thing is actually-

Tobias Carlisle: You don’t mean you don’t mean fire sale liquidation of the business, you mean fire sale liquidation of the stock by the holders of the stock or do you mean liquidation of the business?

Dan McMurtrie: … Liquidation of the business. Well not necessarily liquidation but we want to look at private market value would be the traditional term for that. So we’re looking at is at a discount to where we think the business could be sold or something could be done there, and then, so that’s kind of are we buying something cheap and then what’s the actual quality of the business? What’s the ability to reinvest capital and grow this thing?

Dan McMurtrie: So if we can buy a high quality business cheap, I think one of the things we’ve learned a lot over time when we focus on is, if you buy a really high quality business, marginally cheap over a multi-year timeframe, your returns tend to be much better than buying a C minus business, very cheap. Because the other thing is, I think with C minus businesses particular, if you’re concentrated, you’re actually taking a lot of agency risk on management, because there’s a lot of ways for management and bankers and private equity and a lot of other players to skim out those returns that your spreadsheet say should be there and we’ve gotten burned on that in the past versus with a high quality business management’s incentives are naturally more aligned to equity accrual assuming that the actual proxy statement bears that out, because there is a long term value creation potential with that business versus this is just a cigar butt.

Dan McMurtrie: So we want to do kind of a cigar butt type analysis, we want to do a quality type analysis. If all of that checks out, we really like it. That’s kind of something we’ll look at taking a position on. Where we’re going to look at getting a lot more positioned is when we see, especially on the long side, we see structural under positioning. So we use factor analysis to look at where our capital outflow is going out of on a sector or something like that, whatever size sector, whatever factor it is. And when you see structural outflows from a given sector, there’s a good reason to think there are going to be bottom-up mispricings.

Dan McMurtrie: Now the caveat to that is very hard to capture that because when it bounces, the trashy stocks always lead in the short term, and that can be very frustrating. So you need to actually have a long term timeframe. So we like to see lopsided positioning when people are very under positioned to sub-sector or a sector, that’s when we’re going to be looking to take a little more exposure, and particularly if we think that that business is in the wrong basket.

Dan McMurtrie: So we look a lot at, who’s actually trading the stock? What does that look like? What ETFs? What are their mandates? What type of active managers are in it? What’s the actual float? How does liquidity change? And so some of our best long positions have been a situation where the stock was very overpriced, there was a short thesis, stock went down. Short sellers got very emboldened by the stock going down. They continue to add to their short. Meanwhile, the average daily trading volume of the stock starts to collapse and all of a sudden the business is actually doing fine. It was overvalued, but it’s fine, and you have a situation where there’s people who are short 20 days of stock of ADV and that sector is kind of bottoming out and other comps are starting to put good numbers up and it’s clear that this extrapolation from overpriced needs to correct to doomsday is wrong.

Dan McMurtrie: That’s a situation where we’re going to put a max position on because we know we have a lot of known structural buyers, we know the fundamentals are strong and we know that the capital flows are already borderline apocalyptic and that’s really when we’re going to look to kind of get really, really hefty in a position, and we also pay attention a lot to what is the kind of catalyst flow and new structure going to be.

Dan McMurtrie: So value investors tend to get in trouble because they’ll have a theory about, okay, management is going to do this to unlock value. They’re going to do all these things. And this is the future that’s going to happen, and a lot of times you go talk to management or you talk to people around the company and nobody has any idea what these money manager is talking about. I mean I’ve seen 700 page threads on Corner of Berkshire and Fairfax where nobody in the industry has any idea what these value guys are talking about, and it’s not that the value guys are wrong about what should be done, but that’s not in play. Nobody actually cares about that in the industry, and then those tend to become what we call Boy who cried wolf stocks where you’ve started the same thesis for three, four or five years, and then those can actually become great thesis because sometimes what happens is like year four or five of the thesis and the investment community, management actually comes out and says, “Yeah, we’re going to do that now.”

Dan McMurtrie: So an example of that last year was Recro Pharma, which for a long time a lot of people were talking about it. They have the CDMO manufacturing business. And for years, I’ve heard this pitch, at least since 2015. People are like, “Well, we’re going to sell the CDMO and get rid of the bad drug development company.” And management was never on board with that. They were very explicit about, “No, we’re going to develop drugs. We’re going to take the cash from the cash business.” And so when management finally came out and said, “Yeah, we’re going to do this.” Thee stock kind of traded up, but no one at most hedge funds could take that to their boss because the bosses are going to be like, “Are you kidding me? How many times have we heard this idea?” Right?

Dan McMurtrie: So we like things like that where there’s some sort of psychological or structural social arb where I’m like, this is a good thesis. And also, I know most people right now cannot pitch it in their shop. So those situations will really like dial up to 10% when management really hits you over the head with, okay, we’re going to do that thing now, and nobody’s paying attention because they’ve been burned too many times, but we’ll need to be able to be able to validate that.

Tobias Carlisle: Let’s talk about short. So you mentioned in the note that it’s in some ways shorts are the reverse of what you’re doing with the longs, but just take us through an ideal short.

Dan McMurtrie: Yeah, so on the short side, we really don’t like shorting on valuation. We really don’t like shorting frauds. I think the only thing you know about-

Tobias Carlisle: I’ve done short frauds.

Dan McMurtrie: … It’s very rare and I’ll short a fraud because the business is collapsing. I won’t short to fraud because it’s a fraud. The only thing you know about a $2 billion company that you think is a fraud is that they’re really good at running a fraud. Think about how hard it is to build a real business to $2 billion. They’ve built nothing into $2 billion. These guys are very good. They have very powerful allies. It doesn’t happen on accident, and I think a lot of the times people have a naive approach to that and they just assume like, oh, this is some huckster, and he just like filed some paperwork and this is just magically this big thing and I’m like, no, there’s a serious industry about how these things get produced and you can track it, and then when crypto, Biotech in 2015, cannabis, they all go up correlated, and then when they all go down, they all go down at the same time. And the problem is there’s a lot of shorts I was looking for these scammy companies, so the borrower rates have gotten insane.

Dan McMurtrie: It’s gotten really hard to time it and do the carry. What we do like on the short side is competition based thesis and these are really only shorts we found that have worked consistently through this relentless bull market is when company one is just getting the crap kicked out of it by company two and a lot of times it’s a private company and so the one we did last year was GrubHub. And so a lot of my family works in the restaurant business. I know a lot of people who own franchises or started franchise companies. I understand that supply chain really, really well, and there were a few things that happened.

Dan McMurtrie: One, we met with all the private competitors and we saw that GrubHub was competing against DoorDash and other players that had more money than them and absolutely no reason or need to make even a gross margin on the sales. And they actually had a stated mandate where the intent was just to burn the thing down and take market share, and they were being frankly kind of almost mean spirited in terms of, they were poaching really key GrubHub employees. They were doing a lot of just extremely aggressive things. They were giving exploding offers to key employees right before very important periods of the year just to disrupt GrubHub operations, and meanwhile, GrubHub is telling investors, we’re the disciplined player, and I was like, that’s cool, but you’re in the middle of the ocean saying I can swim longer than that guy.

Dan McMurtrie: I don’t really care. Neither of you can swim for months and you’re not going to reach land. And what was weird was the stock prices remained somewhat resilient even as we saw DoorDash and a couple other players take a massive amount of market share. So that was one problem in terms of, we knew they couldn’t compete. And then at the same time we were talking to a lot of restaurant operators and most of them were telling us that unless they sold two plus meals or three plus meals, they were taking a loss on every GrubHub order. And so I think, Silicon Valley kind of usually starts with a good idea and then runs way too far with it, and I think recently there’s been some startups where it’s not just trying to extract a margin off of being a marketplace, they’re trying to extract over a hundred percent of the available margin in the market, and that just doesn’t work because you can’t steal from somebody who’s dead in a sense.

Dan McMurtrie: And so you had a lot of people that were paying basically 18% of sales, or higher when their margin is 15% and that just didn’t work, and they were only doing it so they could advertise that if you went on their website and bought directly through them and you could get a discount in the set or whatever. And so that’s a competitive problem, and we also think that GrubHub in particular had a, going back to that New York Connecticut bias, I think one of the reasons that wall street really liked GrubHub so much was simply that Seamless is the standard food ordering platform for bankers and consultants and hedge fund people, and so it was such a familiar use thing that nobody realized that nobody used GrubHub on the West Coast.

Dan McMurtrie: You go to the West Coast and it’s all DoorDash for the most part in San Francisco and other places, and they really didn’t have that strong of a hold on the market. They just had a very strong hold on a certain class of 23 to 30 year old kids at these eight tier firms. And so people were extrapolating that and they couldn’t see themselves not using Seamless. And so they said, well obviously everyone is using Seamless, and so that was a problem.

Dan McMurtrie: So we knew in terms of that customer relationship, we knew that the broad customer base was turning against GrubHub or at least was just very indifferent. We knew that the analysts on the sell side had a very strong bias and they really were evasive. Every time we tried to make these arguments, the counter argument was just, “Well, I don’t think so.” And I was like, “Cool, but I have quite a bit of data points here and we’ve interviewed everybody.” And they go, “Well, we just think that they’re going to hold it out and then their margins are going to mean revert.” And that might be true. But in order for you to get to that end point, that stock’s going to have to take a massive bath because they have to fight a war, win it, and then try to rebuild. And it was at the beginning of the war and everybody was like, “We think they’re going to win the war.” And I was like, “Cool but DoorDash has almost $2 billion just to come after you.” And so that’s somewhere it’s just a vicious competitive market.

Dan McMurtrie: Everybody’s already pricing in this consolidated market state. When the market is not consolidated, it’s still in a place where people are going to compete for margin, and we also thought nominal growth rates were just not going to be as high as some of the people want them. And sometimes these things, if their growth rates are high enough, people go, okay, the margin will work out. But these are not SAS growth rates, these are solid growth rates, and so we just saw this big lopsided thing and this was kind of I think two Q4s ago and going into the following year and you just started to see everything on a fundamental side was trading against GrubHub and the street just really wasn’t getting it yet.

Dan McMurtrie: So the first thing the stock went from I think it was up to 120 somewhere in there and then it kind of dipped and every level down people thought it was finally time to buy the dip, and then the big thing that surprised me was I actually covered the short before there, I guess one or two earnings calls ago and I thought that they were going to come out and try to say, “Okay, we’re kind of getting to the end of this game. Uber’s dialing back some spending, DoorDash wants to go public.” Things like that. And actually they wrote one of the most shocking shareholder letters I’ve ever seen where they just kind of admit, “Oh hey. It turns out that if you have a business that scales one for one revenue to cost on labor, there’s no unit economics there.” Which I had been shouting about like crazy person for years, but they just admitted it.

Dan McMurtrie: I’ve never seen a company just admit like, “Yeah, our business model is torched.” Which was just really bizarre, and so that’s an example of a short. Another short, I won’t spend very much time on this one, but it was a company called Myriad Genetics that does genetic testing and everybody’s heard of 23andMe and these companies and those are not medically robust genetic tests. Those are entertainment and disturbingly a law enforcement tool, I don’t know, very sketched out by those companies, but there are companies that do actual genetic testing and so everybody knows Illumina genetics.

Dan McMurtrie: Illumina makes the sequencers, but Illumina doesn’t do a lot of customer facing work, and my theory on that on why that is, is basically genetic testing is so much more complicated than blood testing. Blood testing you’re getting two integers out. Genetic testing, you’re getting terabytes of data potentially. And then the testing methods, not methods, but data analysis is constantly changing and so there’s a really heavy service component to genetic testing in terms of how do you work with a local practitioner at seeing patients all day? How does a practitioner at seeing patients all day keep up with a field that is changing week by week in terms of what the cutting edge standard is? And so you need to have the testing provider provide a lot of information and there needs to be a very good record keeping and a lot of reconciliation among, okay, two years ago we did this test, this was the standard. Now the standard is this.

Dan McMurtrie: So there’s a super heavy service component. Myriad was one of their first genetic testing companies. They tried to patent genetic tests that got thrown out. That was a big problem for them, and what they’ve essentially tried to do is they’ve tried to use branded tests and this strategy just has not made sense to me for a number of reasons.

Dan McMurtrie: One, there’s just so many different genetic tests you can do. I don’t understand why you think you’re going to have like a brand name, like Cologuard, like exact scientist type product, and two, they’ve been charging more and they’ve had some issues with Medicare, Medicaid reimbursement, fraud type issues. Again, I’m not a fraud person, but the big problem was you had two other players really enter aggressively. Ambry Genetics and Invitae and I went and visited those companies and Invitae in particular, Myriad is one of these kinds of old golf course type sales models for the most part, and Invitae their warehouse in San Francisco looks a lot like an Amazon distribution center.

Dan McMurtrie: They have robots, they’ve custom built to run the robots doing the tests and they’ve got, it’s like a pit stop. They have shaved off 30 seconds on every single set they have, and their stated strategy is we’re going to try to cut price by 50% every year and more than double volumes and we’re going to try to build this software layer to do the service on top of it and be the easiest to work with. And we’re just going to try to obliterate price so everybody else is dead and everybody is going to have to work with us because we’re going to be the best to work with. The cheapest, the fastest, just higher quality.

Dan McMurtrie: So they’re pitching an Amazon model. Whether that cashflow side of that ever works out doesn’t really matter because they have enough money to try that, and so an Ambry, largely the same thing I think not executing as well as Invitae. So Invitae is just a very dangerous company to compete with because they’re ruthless, they don’t care about profits, they have the capital to continue to do that, they’re a lot sharper technically and they are much better with customers and they’ve poached a lot of Myriad’s top salespeople.

Dan McMurtrie: We follow a lot of LinkedIn stuff to see where people are going and Twitter and all that. And so we saw Myriad had gotten that very dangerous point in healthcare where it started to look cheap. It started to look like, oh it’s a low multiple thing and it was a point where it looked profitable on multiple of these other things and we were looking in the underlying market and again, the market share shift was so dramatic that there was a slight summer breeze, all of a sudden this thing is losing money across the board and could actually potentially have a leverage issue.

Dan McMurtrie: It went from a company that looks like they have a small amount of debt to where a company that is just going to be incinerating cash and may not have any staying power, and I also think their IP, which they tout a lot, I don’t think it’s worth anything, and I haven’t really been able to find anybody who’s a practitioner who’s been able to explain to me why it’s worth anything. I mean, maybe some nuisance value. So that’s another one we shorted and did pretty well with it.

Dan McMurtrie: A lot of the things we’re focusing on the short side are these types of situations where the street has some opinion here under the hood in the market, there’s a really aggressive competition happening and usually one of the indicators here is it’s usually a win for consumers. It’s usually something where the consumer is pumped, everybody’s getting cheap genetic testing, everybody’s getting fast delivery of all their favorite foods, and then the question is, is the consumer surplus being created actually sustainable by the underlying market? And the answer is often no. And then when you decompose that, there’s usually a legacy player that is freaked out by how aggressive the other player is, but they’re not doing the balance sheet.

Dan McMurtrie: It’s like playing poker, the stack sizes are so different. That one player is going, well, that guy’s a fast and loose player. I’m like, yeah, but he has a 20X your stack. He can play as fast and loose as he wants. So you’re probably done unless you just keep hitting rock. So those are the types of things we like to short.

Tobias Carlisle: Let’s talk about portfolio construction very briefly. In your note, you’re targeting 200% gross, 30% net. Is there any reason for that?

Dan McMurtrie: 200 is the max.

Tobias Carlisle: 200 is the max. Okay.

Dan McMurtrie: 200 gross is max and depending on what’s going on, we’re going to be typically 125 to 200. It tends to look very similar to the kind of fable tiger model of we’re going to be net long. We’re long and short for fundamental reasons. We’ll add in some sector coverage or if we see really cheap hedges that allow us to maintain more long exposure, we’ll take those. But across the board, we’re trying to structure the book to allow us to ride out our strongest fundamental views.

Dan McMurtrie: So we’re really not trying to be, we don’t really care what the market’s doing and any given day or month, and the way we want to structure it is we got to be able to write out the core fundamental views, and we want to make sure that on the short side, and also on the long side, we don’t have a liquidity mismatch. And so one of the things that can be nasty for a short seller is like, let’s say it’s your first day running a long/short book. You come in, you go, okay, I’m going to buy $100 of stock, I’m going to short $50 of stock and I’m going to short all these scammy companies and I’m going to go long all these high quality companies. And then what tends to happen is when the market starts to puke, a lot of managers have to cut risk, and so they’re going to sell those crowded names, but they’re also going to buy a lot of those short names back, the highly shorted names.

Dan McMurtrie: So you can get pensored in a very brutal way, and so I think like the way things are actually going to behave and that doesn’t always show up if you do a multi-year regression or something like that. You need to look at a little more of kind of trailing metrics and where actual positioning is. If you try to do an aggregate top-down analysis on that, you can get in some real trouble, and I’ve seen some people have a bad time. So we want to focus a lot on, okay, what is the actual liquidity profile of these names? What does the holder base look like? There are some value names where like eight value hedge funds own 70 or 80% of the stock and when one of those breaks there’s no floor or if the market starts to puke and they get redemptions, there’s no floor. And so that’s a lot riskier of a stock over a short term period of time than a stock that’s overvalued even, and I think you need to take those things into consideration a lot when you’re weighting things.

Dan McMurtrie: So we really want to avoid anything where we think we see a big risk of holder capitulation on the long side and on the short side, we really don’t like anything that has high short interest, high borrow, very variable liquidity, anything that’s really prone to short covering in a down move because the short book needs to be able to try to drive alpha but also it needs to be able to actually work when the market goes down to provide liquidity so that we can buy more longs. I think John Hampton talks about this a lot. The big reason you want to be short as it allows you to go longer what you really like and so we really pay a lot of attention on the short side.

Dan McMurtrie: We’re typically going to have probably 20 to 30 short positions and some of those are baskets and there’s going to be two to 4% positions. Going over 4% it gets a lot harder to manage because things can rip and then you have a really big beefy position where one idiosyncratic things going to wipe out your whole portfolio construction. So if we go at a 4% it needs to be pretty the opposite of those positioning dynamics and structural amateur we’re talking about on the long side and we also let the you know-

Tobias Carlisle: You need to have a catalyst very-

Dan McMurtrie: … Yeah.

Tobias Carlisle: Varying the attempt catalyst that sort of sizing.

Dan McMurtrie: So we look for what we call phantom catalysts and that’s usually something like on page 200 of indenture, there’s a clause that says, “Okay, X date, the partner of the company can revoke all financing.” And so we’ve done two of those now, both pharmaceutical. One was a company called Mankind Pharmaceuticals and Sanofi had a clause where on a certain date they could pull all backing of this company and going into that event, you saw everything online, any digital trace of anything about that company just disappear.

Dan McMurtrie: The clinical trial stopped, the new IP filing stopped, all the job posting stopped, the people who are on the team related to that product switched teams on LinkedIn and you saw job postings that were up to sell this product just vaporized and we like those because people aren’t focusing on it. Either nothing happens, something can obviously happen but generally speaking, nothing happens or you make money, and there was almost the exact same setup with a company called Giran pharmaceuticals, which is an oncology company. Same thing.

Dan McMurtrie: The big sponsor that they were claiming as the white knight went completely dark, and a lot of evidence that this was canceled. Either nothing happened on this day or we made money and so did that, and for those positions we will go a little over 4% if we can buy cheap call options and try to cap because we don’t really want to lose more than 1% on a short, which you think about it for doing two, 4% positions. I mean we’re not trying not to lose more than 25 or 50% which is emblematic of how much skew there is in a short. On a long side, we’re trying not to lose more than 2% on a position. And so we do look a lot at volatility, some other stuff like ATR, correlation positions and we’re going to be, that’s the big reason why we’re slower in taking positions because you can’t double down on a position. If there’s already a 10% position and it gets cut in half and you add another 5% then you’re at a point where you might have to go.

Dan McMurtrie: Your investors are going to look and say okay you lost over 10% of my money on one bet. And it’s not, especially on Twitter, there’s lot of people who think it’s about whether you’re right or wrong on that bet. It’s like, no, you’re hired as a money manager to make investments. Even if you think you’re right, like I don’t think I have a fiduciary…

Tobias Carlisle: Mandate.

Dan McMurtrie: Yeah, I don’t think I have a fiduciary mandate to take my entire client base down on one bet that I refuse to, when I should have, as I’ve talked about, I should have lots of other ideas and so sometimes you just got to now you can get around that really painful situation if you just have a smaller position waiting going in and then if things get weird, then you can go to a full position waiting and you’re not taking as much a capital impairment risk. And we also try to do things like, we’ve paid a lot attention to underlying company leverage and things like that. So it’s easier to double down in a company that’s 40% cash, no debt and 20% free cashflow than it is to double down on 8X levered housing distributor or something like that. So to-

Tobias Carlisle: To what extent are you influenced by Hampton, Chanos? I know you have, I don’t know the extent of that relationship with Chanos, but you know Chanos in some way.

Dan McMurtrie: … Yeah, I’m friends with both of them. I mean, I mostly, I don’t think I’ve ever talked about portfolio construction with either of them. I’ve seen what they’ve said about it and I pay attention to everything and we mostly talk about individual names and-

Tobias Carlisle: My impression of what Hampton does is that he’s almost quantitative, systematic across the short book that he might have 100 to 150 names. All pretty small. I don’t know as much about Chanos.

Dan McMurtrie: … Hampton has been able to build positive expectancy or at least break even expectancy into shorting. And so he’s got a hyper diversified book. It’s systematic. I think both Hampton and Chanos most people don’t understand how they run their… Chanos also runs a diversified short book, and I think this has been written about online, but he has a strategy where he’s levered long the index more or less in a short basket, and both of those-

Tobias Carlisle: He’s won 90/90 run.

Dan McMurtrie: … I think something like that. I don’t have the docs. But-

Tobias Carlisle: I think I’ve seen him talk about that.

Dan McMurtrie: … In those types of scenarios, I think a lot of people, again, one of the big mistakes that people make when they look, especially on Twitter about money management is they get really obsessed with the ego benefit or detriment of winning a specific stock debate. And portfolio construction just absolutely dominates that, and so you want to structure everything so that even if you’re horrifically wrong on an individual position, particularly positions where you have a lot of conviction. So we have rule sets in terms of how we actually size everything. So all those parameters are checklists. And then we’ve got some waiting and things like that, and not really Markowitz, but some similar stuff.

Dan McMurtrie: But those guys can afford to be very wrong on many names. And Hampton, I think he talked about Ameren. He is fairly routinely, horrifically wrong on a name, but it’s a 10 basis point short. And overall because he’s shorting 50 of those names, those characteristics, it works very well, and also it allows him to maintain that long exposure. Same thing with Chanos. So a lot of times people make comments like, “Chanos only makes money once a decade or something like that.” And I was like, “Not true. Chanos actually has one of the most robust track records.” Because it’s, again, a lot of large portion of shorting is allowing you to maintain that long exposure. And if you can be the guy who can buy last Q4 or two Q2 years ago, 2018 and you’re not ruffled, that’s a massive advantage. And that’s really what’s going to allow you, I mean, so many fortunes have been built by having liquidity when other people don’t.

Dan McMurtrie: So a lot of about how we’re looking at the short book is we kind of have a standard short book that’s designed to be able to definitely provide liquidity in market down moves. And we also think that there are negative expectancy especially versus our long names. And sometimes it will be paired, but we don’t necessarily explicitly think about the pairing. We have views and then views aren’t necessarily in the book, because I think a lot of fundamental managers end up being technical traders because they only do fundamental work when the stock chart goes to some level and they go, “Oh maybe there’s something to do now.” Then they fire drill their analysts who stays up for two days calling people and then he goes, “I think the sell side numbers are here, and I think the numbers are here.” And there are some people who can do that well.

Dan McMurtrie: It just sounds like a terrible life, and I also think you can get really burned that way. And so for us it’s more about tracking views and when we see prices go. So on a pair trade, if we have long, we have a basically we’re short in spirit another name. If that name then squeezes 200% then we might short some. We tend to wait until, especially if we see a position where there’s no catalysts, no information flow, we’ll wait till we see other people in a great position of pain. Sounds mean, but it’s more like-

Tobias Carlisle: That’s business.

Dan McMurtrie: … Well it’s more like somebody’s pitching me, I always think of short pitches, especially from younger guys who are pitching shorts. They see this glorious victory because they’ve watched The Big Short and they’ve read these books and they’ve seen these interviews and I’m like, before the glorious victory comes the war. It’s like one of the things I really like about Marc Cohodes is Cohodes is he lives on the battle.

Tobias Carlisle: He relishes the war, yeah.

Dan McMurtrie: Yeah, and whenever I imagine what Marc Cohodes might be doing, it’s he’s always just got like a bowie knife and he’s just licking it. Like he just lives for that. I don’t, I like not having to just fight all the time but I think in the short side, how you construct the book, you need to make sure that you have, I think the liquidity is number one over everything. Liquidity and positioning risk in my opinion, especially in this market are so important. I think it overrides everything else, like sector exposure, size, beta. Positioning is going to crush everything else.

Dan McMurtrie: I think a big reason for that is if you’re an active manager, you’re probably going to have some correlation with other active managers. There’s always someone else who is aware of a stock you’re aware of, definitionally because somebody owns the shares. And the issue right now is that there is, like long/short equity is the least popular investment product in the world probably. People hate it right now. And so if you have AUM as a long/short manager, your one bad day or one bad phone call away from having it being polled. And that is causing, in my view, very tangible distortions in markets where it doesn’t matter how much you like the name, you can’t take a bath on it.

Dan McMurtrie: People don’t have the ability as an agent of somebody else to take that risk anymore because career risk is dominating everything. So I think if active share is X percent of the float, that can be a lot riskier than people think because there’s active guys tend to move at the same time because they have to cover their ass. And so we are really, really focused on that above all because that’s how we’re getting a lot of our good entries is when we see some massive flush out of people have been positioning one way or the other because of some event. And so that’s really the main thing we’re parameterizing the book for right now is just that one factor because… And the other thing I qualitatively talking to a lot of other hedge fund people, so many people I know can’t put on what they’re really convicted about at their jobs, whether it’s family office or multi pod shop or whatever because there is a career risk angle.

Dan McMurtrie: I can’t pitch that to my boss because that thesis has been around since 2015. I can’t pitch that because every value guy’s talking about that. I can’t pitch that because that’s just a Momo stock and we’ll get hit for being, and so if you look at all of the memes on Twitter of, “Oh, he’s just a idiot who buys high price to sale socks,” or, “Oh, he’s a value guy. He just buys dumpster fires,” there’s enough means now where almost any stock is subject to a meme, and the problem is those actually influence manager behaviors pretty significantly. And there’s been some academic papers written on that, that are really interesting.

Tobias Carlisle: I have to get the links from you for us.

Dan McMurtrie: I’ll shoot you it, yeah.

Tobias Carlisle: Let’s change gears a little bit. Let’s talk about your Bangladeshi venture capital fund. What’s the attraction to Bangladesh?

Dan McMurtrie: Yeah, so when we started Tyro, my hedge fund, which has the illustrious honor of being the world’s least consequential hedge fund.

Tobias Carlisle: They’re a lot of guys competing for that honor on one of them.

Dan McMurtrie: Yeah. So we had like three nickels and a laptop to start with and-

Tobias Carlisle: Couldn’t afford the Bloomberg, like me.

Dan McMurtrie: … No, we could not do the two guys in a Bloomberg. Actually by my partner said that yesterday on a call. I was like, “We were two guys on a Bloomberg.” He’s like, “We couldn’t afford a Bloomberg.” I’m like, “Shut up.” But anyway, so what we had to do to start out with is we went around to people we knew who are, I was very lucky to grow up around a lot of traders and investors and operators and things, and that really gave me my focus on what’s actually going on in the business. And so I went to a lot of them that either trade their PA’s or what have you. There’s a lot of bored old ex wall street people and they really like, some of them, depending on how you approach, you have to have some social skills.

Dan McMurtrie: They like a young buck that wants to really like has some fire in their belly about what they’re doing. And so I had some people where I’d call them. I’m basically like, “Look, I’m going to hassle you about the stock anyway. You know I’m going to call you. Can we maybe set up a consulting thing or can you help me out with this because you have more insight on this area or could you introduce me to, I need to talk to this person like that.” So there’s a lot of we just bootstrapped, we used Twitter, we used everything, we treated getting coffees and all this stuff by our coffee’s happy hours.

Dan McMurtrie: Just meeting everyone like a job, and one of the reasons we ditched the Mugatu handle on Twitter was I counted it up and I’d met like upwards of 500 people from Twitter and I was like, “Everybody knows who I am. This is ridiculous.” And then they’re like seven people who didn’t know who were like, “What?” But anyway, so a good friend of mine Rajat, he used to work at Prince Street Capital where Rashmi Kwatra who you had on the show recently also worked and they’re good friends and he had left Prince Street and he had a personal family member that was sick and so he went to work for a nonprofit that was doing bone marrow matching. There’s two big groups who do that.

Dan McMurtrie: Then he started a VR tech company that does sports simulation. Very, very cool stuff. But he was a really good, he used to cover kind of the Asian supply chain for computer chips. And so he was one of those guys where a new Nintendo game would be announced and he would be like, “Oh, I need to go home and buy this random niche company in Guan Jo because they make this one analog thing that’s going into that and it’ll print next quarter because they must have shipped that last quarter.” And he would know that while we were sitting at the bar, that was how his brain works. He just has it and there’s certain guys like that that have physical supply chains like back of their hand, and also just had very good intuition for where consumer tech trends are going, software, and so he’s been one of my best friends, my karaoke partner in crime for a long time, and we’ve both talked a lot and focused a lot on how tech is changing things globally.

Dan McMurtrie: And so there’s this theme that all of us are very interested in here and Rajat as well where, the way tech is changing, you can’t just say, okay, tech worked this way in the US and EM is here, so it’s going to do this. There’s weird lag things and then there’s really abrupt catch up periods. And so even looking at emerging markets and how technology is impacting them. And so I think a lot of people in the US are either surprise to know that like Jakarta is one of the hottest tech scenes in the world right now. And there are a lot of people are going to go, “No, that’s not.” But it’s crazy, and Vietnam is now increasing their blowing up. And now there’s actually really interesting tech startups in Myanmar and obviously India is a huge VC place, in China, and now we’re seeing VC funds and tech startups in Pakistan, in Egypt, in Venezuela, and what’s interesting is that there’s massive leapfrogging happening where they don’t have this legacy.

Dan McMurtrie: There was never dial-up, there was never a desktop, it’s a mobile only. And some of these countries we’ve seen several countries where they had illiteracy rates of over 40%, 20 years ago or 30 years ago, and now they have smartphone penetration of over 40%. So if you think about over a 30, 40 year period to go from almost half the population being illiterate to almost half the population having a smartphone, that’s a profound societal shift, and there still issues around things like plumbing and whatnot that need to get fixed. But-

Tobias Carlisle: What’s much harder to string twisted pair coaxial cable than it is to just put mobile phone towers around and then connect to that. So that’s what many of the developing emerging markets have seen that occur, and then there’s no reason why they can’t. If you’re a generation or two behind smartphone technology in the US it’s still very, very modern technology.

Dan McMurtrie: … Right. And I think that, that assumed lag is getting shorter and shorter due to people like Huawei and Xiaomi who are making very cheap and there’s not African cell phone makers that are, they’re iPhone 7s. They’re not iPhone 10s but who cares? A lot of people in America still have iPhone 7s. And the other thing is, so what’s happening at that is because there’s all these smart phones now, these massive populations that are generally very young, 35 and under can now all communicate. And so there’s a lot of books like Why Nations Fail and other things that basically say a lack of coordination and corruption and things like that are holding these countries back.

Dan McMurtrie: I think what’s happened in a lot of these countries is that there are too many people now who can talk to too many other people. It is forcing such a radical level of transparency into these countries that’s never existed before. And the governments are kind of freaked out because they’re like, when there’s a protest now it’s not 20 kids in front of a school, it’s holy shit, there’s 2 million people on the streets. And so we’ve seen this, and so I think the reason you’re seeing a lot of these protests in these countries is just simply the ability to coordinate, and a lot of people go, “Well they’re upset about the corruption.” I’m like, “I think they’ve been upset about the corruption for a long time.”

Tobias Carlisle: Right, but they couldn’t do anything about it.

Dan McMurtrie: Yeah, and so we’ve been very interested in this kind of this theme of wow, and the rate of change is so wild. So we’ve just been doing a lot of research around. And then, again, is because these are harder places to do business, a lot of these startups are having really innovative solutions to problems because in the United States, most tech businesses are essentially a layer that’s being put on existing economic modules. And so I think most people in technology, this might offend some people. I think a lot of people in technology in the US don’t actually know a whole lot about technology in terms of how actually solving problems. It’s more like, okay we’re going to use this software thing to tell these other things to do this. And in a lot of these countries you’re like, okay, we don’t have physical logistics or we don’t have any KYC or we don’t have, there are a lot of countries that do not have digital maps and you don’t realize that’s a problem until you try to get around.

Dan McMurtrie: Let me tell you it’s a big problem, and a lot of these countries, Google says they’re map works and let me tell you it does not and it can cause you some big problems because I ended up in the very wrong side of Dhaka. So starting like 2015 and now we’ve really looked at this and I think looking at Asian tech, you can kind of like look around the corner in terms of what US consumer tech will likely look at in several months. I think Asian tech broadly a lot. There’s the popular meme of, Asia stealing our stuff, dah, dah, dah, dah. And I’m like, “Yeah, they stole it, they have it and now they’re hauling ass ahead of us.” And so, I spent some time in Asia this summer.

Dan McMurtrie: I try to go once or twice a year at least, and every piece of software I used was radically ahead of the comparable software in the US and that was just mind blowing. So Rajat and I were looking at all these markets and we found that there’s a lot of VC funds in all of these other countries, and what he and I both got is we kind of take deals around to our friends, LPs, family offices, whatever. There’s a lot of people I know that I’m friendly with that are like, “Hey, I like you. I don’t want to invest in long/short, but let’s talk ideas.” And so if I see an interesting private deal, I’ll go, “Hey, I think this is cool and here’s the research I’ve done on it.” And so we had sent some of these deals around and some people had done some of them throughout the rest of Asia, and we started looking at Bangladesh because Bangladesh in 2016 had its first real tech startup called Pathao.

Dan McMurtrie: It was Bangladesh Uber, and it was founded by this kid who was basically like, “Why do I have to do outsource IT for Microsoft? Why can’t I build a real tech company? ” The guy is kind of like punk rock. His name is Elius Hussain, who is just the man, love that guy. And this guy was like this is bullshit. I can build a real tech company. And so he raised like three or $400,000 and Rajat was one of the guys that got emailed from and Rajat is a little bit of like a character. And so he was like, “Hell yeah, this is awesome. I’ve been waiting for,” he’s from Bangladesh and he’s lived in the US for last 30 years. And he was like, “this is great. I want this to happen.”

Dan McMurtrie: So he helped raise the initial money with the Prince Street guys and Rashmi, who you know and because Pathao worked, all of a sudden, it was the first time in Bangladesh that there had been a real legitimate startup and all of a sudden there’s… So the shocking thing about Bangladesh is it’s over 140 million people or around 107 million people in the size of Iowa. So it’s insanely dense. And like 60 plus percent of that population is under 35 and I think like 55 is under 30.

Tobias Carlisle: I think you had 65 under 25 in your [inaudible 00:56:37], which is very young.

Dan McMurtrie: Yeah. So it’s an extremely young population.

Tobias Carlisle: Also a tiny pay gap between women and men, which I thought was interesting.

Dan McMurtrie: Yes. Two other things are very interesting up on that. Legally, it’s a secular country, but it is a predominantly Muslim country, but it’s always had a female leader. So that’s very unique. And so it’s a country where if you try and go, “Oh, it’s like this.” No, you’re going to be wrong. It’s a very unique country, and so you have all these young people, the birth rate is under control. So you don’t have like the Uganda problem of just way too many kids and you can’t handle it. The pay gap between men and women is, women are relatively very empowered. They are working, they’re making equal money and there’s this booming middle class of probably 40 million people who are making many multiples of GDP per capita, and when I was there this summer talking to people.

Dan McMurtrie: It was very common for me to ask, “How much do you make versus how much your parents made?” And they would just deadpan, “Oh, 25 times what my parents made.” And they’re like 23 and I was like, “What?” And they’re like, “Yeah, my dad makes X hundred dollars a month and I make 18 grand a year or something like that.” And they’re all online. They’re on Facebook, they’re all on Reddit, they’re all on YouTube. When I was in Dhaka, the first night we were in a cab and a guy held out in the window a copy of the Intelligent Investor on the street, Dhaka.

Dan McMurtrie: So I can make jokes about that for hours, but they have the exact same information. They’re very aware of what’s going on, they’re building on AWS and Azure. And there’s been a little bit of a catch up speed getting things up to quality, but between 2016 and now, you’ve gone from maybe six real startups. Pathao worked, and so all these young kids go, “Wow, I can actually build something.” And so you had people leave Pathao, we called it the Pathao mafia and they’re starting companies. You have people coming out of the universities, they’re starting companies, you have other programmers from telecoms and places, starting companies and you actually have now reverse brain drain.

Dan McMurtrie: So there are people leaving San Francisco and Seattle and other places, and we met several people that have left high six figure, low seven figure jobs to go back to Dhaka to build companies. And so there’s no capital that’s seeing this. So I’m saying people who are leaving 800 grand a year guaranteed as a lawyer or something going back to build a startup in Dhaka. And the other thing is the startups, they’re actually solving very real problems. It’s not a new cat face app. I’m really tired. I think a lot of the techs that we’re doing now is aggressively superfluous and it works because we’re a very rich country, but these are companies that things they’re in are very necessary and because they have to do tech plus some sort of actual economic function, they build very strong moats. And that’s the thing that really people don’t get about a lot of them is if they control part of the physical infrastructure and the whole software layer, you can never rip them out and they’re moving so fast versus the incumbents.

Dan McMurtrie: So a lot of these companies are growing 50% month on month. I mean, I’ve never seen growth rates like this. I’ve never seen people hustling like this, and it’s extremely tangible. And also a lot of these companies, we’ve shown several people this and they’d go, “Well, we think this market is just Bangladesh. That’s the term and where we think the market’s just Dhaka, that’s the term.” And actually a lot of these companies are going to be in four or five countries this year and two or three of them that were about to announce deals in are already in three plus countries.

Dan McMurtrie: So they’re being priced as if they’re highly speculative seed deals from some kid in Dhaka, which from a certain perspective is true, but a lot of these companies, even at the seed stage already have 50 or a 100 or 200,000 customers. There’s a company we’re going to invest in single digit a million dollar valuation that already has a million and a half MAU and 600,000 DAU, and you have a lot of these companies just have outstanding metrics. They’re scaling. The economics actually work. Again, you have to do your bottom-up work obviously. It’s going to be a low hit rate, but you’re talking about, there’s probably between 150 and 200 startups just in Dhaka right now. And so I was like, wow, this is amazing. I live in New York and I also don’t speak Bengali. People that are speaking English you can get by, but I don’t speak Bengali, so I can’t do legal work and stuff like that.

Dan McMurtrie: So Rajat said, “I want to move back.” And the reason we started, he’s like, “This is amazing. My country is flourishing. I want to help this. I want to move back, I want to hire a local team, smart people, and I want to back these companies.” And we saw how much ability the West add value to the companies in terms of just back office stuff, marketing, legal, compliance, accounting, data security, and really bringing in western and global expertise. And we’re basically tapping the hedge fund network of all the people you know at these companies and saying, “Hey would you look at this guy. You’re trying to do this thing in the US, that’s cool. These guys are trying to solve this for the first time ever in their country.”

Dan McMurtrie: So there’s one company we looked at, it’s the first reliable blood testing in the country and things like that. So we’re bringing in advisors, we’re bringing in back office support and we’re going to try to support companies regardless of whether or not we’re going to invest in them, and that sort of helps us bet them in a sense. So we just go out and say, “Hey, can we introduce these guys? Can we help you out?” Get to know the founders over a period of time. Once every few months we’re going to make an investment, and so Rajat is going to live there and manage a whole team there, and myself and a few other people in the GP side are going to be on the investment council. We’re going to do analysis and really help recruit expertise for those.

Tobias Carlisle: Can I just ask? The thing that occurs to me, the difficulty with emerging and developing is rule of law and getting an exit or getting your money back. How do you get comfortable around questions like that?

Dan McMurtrie: Yeah, so there have been some exits. Alibaba and Tencent both have taken director proxy stakes in the country. I think this is an investment where you have to really understand what the deal is. If you want this to be a three or four year exit and especially in emerging markets, it’s not generally that you can’t get liquidity, it’s you can’t generally get liquidity at a specific time. You can’t bank on, I can get liquidity next month or in six months.

Dan McMurtrie: So we’ve structured the fund to be a very long life vehicle. It has up to a 10-year life and a lot of these companies within the next year or two, again, are going to be multinational companies. So there have been exits. We’re very focused on things that are very strategically important and likely would be an acquisition target or a IPO-able or something like that. We can’t finance-

Tobias Carlisle: Is there a Bangladeshi stoke exchange?

Dan McMurtrie: … There is, yes. Dhaka Stock Exchange and you can’t underwrite a perpetual cash burn machine. So we have to underwrite these things through cashflow positive where they can actually start to compound internally. There isn’t the ecosystem of capital necessary to just kind of-

Tobias Carlisle: Not lots of followers.

Dan McMurtrie: … Yeah, you can’t play a Keynesian beauty contest. You have to actually do fundamentals, which I love, but it’s frustrating some other people. So a lot of these guys we’re talking about one to three years to really robust cashflow and then reinvestment and then if you’re investing a follow on that, it’s about what’s the ROIC on growth. And so what we’re doing for the fund is, there’s a main fund and so investors in the main fund can also get access to co-invest for those follow on rounds.

Dan McMurtrie: So basically if the bet’s working, you can dial that up if you’d like. And a lot of what we’re going to be doing is kind of after we now see first few investments, we’re going to start putting out a lot of content around here’s what’s actually going on here because this is a story nobody’s heard yet.

Dan McMurtrie: And part of the reason why I wanted to be involved versus just farming out to somebody was this is one of the last few remaining unique ideas I’ve ever, I don’t know how many more of these are going to be, and I grew up loving all these heroic investors who are doing all this stuff for the first time and now even the craziest idea how I take it to somebody and they’re like, “Yeah, I did that in the 80s.” And I’m like, I finally could do something that’s going to actually make a positive impact, produce good returns I think, and is unique, and we think we can build a really strong relationship with the startup community in not just Bangladesh but greater Asia, and so a lot of this is about how do you structure partnerships? How do you bring in people?

Dan McMurtrie: So on the exit side I think we’re not as concerned about that because we’re trying to take a very long term approach and we’re trying to make sure these things actually can, we want to be in a position where we don’t need to exit in the short term. On the legal side though the companies tend to be structured in Singapore, they’re not VIES, their direct ownership and there is precedent that you can reach in and remove a director and we have one of the top tier law firms in Bangladesh and top tier forensic accounting and things like that, working with us in Bangladesh to verify that the legal standing is good. The compliance is good. That all that’s good.

Dan McMurtrie: We’ve met with Bangladesh Bank and also BIDA, which is the investment authority. So we’ve interfaced directly with the government. Also Rajat’s father is a fairly prominent person in Bangladesh. He was the former head of the chamber of commerce and also he is the head of North South university, which is the largest private university in the country. And so we have an ability, I think this would be a little more dangerous if we were sort of a faceless actor and we could just get swatted like a fly. But we’re being very upfront about going and speaking to people about what we’re doing, what our intentions are, things like that, and we’re getting the best counsel available and we’re talking to a lot of comps and other people like that.

Dan McMurtrie: So my focus over the summer was really focusing on vetting all of that out. Same thing in Singapore. So the other issue there is the FX. So the companies are structured in Singapore, held in Singapore, they’re operating subsidiary in Bangladesh. The cash is held, until it needs to be actually spent is held in Singapore so that there isn’t the FX risk. And if a company is going to be spending cash in the short term, we expect the return on that cash should be greater than the currency depreciation risk. But we don’t want them, if they do 20% dilution and they have that amount of the company’s value in cash, I don’t want to take Bangladeshi taka risk on that.

Dan McMurtrie: Particularly, I think right now, they’ve got some smaller banking issues that are not relevant to what we’re trying to invest in. But we’re trying to really control the jurisdictional and currency risk as well as compliance risk. So we’ve really vetted out a lot of that stuff in terms of how we get in, how we use assist, and then the exits. I think there’s going to be opportunities for secondaries, but I think acquisition is likely most of the exits.

Tobias Carlisle: Well, let’s change gears entirely and talk about the dating paper. A fascinating paper, I’ve read it a few times. Just give us a flavor of what’s the thesis of the paper?

Dan McMurtrie: Okay. So everybody’s unhappy with online dating, but everybody’s online dating. That’s kind of the thing, without any bar.

Tobias Carlisle: That was the impetus for it.

Dan McMurtrie: Well, I mean, we’d done a lot of work. Actually this was a former Rajat and I project as well. Rajat and I both found this market so interesting. It was growing like wildfire and I’m a little bit of a stand-up comedian and so I actually started my Twitter account which a lot of people may know to test stand-up comedy jokes and comedy is interesting because it tells you what’s on the fringe of culture and what’s becoming mainstream because they’ll talk about the thing everybody knows.

Dan McMurtrie: The best thing as a comedian is somebody everybody believes but nobody wants to talk about. So for several years it was like, “I know you’re on Tinder.” And it was a cheap joke and we saw these user metrics continue to grow and it was always regarded as the sideshow. And then it got to a point where Rajat and I, and a bunch of other people were looking at it and saying, “How do you even meet somebody offline anymore? Can you even do it?” I mean, you obviously can go to a bar or something like that but one of things that was really noticeable was that people don’t make introductions anymore below a certain age and generally the reason is, it’s just too risky if it doesn’t work out, you blow up the friend group.

Dan McMurtrie: We go, this is really interesting. At the same time we saw the earliest stories about how divorce is skyrocketing. We saw a lot of claims that American family formation is dying. We have a big thesis attire about affordable housing. So we look a lot at household formation, and housing. I mean, so this is just really interesting and so we’ve kind of read everything about it and we’ve had like 10 different views about how we think this market’s working, and we might just be over-fitting, but we finally got to one where every incremental piece of data we’re getting really clicks it in. And also spending time in Asia and the Middle East really kind of made some things click. And so basically the idea is that online dating is a transparent market like the stock market.

Dan McMurtrie: It’s allowing unlimited liquidity on either side, which is causing pricing transparency. Nobody is actually happy with price and transparency because even if they’re getting a better price, everybody thinks they’re going to hit above their weight. Everybody thinks like I’m going to be the genius who buys the cheap stock and makes all this money. And so when you have to trade things at a fair price, everyone is on average, less happy. And so I think that’s why everybody’s not happy is everybody’s getting kind of a fair price, and then there’s some adjustments to that.

Dan McMurtrie: So some distortions about, okay, we generally think it’s an efficient pricing mechanism, but what are the frictions there? And so the big friction is the visualization of dating. And so everything now is Instagram-ified. It’s about how you present yourself in photos, and also there’s other things like time of day. And so we’ve talked to everybody at all these companies, women get at least five times as many inbound likes as men do and in many cases, 25 times or more, and so it doesn’t matter if you’re the nicest guy ever, if you’re really good looking even, if you’re six pages back in the queue on some of these websites, they’re never going to see you.

Dan McMurtrie: It’s like when you get an email from Sony back in like eight months being like, “Hey, I completely lost this.” It’s not going to happen. So there’s some structural dynamics in terms of the UI that are really changing how dating behaviors are happening and so that’s a pricing inefficiency, and there’s a few other things I can dig into.

Tobias Carlisle: There are a few fascinating charts and one of them I think came from Plenty of Fish or I’ve seen it before where the distribution of men rating women is basically a normal distribution from most attractive to least attractive, the tails, as you’d expect. But then the women rating men is a totally different distribution where women think that most men are unattractive and for most attractive, the score, and I’m guessing it’s rounded is 0% of men. Women regard 0% of men as most attractive. And so then how does that dynamic play out on a dating app?

Dan McMurtrie: I don’t think that’s entirely true.

Tobias Carlisle: I’m guessing it’s rounded down, a couple zeros.

Dan McMurtrie: I think it’s slightly misinterpreted. So one note is, the average female user has a much higher match rate than the average male user and so-

Tobias Carlisle: How is that possible?

Dan McMurtrie: … Because a lot of people are just not getting matches. There’s a lot of people are just never getting matches. There’s inbounds, outbounds and then you basically have a power law distribution where you have like, I guess everything has to clear, but the women on average, if they have an inbound or they produce an outbound, they will get, I’m sorry, the absolute numbers are different. It’s the percentage wise. And so women are going to say yes on a far smaller percentage of the pool.

Dan McMurtrie: So if you have a hundred women, they’re saying yes, they’re all saying yes on 10 men and those 10 men tend to say yes to basically all a hundred women, if that makes sense? So it’s like the match rate is different from the absolute number of, so there’s a lot of people who are, and that’s the way it ends up working out. But I think the issue there is its like if you go to a buffet and you can have whatever you want, you might be a little pickier about, well maybe not in America, but you might be a little pickier about what you get because you can have whatever you want. And so I think some of the online dating data, it really amplifies that because if you can have whatever you want, you’re probably going be a little more selective.

Dan McMurtrie: You’re going to be like, “So, would you like a Toyota or a Ferrari? Would you like any of these five Toyota’s or this Ferrari.” And you’re like, “I don’t really need the Toyota. Just give me the Ferrari.” And I think that’s kind of what’s happening. So I think it’s a little, I don’t think women are as harsh is what’s happening. But I think it’s an exaggeration.

Tobias Carlisle: I think the implications for the dating market are sort of interesting, but I think more interesting are the implications more broadly for society. What do these apps do to society?

Dan McMurtrie: Yeah, so I think that this is, it’s counter-intuitive because some people look at it and they go, people are getting married as much. I’m from a Catholic family and so people are living in sin and all of this and they focus on all these unethical traits. And I think I’m a big believer that a lot of the things that we have culturally and religiously in whatever are logical adaptations for a different era.

Dan McMurtrie: So if you go through a lot of the old Testament or whatever, a lot of the rules made a lot of sense under the context they’re written. And that’s really where this conflict is happening is we are still benchmarking against that versus the world we actually live in right now. And so what’s happening here is because everybody has unlimited and instant access to dates, everybody not only can go on a date, but also if you’re on a date, you’re aware you can get another date. And also as you go on more dates, you really know what the dating pool looks like, right? And so when I talked to my grandparents or my grandparents siblings or something like that about what their dating was like, they got married-

Tobias Carlisle: They had to get a debutant bowl or something.

Dan McMurtrie: … Well probably that.

Tobias Carlisle: You had one chance in the season.

Dan McMurtrie: Yeah, and so they got married on their, I know some people got married to the first person they kissed, some got married on the second or third date they ever went on was the person they married. And so that the pool you were choosing from was very small. It was people your family knew, it was maybe people you met at school, church and a few other places, and it hasn’t, I think some people view ourselves as very progressive.

Dan McMurtrie: The United States is not very progressive, but on a global standard, it’s really, really risky for women to date. There’s a lot of physical risk, there’s a lot of reputational risk, it’s really bad, and so that dynamic is even stronger in other countries. And so now younger people have access on a no risk basis to an unlimited size pool, and so if you’re on unlimited size pool where there’s no called strikes, like Warren buffet talks about.

Dan McMurtrie: So you’re just going to say no unless you’re really, really interested. On the flip side, guys typically just go, yes, yes, yes, yes, yes, because they’re guys. But as a result of that, the stakes of dating are just generally much lower because it’s very commoditized. And so when you’re younger and you’re skinny, and in shape and you look good and you’re having fun and you’re not looking to make a commitment, you’re not going to get married.

Dan McMurtrie: You’re going to go on a lot of dates, you’re going to have a lot of bad dates, and the bad dates are going to inform what you can’t really tolerate in a relationship, and that’s going to go forward. And so people are not getting married younger, and so marriages from 18 to 25 are collapsing, but by the time you get to 30, 35 marriages are going up, and the divorce rate of overall marriages is declining. And so my hypothesis is look, when people are young now they’re dating more meaning they have more information on the market, if you think about this like an economics problem.

Dan McMurtrie: They have more trading experience, so they probably are better able to price things. They are better aware of their opportunity costs. So nobody who grows up in the online dating era is ever going to have the classic rom-com mid 40s like, “Sometimes I just wonder like what else is out there?” If you’re in my age bracket, you know what else is out there. You’re like, “No, I’m really good. I don’t want to go back out there.” And so it’s causing, you can price your opportunity cost better, you can price the market better, you have more experience, and you don’t feel the need because the pool is so large, you don’t feel like you need to marry as soon because you might run out of options.

Dan McMurtrie: It’s clear there’s a lot of options and so people are getting married much later, but I think they’re getting married on a much more informed basis. I think it’s also because there’s so much information communicated and because there’s so many iterations, I think a lot more conversations are happening. I think people are having conversations about personal finance, about what your actual lifestyle is. I also think this renter’s generation topic, which kind of lays on top of the online dating is causing… So there’s an interesting statistic.

Dan McMurtrie: Cohabitation is up with younger people. So people move in with their boyfriend and girlfriend, but the conversion from cohabitation to marriage is down. And so that’s another evidence of there’s more trials. So you’re going to go in and you’re going to actually figure out, okay, do I like this person? Do I like this person relative to all my other options? Okay, then we’re going to actually try to live together. Can we actually live together?

Dan McMurtrie: You might really like each other, but might kill each other if we’d live together. You’re figuring that out. So it’s just a lot. All these things I think you can all think of as more trading volume that’s causing pricing to come. And then when people are getting married, they’re getting married with a lot more information about themselves, about other dating options, about the person they’re marrying, and divorce rate appears to be dropping.

Tobias Carlisle: Do you think it’s curious that a finance guy has done this analysis on the dating market, which is probably, I was trying to think of an analogy and I don’t know whether it’s like a reformation or if it’s like a Jerry Maguire kind of, or… I went with Carrie Bradshaw eventually, but then it’s not any of the more social sites that pick it up. It’s picked up by institutional investoring, chat to Joe Weisenthal on Bloomberg. I just think it’s a funny kind of direction that that observation took.

Dan McMurtrie: Yeah, I mean, a lot of that’s based around this kind of Twitter brand I built, which was largely light spirited and supposed to be funny and make up jokes and stuff and-

Tobias Carlisle: Will the actual Twitter account change or is just the name?

Dan McMurtrie: … Just the name. I mean, I just make jokes instinctively.

Tobias Carlisle: Deleted some old tweets, I saw that.

Dan McMurtrie: Yeah. I mean, I didn’t know what was on there. I’ve just been gunning out offhand comments for like… And literally what I was doing in 2015, 2016 was I would just tweet all these jokes and then I would go look at which ones people liked, I’d take those out and that was my stand-up set and it seemed like I was like freakishly good. And I was like, no, you just didn’t see the 81s that panned.

Dan McMurtrie: But I think, we have this thesis and there’s a reason we published the paper, a high level beyond the thesis and that is that the average person on the internet doesn’t have a lot of stuff to say that’s really high value, but there are nominally a very large number of people that have really good insight particularly in fields that are fast moving, that are changing because even if you were to as a hedge fund hire an expert network, you’re going to get some guy who has a really, really nice pedigree but he hasn’t really been in the trenches in probably 10 years and if he’s telling you he is, it’s because he’s calling a guy who’s actually in the trenches.

Dan McMurtrie: If you can actually… I’m trying to do kind of for industry RootWork what Patrick O’Shaughnessy and some of these other guys are talking about in terms of build, share, learn, repeat. Where I’m not advocating that people go out and buy Match stock. I’m saying this is what I think is going on in this industry. And I think it’s a topic a lot of people are interested in because it’s vaguely related to sex and also everybody’s frustrated with it. Nobody understands. You go to any bar or any stand-up show or any of these things, everybody’s talking about how they’re not happy with online dating. And so we have a view, we think we understand why people are still doing it, we think what the impacts are, we think there’s some ways you could game it, and we think there’s a lot of investment implications and specifically in consumer and in online dating itself, and all the-

Tobias Carlisle: How do you hack it then?

Dan McMurtrie: … So, how you hack is, yeah, I’ll talk about the paper hack and I’ll talk about how you hack online dating because I do know how to hack online dating, and you can’t hack Tinder. Tinder is the one you can’t hack, and everybody gets frustrated and I’m like, “No. Tinder is a one variable, yes, no. There’s no gaming there.” But the idea with the paper was we’re going to publish papers like this and put it out there, and just kind of use it to solicit feedback. And so when we put this paper out, we’ve had something like you’ve had well upwards of 500,000 people click on it and we’ve had 50 plus people reach out that either work at one of these dating companies, they want to talk about our views and a lot of them called and said, “This is really interesting because this corroborates what I’m kind of seeing, but I hadn’t really put it together.”

Dan McMurtrie: We took a dig at Facebook dating, so we had some Facebook people that wanted to talk to us about it, and we also had people who run matchmaking companies, who run startups, who all these different people that I would never be able to find because they don’t have a presence, something like that. All reach out, all want to talk, and so it’s just great in terms of, okay, now I have a list of all these people in the industry that I can reach out and talk to anytime because they know I’m interested in researching this and also they know that I’m not researching this and I’m not talking to them because I’m looking to trade the stock tomorrow and that’s not what I do. And I think this is a model we can sort of scale and use to continue to build a network.

Dan McMurtrie: In terms of how you date actually the online dating platforms themselves, there’s a few things. Like one, there are actual dating advice services that kind of look at things and 90 plus percent of the time when they look at, it’s usually men.

Tobias Carlisle: Take a bit of photo.

Dan McMurtrie: Yeah, it’s you don’t have a high quality photo or your photos are weird. You have one good photo and the other ones are really bad and grainy but usually the man has not actually filled out the whole profile. They get a little bashful, they don’t have an actual description or it’s like a joke and it’s okay to be a little funny but somebody doesn’t want to think that you think going on a date with them Is a joke and I have a problem with it because the more uncomfortable a situation gets the more I need to make jokes and I have bombed many a date with bad jokes. So filling out the profile correctly, but I think that the other two things are, on sites like OkCupid and others like that where you have a lot of information on the user, a lot of this is just kind of obvious.

Dan McMurtrie: It’s have a fully written out profile that has interesting things about you. When you have pictures, put pictures of stuff that’s interesting. Are you doing stuff? Show off your attributes that you want to show off and then if you’re going to reach out to somebody, you should actually do the work to reach out and figure out, find something that’s a hook.

Dan McMurtrie: I think the other thing people forget is a lot of these are designed to make you click. And so if you find people that have a demonstrated ability to have deferred payoffs are typically going to be a little less susceptible to that, and so I think it’s better to find somebody that has a really strong, passionate about something, that’s very interested in something specifically, something you’re interested in. You’re going to have a little more luck there versus just like Billy and Karen trying to match, and I liked going to EDM concerts on the Saturday. That’s just a very efficient market.

Dan McMurtrie: So I think a lot of it, and then the biggest hack I think is time of day because of that cue dynamic. Oh, I think they took it off, I don’t know, because I haven’t been on the apps and all but OkCupid used to show you when people-

Tobias Carlisle: Is that a humble brag there?

Dan McMurtrie: … Yeah. Well, I mean, I was on there for a long time, but they used to show you when people were online. And so I think when you send your message is very important. So a lot of times guys tend to, is there a polite way to say this? Guys tend to send messages-

Tobias Carlisle: Later at night?

Dan McMurtrie: … Yeah. When they’re currently looking for a girl. A wink, wink, nod, nod and that is not good because they all come in.

Tobias Carlisle: You got to plan ahead.

Dan McMurtrie: Yeah, you’ve got to plan ahead. They’re not written with the brain in your skull. It’s just not a good move across the board, and it’s like you have to write, typically people check these things either before work or after work. Largely is after work. So you want messages going out in the three to 5:00 PM range so that they are there when somebody gets off work and is checking something. Particularly because if it’s after work and somebody doesn’t have a happy hour date or something to go to, then they’re specifically looking for that and you need to write something that’s actually thoughtful or funny or insightful, and the other thing is you’ve got to figure out for you and for what you’re looking for, which dating platform is better because they all have very different UIs and they’re all game mobile in a different way.

Dan McMurtrie: So like Hinge for example, has individual widgets that are like topics and pictures and things and you can comment and respond to an individual one. And so if you’re somebody that likes to make jokes or if you have something interesting to say, you can make a very contextual response, and that’s really good. On OkCupid, you can write them a six page love letter if you want, and you also have to think about those audiences that are-

Tobias Carlisle: Do you recommend that people write those six page love letters?

Dan McMurtrie: … Do not. Never do that unless you can write one of the funniest. It would have to be, it’s a very high risk, high reward situation. I mean, I’m sure somebody could write like a Mick Sweeney’s type piece that would crush it, but I don’t recommend that. That’s not a great move. And then I also think like things like eharmony, and others like that, that are explicitly, like eharmony, you have to pay and apply. They say they’re using all these metrics. eharmony just screens for, are you desperate? Are you really seriously looking for a relationship right now? And then they give you a very limited number of matches so that you don’t to reverse that dopamine feedback loop. And so there’s some things like that where the more slow the dating mechanism, the more people are going to be seriously looking for a relationship, which is kind of counter-intuitive, but everything’s optimized to dopamine, and then there’s all these increasingly niche dating sites.

Dan McMurtrie: So whatever you’re interested in, I would look for, there’s probably, there’s a farmer in-

Tobias Carlisle: Value investors only.

Dan McMurtrie: … That might exist, I don’t even know. There would be like 25 women and 30,000 men and it would get really weird, and man, I would love to start that just to read the conversations. That would be weird. But yeah, you’ve got all these strange things, not strange, you just get niche conversations. So you’ve got to go all that, but the main thing is about time of day, quality of photos, quality of what’s in your profile, making that really hooky. The other thing is a lot of times guys look at their widgets added. So you can put your Spotify profile in, you can put your Instagram in and anything that’s missing from your profile looks either lazy or like you might be fake, and so a lot of times I think some of the things that assuming you’d get the time of day from the other user, you need to understand that you’re pitching them and anything that’s lazy is going to come off of course as lazy.

Dan McMurtrie: The other thing to realize, I got Tinder versus the others is the average time a person on Tinder spends looking at another Tinder thing. I think is two seconds. So first photo is very important. But honestly, if you’re not an eight or above, I don’t know why you’re on Tinder. It sounds really bad, it’s a purely visual medium where somebody is going to spend under two seconds looking at you and people spend all this time trying to hack that one. And I’m like, cool. Okay. All of the others, like Hinge is structured for you to be able to show off cool stuff. Hinge is made so you can’t actually swipe very fast. It takes a second for profiles to load all the other things.

Dan McMurtrie: So Hinge gives you an opportunity to show off. Bumble has done this weird thing where they’re like, want to be women forward, and the big culture shift always happens in online dating when women get comfortable with the platform and they realize, oh wait, I can go on this platform and now I don’t have any risk. I can just say no, and it doesn’t matter. And that what was really sticking out in the middle East and Asia, is that you had women that had never been able to have any agency in their own dating who were all sudden on Tinder because first the guys joined and girls were like, “Oh, that’s sketchy.” And then some girls join, and then those girls basically tell the other girls that, “Hey, you realize you can just say no and they don’t know you said no and you get access to millions of guys instead of your brothers five friends.” And they’re like, “Wait a minute. That’s awesome.” And actually Bumble is doing quite well in a lot of those markets because they are explicitly putting forward the women power angle.

Dan McMurtrie: But one of the things it does is men can pay to extend a match. So once there’s a match, the woman has to message the man within like 24 hours I think, and men can pay to extend the match. And actually a lot of the female users will only message a guy if he extends the match because they’re like, okay we matched. But now like are you really interested? And I’m just skeptical-

Tobias Carlisle: You have to pay per person?

Dan McMurtrie: … No, you pay the subscription, which is actually kind of genius because Tinder and some of these other platforms, the users that pay have the worst success rates. It’s people who can’t get any matches. So they pay thinking that more-

Tobias Carlisle: Maybe it why they’re paying.

Dan McMurtrie: … Right, and they think it’s going to give them an edge. But actually it’s the highest prediction of bad results. And so what all these platforms have tried to do is shifted away, sort of that it’s not just changing your odds, it’s something else like Tinder Gold and all that. But Bumble has done this great thing where the match extent thing basically is a way to make a guy have to say, “Yes, I’m interested twice.” And to girl it costs nothing. And so they’re just like, “Ladies, would you like to be a double sure that guys are interested?” And they’re like, “Yeah.” And then the guys they’re like, “Pay up.”

Dan McMurtrie: I think it’s incredibly frustrating and annoying, but I think that’s kind of part of the idea. So there’s all these monetization things happening there.

Tobias Carlisle: It’s fascinating stuff, Dan, but we’ve come up on time. If folks are looking to get in contact with you, how do they do that?

Dan McMurtrie: Yeah, you can. We have a website, tyropartners.com, or you can email me at dan@tyropartners.com or you can obviously go on Twitter at @SuperMugatu. We are extremely online and always available. Thanks so much for having me, Toby.

Tobias Carlisle: Yeah, my pleasure. Dan McMurtrie, Tyro Partners, and, sorry, what’s the name of your VC firm?

Dan McMurtrie: Anchorless Bangladesh.

Tobias Carlisle: Anchorless Bangladesh. Thank you very much.

Dan McMurtrie: Really appreciate it.

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