During his recent interview with Tobias, Dan McMurtrie, Founder of the Long/Short hedge fund Tyro Partners and Bangladesh VC fund – Anchorless Bangladesh, discussed the considerable advantages of setting up a venture capital fund in Bangladesh. Here’s an excerpt from the interview:
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 surprised 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…, 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.
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