Combining Technology and Finance
How I Got My Start in Finance
Featuring Divya Narendra
Published on: July 8th, 2019 • Duration: 22 minutesDivya Narendra joins Real Vision’s Justine Underhill to discuss his time in both the technology and finance industries. Narendra talks about his role in the contentious early days of Facebook, and explains how he transitioned to co-founding investment research company SumZero. Filmed on June 25, 2019 in New York.
JUSTINE UNDERHILL: This week on How I Got My Start in Finance, Divya Narendra, the co-founder of SumZero, tells us his story of studying at Harvard, the early days of Facebook, and his ultimate pivot into finance.
DIVYA NARENDRA: So my parents are doctors. They're immigrants from India. My mom's a pediatrician. My dad is geriatrics, so he takes care of old people. They kind of cover the spectrum between the two of them.
I thought I was going to go into medicine. I thought maybe I'd do something in surgery. I used to watch TLC a lot as a kid, and they'd have shows where they would show open heart surgery. And like oh, that's pretty cool. That could be fun for me as a career.
But I think like a lot of people, I didn't really know going into college exactly what I wanted to do. So kind of in high school, I leaned a little bit more towards the sciences and maths, kind of quantitative fields. In college, I majored in applied math.
So I went to Harvard, pretty liberal arts in terms of their requirements. And so I took a lot of different types of classes, even outside of math. I took some comp sci. I took some physics. I took some languages stuff. I took some music classes.
And even in school, I was a little confused about what I would do with all the stuff I had studied. And the thing is at university, there were a few tracks that I think people followed. Finance was one of them. Medicine was another one. Law was another. Some people went into academia. And when I was an undergrad-- and I was there from 2000 to 2004-- entrepreneurship was not a track at all.
JUSTINE UNDERHILL: Really?
DIVYA NARENDRA: And when I say a track, I don't mean like a major. There was certainly no entrepreneurship major. But there weren't any people I knew who were doing anything entrepreneurial. This was pre Google being a public company. Google was still private at the time.
So I remember the people who were interested in technology-- for them, landing that job was like working at Goldman Sachs for someone who was interested in finance. What sort of hit me was when I was a sophomore, I was just kind of sitting around in my dorm just thinking about-- well, I was actually just surfing the web. And I was thinking about kind of my own social experiences in college.
And that's when I discovered Myspace. Craigslist was pretty popular at the time. Online dating was starting to become a thing. So there was a website called AmericanSingles.com, which, when you're in college and you're inexperienced, the idea of an online dating site is actually-- I don't know-- I found it pretty interesting at the time.
And on campus, I was pretty awkward. I thought most people were pretty awkward anyway. So it seemed like an interesting niche to explore a little bit. And it just dawned on me that on campus, there was no online tool to connect folks, be it for social reasons, or academic, or otherwise.
And so I came up with this idea to create a website that would verify acceptance by looking at the email address of the applicant or the user, and to check if it just had a harvard.edu string in the email, and to use that as the basis to create a better Myspace or a better Friendster.
And my roommates at the time were the Winklevoss twins, who I'm sure many of your viewers already know. And so I brought it up with them, and they got really excited about the prospect. And so we set off to create a business out of this. At the time, I didn't really know what that involved.
But I think through the process of trying to launch that business, it hit me that entrepreneurship was something that I could do as a career choice, as opposed to just kind of going into finance or something a little bit more established. Interestingly, it turned out that our plans to start that business did not work out. And so I ultimately decided to go into finance anyway.
Essentially, we launched what at the time was called ConnectU. And Mark Zuckerberg, who was two years younger than me, was our last programmer who we had hired to build out ConnectU. He ultimately started Facebook, and we're like, wait a second. This is the competing website. They had first mover advantage.
And it didn't really make sense for us to really try and compete with Facebook at the time. In the first 10 days of its launch, I think it had 8,000 members. It was essentially like the vast majority of both the undergraduate and graduate student body was already on Facebook. I mean, it was unbelievable, kind of a classic viral growth story.
JUSTINE UNDERHILL: Yeah, your idea works.
DIVYA NARENDRA: The idea worked. Exactly. We weren't the ones who--
JUSTINE UNDERHILL: Executed.
DIVYA NARENDRA: Exactly. So then what happened was I moved to New York. I spent two years working at Credit Suisse, which is down the street actually, in their M&A group. And the idea there was just like OK, plan A didn't work. Let's just get a job. So I got a job.
And I thought it was pretty useful because I learned a lot about business fundamentals. In college, I had taken some economics classes, but I hadn't taken-- well, we didn't even have the option to take any business classes. They weren't available. We didn't even have accounting as an option.
So I really didn't know anything about accounting, which is the language of business, in a way. I really had no formal training in how businesses think about capital allocation or growth. I've never really looked at doing a deep dive into an industry to understand the competitive landscape or the sort of science of hiring, all the things that matter when you're starting a business.
JUSTINE UNDERHILL: Right.
DIVYA NARENDRA: Just working at a company like Credit Suisse, as an M&A banker, you get to see companies buying other companies. And through that, you can kind of assess, well, why they decide to purchase company A versus company B?
JUSTINE UNDERHILL: So you learned all that on the job?
DIVYA NARENDRA: Yeah. It was just all on-the-job training. And it really felt like a boot camp. In fact, we had a six-week boot camp before I officially started my job, which was miserable. It was like, you'd show up to work at 9:00 and leave at 4:00 every day for two weeks. That was M&A. I mean, that's the stuff that I'd heard about as being just kind of normal. But it doesn't really hit you til you're in it.
JUSTINE UNDERHILL: Wait, so you start at 9:00 AM, and you leave at--
DIVYA NARENDRA: Yeah. You might leave at 4:00, or you might stay overnight.
JUSTINE UNDERHILL: Oh, OK.
DIVYA NARENDRA: And it's like every day.
JUSTINE UNDERHILL: Wait, so 4:00 AM or--
DIVYA NARENDRA: Yeah.
JUSTINE UNDERHILL: Oh, OK. So you're barely getting any sleep.
DIVYA NARENDRA: You're not sleeping much at all. It felt like I was in training in some special operations force--
JUSTINE UNDERHILL: Wow.
DIVYA NARENDRA: --or something like that. Like I couldn't tell whether they were testing me on my--
JUSTINE UNDERHILL: Endurance.
DIVYA NARENDRA: --financial knowhow or just purely on endurance. But anyway, so ultimately, after that boot camp period, you'd get assigned to deals. And the way these M&A transactions work is, you get put on a deal. And usually the MD, who's like the senior guy on the totem pole, he's kind of doing his work from 9:00 to 5:00.
And then at 5:00 PM, they dump something on your desk that involves turning a document. Maybe it's a presentation or model by later that night or the following morning. So that's how they ruin your night, just with this surprise dump of work. And a lot of times, you lose your weekends. And that was just kind of normal.
It turned out that while I was there, one of the guys I reported to-- he was an associate. So he was a post MBA associate. I noticed that he was sort of day trading while we were at work. He would strike up conversations about random small cap stocks that he thought were interesting. And he would you chat with me about it because we sat next to each other.
We were the only two employees in that group that seemed to follow the public markets. And I kind of discovered the public markets in that phase. And what I really enjoyed about the public markets versus the banking industry is that whereas-- the banking industry, you spend a lot of your time focused on process, which is to say, we didn't care as much about how much a company was going to pay for another company. Because we weren't the buyer or the seller. We were this intermediary advisor, right? So if the transaction closed, Credit Suisse gets a fee.
JUSTINE UNDERHILL: Right.
DIVYA NARENDRA: And so the onus wasn't on us to really dictate the terms of a transaction. It was really on us to create an efficient process. So let's say we represented a seller. It was our job to make sure that sale process, that auction, was as advantageous to the seller as possible. We'd find as many prospective buyers as possible. And we'd run that process in a way that provided transparency to all of the parties in the room and really maximize the sale price, right?
So it's a different mindset, versus the investing mindset where you have skin in the game. And so suddenly you have to think, oh, OK, well, if I purchase this-- let's say it's a stock-- you need to assess intrinsic value because you have to have some conviction behind why you're buying something or why you're selling something.
That really puts a premium on your analytical skills to not just build a model, but understand the inputs of that model and understand, well, what are the real levers here? If the CEO of this company says margins are going to go up, is that true or not? Are they going to go up? Are they going to go down? Well, let's look at the competition.
So I found that intellectual exercise really interesting. And that's how I sort of built my interest in the public markets. And then two years after my banking entree, I ended up moving to Boston to work at a $3 billion hedge fund that managed money for the Harvard endowment. And that fund was run by a guy who used to work for Harvard Management Company, which is the entity that manages the endowment.
And he left probably 2003 or 2004. He started this fund, $3 billion fund. And it was a relative value multi-strategy fund. And I interviewed at a bunch of funds, and I ended up choosing this place, just because I like the people and I wanted to dive into public markets investing and just do it professionally.
JUSTINE UNDERHILL: And the hours were a little bit less crazy, I imagine.
DIVYA NARENDRA: The hours were consistently 7:00 to 7:00. I don't know why there were 7:00 to 7:00. I feel like maybe that was the culture at HMC, and they kind of just preserve that. They didn't have to be that schedule. It could have been even shorter.
But the thing about investing is that unlike I think some jobs, it's like it always-- it's in your head all the time. Because the world and just kind of news events are constantly affecting the valuation of assets, right? So if you happen to cover NVIDIA as a company, as a stock, right? Like when Trump announces a trade war against China, you have to be able to process that and be like, well, how does this affect NVIDIA?
Does it mean they're going to switch over? Are they going to change their supply chain somehow? Are their margins going to get compressed? Are they going to see a decrease in demand for whatever reason? How does that actually affect the stock price? Do I still want to own that stock? So that stuff stays with you when you leave the office.
And so I kind of felt like it was, you were kind of always on, thinking about the world. And it was an interesting experience because a lot of our positions were pretty levered. What happened was actually a year into that job-- this was the summer of 2007-- the credit crisis hits. And this was a year before the equity crisis in 2008. So if you remember in 2008, October-ish of 2008, the stock markets collapse. After Lehman fell, the equity markets around the world-- certainly the US-- fell a lot, 40%, say.
But a year prior to that, there were some very troubling signs in the credit markets. And we were experiencing that directly because we owned a lot of credit. We had a lot of credit exposure. As the junior guy on the team, I was sort of watching this fund that had a lot of pedigree and some really smart people lose a lot of money.
JUSTINE UNDERHILL: Wow.
DIVYA NARENDRA: So over the course of a day, we would see hundreds of millions of dollars lost in mark-to-market P&L.
JUSTINE UNDERHILL: Wow.
DIVYA NARENDRA: Or I'd go home and be like, wow, this fund just lost $300 million today. Now obviously, this is paper money, but--
JUSTINE UNDERHILL: But still, it's real.
DIVYA NARENDRA: It's real, right?
JUSTINE UNDERHILL: Yeah.
DIVYA NARENDRA: Yeah, so--
JUSTINE UNDERHILL: Did you see that at the time as a warning sign of what was to come? Or did it seem just sort of like an anomaly?
DIVYA NARENDRA: I did, because usually, the credit markets are a leading indicator of what's going on in the equity markets, typically.
JUSTINE UNDERHILL: Wow.
DIVYA NARENDRA: And part of that is credit investors tend to be more conservative than equity investors are. I did a mix of equity and credit while I was there. But there were some guys on the team that just did credit. And that was really their wheelhouse. And that was their lens into the world.
And when you see firstly in bonds that are supposed to be secured by collateral trade well below par, and you happen to own-- maybe you own some secured credit, but you also own some unsecured stuff. It's concerning. And anyway, so the founder of the fund decided to just sell all of his assets that summer in July, August of 2007.
And Citadel, which is a very large firm out of Chicago, kind of swooped in and bought all these bonds and other assets and positions that this fund had, essentially at a fire sale price. Because the fund was getting margin calls from its counter parties. And it could have been a lot worse.
At the time, we were like, man, it's just a really bad outcome. But then of course, as we got closer to 2008, other funds started shutting down. So it wasn't like that unique of an event. But it felt unique at the time.
And so for me, I was still very-- I was 25. And so it's not like my career had been shot because of that event. I was the junior guy on the team. And so I had opportunities to interview at other funds. But that's when I came up with the concept for SumZero and realized that if so what capital shutting down was an opportunity for me to go do something entrepreneurial.
JUSTINE UNDERHILL: OK. So then yeah, can you lead us through a little bit about how you started SumZero? This is still in the midst of the financial crisis.
DIVYA NARENDRA: Yeah.
JUSTINE UNDERHILL: So how were you able-- so talk a little bit about what SumZero is, but then also how you were able to get clients without anything really to show.
DIVYA NARENDRA: Well, so the concept, really quickly, was to create an online network limited to professional investors only. We call that the buy side. So these are analyst and portfolio managers at mutual funds, hedge funds, and other asset management firms. And the goal is to give them a venue in which they could share ideas.
So when I was at that fund in Boston, I realized that a lot of my seniors, they weren't paying that much attention to Wall Street research. I mean, they would get it. I mean, we received research from Morgan Stanley, and Goldman, and Citi, and all the wire houses.
But they took that research with a pretty big grain of salt. There's a lot of conflicts of interest between Wall Street and the buy side. And Wall Street has no skin in the game, right? So when Goldman Sachs says, you should buy Twitter, and they put a price target on it, that analyst doesn't own shares of Twitter. He's not even allowed to hold shares at Twitter.
However, if you know that some analyst at a large fund has a significant position in Twitter, you want to talk to that analyst because that analyst has skin in the game. If Twitter stock goes up, that guy makes a lot of money. If it doesn't, he loses a lot of money. Before SumZero, nobody had created an online centralized platform for all of the insights from the buy side to be collectively shared.
The industry has had, I think, a reputation of being pretty opaque. So we always got to question like, why would somebody do this? Like why would an analyst share their research? And so SumZero tries to address that. So in 2008, I launched with a friend of mine from college, who was himself a portfolio manager at a fund. We launched a beta version of SumZero, very skeletal.
And I just asked my friends who had also worked on the buy side or gone to the buy side to join as beta testers in the beginning, including that associate from Credit Suisse. He was actually our first user.
JUSTINE UNDERHILL: Oh, fun.
DIVYA NARENDRA: Yeah. And he's actually gone on to build quite a name for himself in the activist community. But we launched this beta. And I just kind of told people, look, post an idea. And by doing so, you're going to get access to the research of your peers. And by the way, just let me know if you have any friends who might be good community members who we should invite.
And that's kind of how the site grew. It was very much a referral process, where I just pounded the phones, asking people to introduce me to their friends who were analysts at other firms. And eventually, we got some press. And then that created an influx of new applications.
JUSTINE UNDERHILL: Wow. So you were able to grow the network just through word of mouth.
DIVYA NARENDRA: Yeah. I thought it was interesting because the site itself was kind of dysfunctional. I mean, we didn't have any funding. It was totally bootstrapped. So we did not have in-house engineers. And our sort of contracted engineer was like OK, but certainly not at the level that I would have wanted. So it took a while to, I think, get enough traction where we were able to go and raise some funding and then really hire a team.
JUSTINE UNDERHILL: Did your experience with ConnectU and Facebook change how you approached building SumZero?
DIVYA NARENDRA: Well, I was more formal about who is involved. So between my co-founder and I, yeah, we had clear agreements in place in terms of what our responsibilities were. And even then, there were some kinks that we had to iron out. But luckily, we've had no--
JUSTINE UNDERHILL: Issues.
DIVYA NARENDRA: --litigation or anything associated with SumZero. It's been totally smooth, I think, story from that standpoint. But I think the other lesson is really one that relates to engagement. And I think the parallels between ConnectU and Facebook in the early days, and SumZero in the early days and today, is just how we think about growing the community, right?
Like in the beginning of Facebook, you had to have gone to Harvard University to be eligible to access the site. Now that changed over time where eventually, they launched at other universities. But that university connection was, for quite a while, one of the baseline requirements of being a member on Facebook. That created the affinities that generated engagement. And that's what differentiated Facebook from--
JUSTINE UNDERHILL: Myspace.
DIVYA NARENDRA: --everything else, where anyone could join. And so there were a lot of fake profiles on those other sites. And so for us, we created an application process where we would review every applicant's background to make sure that they had a legitimate buy side track record, that they weren't just a hobbyist investor looking to share their views.
At some point in time, we might create a tool for that. But in the beginning, we wanted to make sure that we had the right people in the room, that they spoke the same language. And I think that resulted in higher quality content, which, in turn, attracts more people to the community. So that's kind of, I think, one of the main perils.