From ConnectU to SumZero, The Journey of Divya Narendra

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February 10, 2022

Divya Narendra is the Founder & CEO of SumZero, an investment community where peer-reviewed professional investment research is shared amongst its members. Its network of analysts is growing rapidly and offers some extraordinary insights. If you’re interested in public equities - check it out.

In addition to SumZero, Divya sits on the board of Gemini, one of the leading crypto exchanges, so - as you can guess - we went down the crypto rabbit hole.

Before his professional career, Divya attended Harvard where he became friends with the Winklevoss twins. If you’ve seen the movie The Social Network, Divya is the 3rd founder of ConnectU. Divya shares some fun stories about that chapter of his life - including crashing the set of The Social Network.

Big thanks to Divya for joining me on the pod to share his story.

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Transcript (this is an automated transcript):

MPD: Divya, thank you for being here buddy.

Divya Narendra: Thanks for having me, Mark.

MPD: Awesome. Let's start off. Would you give an overview of.

Divya Narendra: Sure. Yeah. So some zero is an online community ally LinkedIn or Facebook, but it targets investment professionals. So we have about 20,000 members globally. And these are pretty much exclusively analysts and portfolio managers who work at either mutual funds or hedge funds or other types of asset managers.

And they use the site for a couple of. Reasons. But the core use cases to share research. Before some zero, if you wanted fundamentally driven investment research, you would typically have gone to wall street. So you would have gone to Goldman Sachs or JP Morgan equity research or UBS, or one of those firms.

And the problem with that research traditional wall street research is that the analyst who produce that research a have no skin in the game and be. They have significant conflicts of interest because most of those firms also have investment banking divisions that prospect. Public and private companies for investment banking business, which is typically, fundraising of some sort or another.

And so if you want unconflicted research coming from analysts who do have skin in the game who are also professionals you'd have. Somehow know somebody at a fund, say a tiger global, or, maybe a fidelity or a firm like that. But, before some zero, that those folks weren't sharing research online.

I set out to create some zero to give professional investors, a venue and incentive. To share their inner thoughts on publicly traded companies online and over the years we've grown some zero to offer a number of ancillary services as well. For example, we'll help analysts on the platform with recruiting.

We'll help them with capital raising needs as well. And we've also opened up this research to individual investors like your parents or yourself folks who are not necessarily working at funds, but just want. Deeper insights into the markets. They can actually subscribe for access to some zero.

There are three different tiers depending upon what your budget is. But anyway, we've started to unleash access to individual investors. But yeah, it's just, it's an investment community. You can almost think of us as almost a higher octane version of say a Reddit or a seeking alpha, something of that.

MPD: It is a lot of the, is a lot of it kind of people posting research they've done, or is it a conversational environment? People chatting with each

Divya Narendra: other it's research I've done. So the typical piece of research is a few thousand words long, and it's going to contain, pretty deep discussion on valuation which is to say.

Not just what does a company do, but what's it actually worth and why? So that might involve a discounted cashflow analysis that might involve looking at comparables that might involve doing some of the parts analysis. If a business happens to have multiple divisions it's also going to involve looking at catalysts that will drive, share price, up or down, depending on whether that analyst as long or short the name.

But it's all fundamental and it's meant to be thorough. It's not a tweet per se or just a, like an off the cuff set of remarks. These are people who are putting, a lot of analysis to what they're saying. And they actually they're putting their money where their mouth is.

They're often invested in what they're talking about and their name is associated with these posts. So it's not anonymized. So if you post something on some. That's let's say lower quality, your own reputation is at risk and you'll probably get a low rating for that idea.

MPD: So Divya, why did the investors share their research?

Divya Narendra: I'll go through it. So multiple reasons. One is they're talking about names. They have a position in already. If you own a stock, let's say it's Blackstone. You want as many people in the markets to know why you own it and why you think it's undervalued, because if they agree and they go buy up the shares.

The stock might actually go up now with a large cap name like Blackstone. It's hard to move markets, but you can imagine with smaller cap names, if you think back to GameStop for example, last year, which where there was a big, short squeeze those names can move more easily if you're able to generate some consensus.

But I think that, I think the bigger point is. If you have insights that people don't have and you can share those insights you can actually have a significant impact on a given stock. It might take some time, but that's how it works. And we find that like the best quality content floats to the top, somehow, it'll tend to get the most views.

It'll tend to get the most rankings, they'll tend to generate the most discussion. And that's what we're trying to do is really bring. Deep dive research and like higher level thoughts to the forefront and cut through a lot of the noise that you otherwise seeing here. If you rely solely on traditional media,

MPD: there any perverse incentives in that, I see some of the big hedge funders on CNBC and other channels all the time.

Pushing their buck. We want people

Divya Narendra: to push their book. That's the whole point of I think sharing your research now, the thing is because our community is sophisticated. People are skeptical by nature. And so the analysts who pushed their book for the sake of pushing their book, but are making bad arguments, those pieces of research tend to know.

Hey, they don't typically perform that well, but B they don't get great feedback. And it's risky reputationally to push your book, and that's why we run a very transparent platform. So your name, your firm name your entire profile is associated with everything you post. And so if you're going to post something mediocre it's probably not going to bode well for your reputation.

In addition, we screen. The idea is before they get published on the platform. So if somebody is posting something that's, sub-par. Where they're missing, significant detail around core components of their thesis, like valuation being one risks, being another we actually won't let that content display on the platform at all.

So it's a much more curated experience when you're on some zero a you have to apply to even be part of the community if you want to be a contributor. So all our contributors are vetted. But B once they're accepted into the committee, Yeah, we, we then vet out any submissions that they post

MPD: and how much content is coming through the site.

Is it a couple strategies a day? Like how

Divya Narendra: much research is typically Yeah, it could be a few ideas a day might be a dozen, but over the course of the year, you'll see a thousand pieces of research get posted on the platform that said it's not a volume play. It's really much more about the quality of the content.

Not so much the volume. But the key thing is that any one idea I think as an analyst, if, or as an investor, if you're if you can learn something even once a year that's actually a pretty big deal because you might gain conviction on a particular company that you didn't otherwise have.

And that could be the basis of your, that could be the basis of a large position that you put on in a given year or maybe in a given quarter. Most. Great investors don't have massively diversified portfolios. Like they typically invest in, in fairly concentrated positions where they do a lot of homework around a given situation and they just understand it inside and out.

And that's typically what's driving the returns. It's not buying a hundred stocks over the course of a year. If you, if that was your strategy, you would just index 32. And be done with it.

MPD: Have you tracked the performance of the research?

Divya Narendra: Yeah, we've been doing a lot more quantitative analysis of the returns on the platform.

And we've actually recently you'll find this interesting. We partnered with a couple ex millennium guys who are former data scientists from millennium which is a very large hedge fund based in New York and Connecticut. They've helped us leverage AI tools to create a model that takes some zero ideas as an input.

And. Layers onto that something like a hundred factors. So some of those factors are fundamental in nature. Things like free cashflow yield, some of those factors are momentum-based. But the output of this model is basically a subset of the sums your idea database, and we've created four different portfolios.

So there's a global basket. There's a, there's a tech basket, there's a small and mid-cap basket. And all of these models have outperformed the S and P 500. Over a 10-year period, which I think is really interesting. And we've even more recently started to invest a small portion of some Xero's own balance sheet into this.

This AI driven model and we've been talking to more firms, both quantitatively driven and also just traditional fundamental firms about leveraging. Some of this modeling to help them screen within the Sub-Zero database because they're, there's thousands of ideas on the platform.

It's hard to figure out, which ones to focus on. But some of these quad screens are one way to do it.

MPD: So is there a way to buy into these funds? Are these publicly available at this point? Not right now.

Divya Narendra: Not right now but it's on our radar. Interesting. We've seen a lot of in the sort of FinTech world.

There's been a lot of spotlight around robo-advisors and other kinds of like investment vehicle alternatives alternatives to hedge funds and mutual funds. And my view on a lot of these models is. They are cheaper than going to Goldman Sachs is private wealth management group. For sure.

If you were fortunate enough to have the funds to qualify, to be a Goldman private banking client, they would take your money and then they would charge you what they call a rapper fee, which is typically around 1%. Maybe it's less than 1%, but it's a pretty big number. So you imagine if you have a portfolio that returns 10% in a given year, Goldman's going to charge you 10% of your returns and what are they doing with that money?

They're typically putting it in, a basket of mutual funds and splitting it between equities and bonds. And that's basically it. They're not picking stocks for you. They're not even making the claim that they're going to outperform the markets. And so what I always tell people is look like if you don't want to do your homework, you can always just go buy a Vanguard ETF, pay virtually zero fees, and most likely you will outperform.

Almost every, wealth advisor. And so these robo-advisors, they do the exact same thing, but they do it at a lower fee, but not as low a fee as you could achieve just by buying a Vanguard ETF or buying a BlackRock ETF. So for me, I was always like, if you just want to diversify, then all you have to do is buy like one ticker voo, which is the Vanguard S and P 500 ETF. You could just own that and never own anything else. You do fine, or you could own the BlackRock equivalent and I think that's just spy, right? But that said, if you want to outperform the markets, then you need a more active strategy. And so one thing that we'd like to do is, allow people to essentially leverage.

This like deep dive, hedge fund research without having to pay the fees that are typically associated with investing in a hedge fund, which tend to be pretty high, like two and 21 and 10, whatever it might be. And that's something that's on our radar. In the meantime, if you're just a stock person, you love equities, or maybe you like crypto, and you just want to know what is the story behind how, ethereum is valued or how, how do I think about Google from a valuation standpoint, all of that research is on some zero and you can read it and it's incredibly educational and really insightful. And I've personally availed myself of it because I'm, I run the site, but, even from my own portfolio, there are a number of situations where.

I really learned a lot about not only a stock, but a given industry through the research on the platform where it's helped me actually generate longer-term returns because I'm not a day trader. I don't, and I don't think really most people on some zero do any of that. It really is more of a longterm investing community.

And if that's something you care about and you're interested in compounding your wealth over a longer period of time, you need to have an understanding of a deep understanding of the companies you're investing in the industries. They operate in what the competitive forces are. And that's exactly the kind of content you learn.

What you gain from being on some zero,

MPD: I've come to realize talking to all the private wealth advisors and the folks in wall street that wealth protection is a on. It's a gimmick that they sell. Again,

Divya Narendra: it's a total, it's a total commodity. And a lot of people are too lazy to understand that.

And what they're ultimately paying for is a brand and they're paying for. Us open tickets every summer or whatever. If you happen to be of that ilk where you've made a bunch of money, and you're lucky enough, or JP Morgan cares about you from the standpoint of private banking, you just have to understand that you're not gonna, you're not gonna beat the markets.

Like you're most likely going to underperform the markets you'll be. Yeah. But what, you will get a certain degree of service if that's what you, if if that's what you want. But I think most people given the choice would rather either reduce that fee or really go after a more concentrated portfolio where there's a lot of thought put into the names.

It's not just oh, let's buy 500 stocks.

MPD: And you've been focusing on public equities and the hedge fund world obviously overlays with that. It feels very much as a VC. Like we are in the golden era of venture. This is our decade. Maybe it's been our decade for a little while. I think

Divya Narendra: it's been that way ever since I graduated college in 2004 when I was in college there were like nobody was trying to become an entrepreneur, like most kids were just, I want to go into investment banking or I want to go work at McKinsey.

And that was it now, ever since, really ever since finished college there's been an explosion of VC funding cause you've had, You've had the Facebooks and the Fang. It's not like all these companies explode, which has had downstream impact. Just, I think people's willingness to fund crazy ideas.

You've had a very low rate environment which has also helped create a lot of let's say Boulder, risk-taking on the part of institutional investors out there. And now, like no matter how old you are, like if you've got an idea, there's there, there are multiple VCs willing to have a meeting and see if it makes sense and potentially invest in.

In your idea. So it's a pretty exciting time. Now we're it's funny, you mentioned where the golden age that's definitely been true, but this is the first time since at least I was 22 that suddenly people are talking about rates going up, which will certainly have an impact on VC.

It has an impact on every asset class, for sure. So we'll VCs going forward, be as aggressive. Probably not, but if you see them out, rates are still pretty low. So I think it, I think there'd be, they'd have to go up quite a bit for the venture capital community, just like suddenly contract plus, most of these VCs have pretty long-term commitments, so it's not like they're at.

Susceptible to like short-term rate changes as maybe other

MPD: asset managers might be the major correlation that the venture community experiences with overall market trends is the denominator effect. When the bottom falls out of the market VCs are suddenly overvalued in the portfolios of large endowments.

And so the upstream supply of capital to VCs dwindles, and that usually leads to VCs investing a little more slowly. We're seeing a similar version of it today. But for different reason there was so many companies that had an IPO in the last 10 years, and now all of that is launched into the market.

Not all of it's liquid, all the companies are getting marked up in people's portfolios. And a lot of the endowments are now over allocated to venture. Not because the other asset classes dipped, but because VC is outperformed so materially. So it's an interesting moment. There, there are fewer LPs. Or the traditional LPs who can write checks in a VC right now.

But I think the trend we're seeing is a lot of the other endowments institutions that weren't on the VC game. Didn't have their alternative asset strategy sorted out are now waking up and realizing, whoa, these are big numbers. We should be.

Divya Narendra: What I will say is that we are absolutely in the golden age of innovation.

And there is no question I've never in my lifetime, seen so much going on from a tech standpoint, across every industry. A lot of these macro trends are. Either industry-wide so like AI is not a tech specific catalyst. That's going to affect every industry. Yeah.

MPD: Software it's everywhere.

Like

Divya Narendra: you think about blockchain tech, like that's a pretty broad swath of, like so many different companies will get affected by that obviously the financial community will and is being affected, first, but a lot of these trends are just massive and they're all happening at the same time.

And it just seems every other day there's every next day there's another, like I remember it was like, mark did that whole thing. Mark Zuckerberg did that whole thing on metaverse like nobody was talking about metaverse and then one day everyone was talking about metaverse and now they're talking about it in the context of it potentially being of greater economic.

Capacity as the real economy. So if you go through like electrification, the revolution of the energy and infrastructure in the United States, CRISPR technology, blockchain technology, it's like, there's so many things that are happening all at once that it's virtually impossible to keep track of.

MPD: Yeah. The question is, does it ever slow down or are we just in the knee of the curve and it's going to continue accelerating.

Divya Narendra: I think we're in the first inning of most of these trends. If you think about blockchain, I've been on the board of Gemini for what you're like 10 years. I don't know there it still feels like we're in the top of the first inning, because when I think about the industry and you have, I don't know, 10,000 different blockchain protocols, many of us will go to zero and probably should go to zero.

But. Even the ones that have promise are so early in delivering on that promise that it gets you excited and nervous at the same time. So yeah I think we're just beginning, yeah, but I don't

MPD: know. It's hard to figure out that you're on the board of Gemini. I think I knew that we had talked about it before.

But I couldn't find it anywhere on the web. Is that a secret?

Divya Narendra: You know what? I haven't touched my LinkedIn profile in 10 years. That's part of it. Yeah. But no, I remember back in the days, like when the guys were talking to me about. What they wanted to do with Gemini. I was like, this sounds

MPD: cool.

And when you say the guys, you mean the Winklevoss twins? Yeah.

Divya Narendra: W and full disclosure, they're there our largest investors at some zero. They were like, obviously personally, very invested in Bitcoin at the time they owned. There was a New York times article that came out that they owned 1% of all outstanding Bitcoin.

I was like, this is, I was pretty skeptical at that time. And through the last couple cycles, they've managed to like weather, all of those troughs where, the markets pull the rug out from underneath and you just, you have people selling this stuff at will.

And they've, self-funded the whole operation, which is like a whole other story. Pretty incredible, but, Like even through the last 10 years if you look at what has happened in terms of defy the NFT market place, just a general, I think institutional acceptance of. Like the concept of crypto, not so much a specific coin per se, but just the idea that, Hey, this is a legitimate asset class that needs to be nurtured.

That happened in a really short time. And even now it's, it's a small fraction of. The other kind of more established asset classes. So like you think about what's the runway there. It's massive, so what the winners are going to be is a whole different debate.

But anyway, this is just another example of the rate of progress that we're seeing

MPD: you, interestingly, sit between kind of what's traditionally an old guard mindset. And then in the hedge fund world, all guard finance, and then with Gemini you're on the frontier. When I go to family office conversations or meet a bunch of, fund folks, there are people who have adopted, who have said, Hey, crypto is the thing we're going to start playing.

We're going to, we're going to trade this. There's a lot of people who still give you the eye roll. Where, what have you taken away from the sum zero community? Is there are most people moving in the direction of crypto or what's that.

Divya Narendra: Definitely. First of all, we're seeing content on the platform covering crypto, which is itself noteworthy.

The fact that people that knew a couple of years ago, I first posted about Ethereum in 2018. I think it was. And then the twins actually posted about Bitcoin. So a year or two ago on the platform. But there've been other guys, there've been a couple of folks who've written about Solano.

There've been pieces on basic attention token. There was a guy who wrote a piece on the defy pulse index. If you wanted a diversified play into defy. So people have talked about it. I think what I'm seeing as the inflection point is more like. Developing real use cases out of this stuff for like real people.

And moving away from just this is an asset class for pure speculation. I think when people roll their eyes about crypto, they're rolling their eyes about the general idea that someone could create a. Token out of thin air that doesn't actually solve any real problem or doesn't really do anything for anyone but serves as a pure speculative tool.

And for VCs like yourself, you're used to investing in things that do stuff and solve problems. So I think even within the VC community, there's a lot of skepticism about crypto because a lot of his stuff is like a white paper and a promise, but zero execution or like very little expectation future.

You're running on a future utility, but like it's hard because a lot of this stuff requires a certain degree of network effects. And so for example, like the promise of a decentralized world requires a lot of things to happen, right? It's not just having this protocol, but it's having people build on top of it and people are using, building apps on top of it.

So when I remember when I wrote about Ethereum in 20 17, 20 18 this was. Right before the first crypto winter, and my entire thesis was on. Hey, like this. Just a token like this, isn't just like a virtual toy that you just trade around with your friends, but like this isn't, this is like an online, this is an operating system.

It's a foundation for a future that could be boundless in terms of what people might do on it. But at the time there was no defy, there was no use case. And it was literally just this promise. Now luckily for Ethereum, after it crashed 90% Somebody came up with this, the idea of lending in a decentralized manner.

And so things like are, they picked up and some of these, ERC 20 tokens that support lending sprouted up. And then people were like, oh, whoa, wait a second. This is massively disruptive to the traditional banking sector. What's that actually worth? Let's try to figure out, How the, how do you value the banking system?

There are a bunch of publicly traded companies in the space. What are their market caps? Let's add them up. What are the frictions that can be removed out of the system? And so anyway, it became much, much more tangible. And then of course it, 50 X from there, I think that's what people roll their eyes.

They don't see the use case. And I think Bitcoin to this day, has that problem where it becomes. Marketed it as digital gold or a store of value. It doesn't really do anything else. It has anointed itself as a store of value. A lot of people still struggle with it. But there are many other blockchains that have a very specific Let's say use cases that are a little bit more tangible.

And I think for people who are macro oriented who like invest in gold, like for them, Bitcoin is a little bit more tangible for people who don't invest in gold. Let's say you're a VC person and you're used to investing in small companies and equities. Like you probably own some layer, one protocols as a small part of your own portrait.

MPD: We had Chrissy Ayaan I don't know if you know him. He's the co-author of blitz scaling and a few other books. He wrote those books with Reid Hoffman was obviously a big name. And so Chris is a VC at his comment on crypto. When we talked about this was to be skeptical, not dismissive. And I think the underlying point he was trying to make was that any new emerging technology that kind of has a gold rush feel to it, there's always charlatans, but there's real opportune.

Where do you see the real place here?

Divya Narendra: I think you got to get to know the teams behind the protocols. There's obviously the sort of scope, but I think his characterization is exactly right. My personal view is like most of this stuff is. There are a lot of charlatans in this space.

And it's unfortunate because, when you look at coin market cap and you just go through the list of all of the different projects, the fact that a enough that there's so many, like no name projects that have no adoption whatsoever and yet have market caps. In excess of a hundred million dollars, makes no sense.

And unfortunately that let's say financial energy, that's blocked up in all of these bogus these bogus projects is taking away. Let's say commitment and adoption from the projects that actually do make sense. And have, W like a real engineering community behind them with real leadership and growing network effects.

So actually just recently one of my one of my good friends who runs a he, he does a lot of crypto investing and he's a former private equity guy. He sent me this chart of, it was like basically tracking. The number of engineers developing on, all these different planets against the price of, or the value of those, of each of those different protocols.

And there were a couple that stood out. ICP stood out the internet computer. I think algorithm was pretty, was a pretty interesting one on that list. And a couple others that aren't super well-known. Have a lot of actual activity from the standpoint of engineers. But aren't necessarily mainstream and actually are far from mainstream is the chart public.

Because if you ask we'll link to it and I can find it for you, he actually texted it to me. I can send that to you, but

MPD: awesome. Now you've you've been known for, it's going to say this way, you've actually maintained a pretty low profile, right? I think you'd probably do that intentionally. You haven't updated your LinkedIn.

And I'm sure it's not in any small part due to the origins of your business career.

Divya Narendra: It's also just my personality. Like I'm not a very, showboaty kind of guy. I like that. I think it's easier to just go about my day and focus on my day job.

MPD: So for those who don't know you by name you have been in a movie, right?

There was a social network, for sure. Everyone's seen at this point, you've mentioned the Winklevoss twins already. You were basically on the connect you team. It was you and the Winklevoss twins who had started that. So first question for you on this topic, there was an actor who played. And I've never had this happen to me.

So I got to hear the other side of a guy named max Minghella. I had to look him up cause I didn't know who played it. He's now famously in the hands, but Handmaid's tale, which is a pretty big show. How was that? How

Divya Narendra: do you do well? I have no role. I had no. Input into how the film is produced written or anything of that effect or in the casting?

I thought it was peculiar that they chose a half British half Chinese guy to play me who they then decided to brown face. So he actually, I think in the film may have been like more tan than I realized, but she also look, I thought the film was really entertaining. I think his portrayal of me was Inaccurate in the sense that it made me seem out to be like this a somewhat dark and brooding person.

This is just, it's not really yeah, like I'm I'm pretty easy going. But not that doesn't really matter as far as the, the narrative or the, like it doesn't really change the the story much, but so that, they never met me. So they really know. I was like personally, but I guess I was in the movie, that's this agitator a little bit of a whip to get the twins to go Sopranos on market on, on, on Zuckerberg, which is, I think one of the it was a kind of a quote from the movie itself.

He's a good dude. He was, we did meet once. They were actually, there was one scene. Where Cameron and Tyler are at Henley at the Royal regatta. And so they tell me that they were going to film a scene there. So we actually flew out there because it was held during Henley. So they were filming the, they would be there easy to find.

And, like the twins had wrote at Henley numerous times at four. And it's if you're a rower it's like the eve