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Contrary Capital invests in companies coming out of university campuses
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Eric Tarzynski is the founder of Contrary Capital.
Prior to Contrary, Tarzynski was an early employee at Kamcord, which was acquired by Lyft. He received his BSBA from Northeastern University.
VatorNews: What is your investment philosophy or methodology?
Eric Tarczynski: I grew up in New Jersey, went to school up in Boston, and really found my interest in building businesses when I was in school, which is why we decided to start building the firm initially. So, I started a payments while I was in school and the genesis behind the firm was a very acute and personal experience, which was that, at the time, there was some large secular increase in people building things on and around university campuses, but we didn't really think that anybody has built the de facto platform, firm or brand in venture across university campuses yet.
What we've been doing for the past four years now really is systematically investing in the top dozen or so companies each year in pre-seed and seed space coming out of university campuses, through a combination of our scout network (we have about 100 scouts that we work with at elite schools across the US), a pretty sophisticated software platform that we built and then through our own HQ team as well.
We've always thought of the university ecosystem in three core ways: as companies, as technologies and as people. Company has been our beachhead for the past four years, investing in these companies coming off of university campuses. Technology means research, things coming out of tech transfer groups at universities, things like that. And then with people we have this notion that, basically, all the smartest people from across the entire world are going through the top 40 or so major research universities at some point in their lives. We started thinking, 'Okay, well, we've already built out what we think is the most powerful university network that exists. What if we could take that and then slightly tweak that on the margins and, in addition to finding great companies that are coming up on campuses, also really focus on identifying the top 1 percent, career, design, engineering and product talent and really identifying those people as early in their professional careers as possible, and then kind of helping them for life.' So, let's say they're getting ready to graduate from school and they want to start a company; fantastic, we'll invest in that company. If they don't want to start a company, and they want to go join a seed stage or Series A, Series B, hyper growth-style company, fantastic, we have a talent team in house that will sit down with them, they basically have their personal talent agent, and they'll understand what their professional goals are, career goals are. Then we'll go to bat for them and we'll make intros and help them land a role that that they're super excited about, all the while keeping in close touch with them, so that maybe in one or two or three or four years, when they do decide to start a company, Contrary is still there.
That's the quick background on the firm and what we're up to now. We're laser focused on the top early career talent in tech, essentially.
VN: What are your categories of interest?
ET: We view ourselves as being in the people business above all else. We're meeting with several thousand people a year and we're ultimately backing and supporting the top dozen outliers. So, we'll do everything from computational biology to enterprise SaaS to consumer and everything in between.
VN: What's the big macro trend you're betting on?
ET: The most glaringly obvious one is the fact that universities, in general, are kind of in limbo with what's going on with coronavirus. Obviously that has a profound impact on many people's lives and, obviously, for many of them it's not in a good way, but for our subset of people, the hyper ambitious, entrepreneurial young people, there's arguably no better time to build a company. Anecdotally, when you look at Facebook and Microsoft and a number of these other companies, these were companies that were started during the reading period at Harvard, for example, when they have free time off, basically when they're supposed to be studying. What happens is, when you provide super talented, ambitious, young people with free time and they're not focused on their CF classes or something like that, and they have time to work on projects, inevitably great companies come out of that. So, that's the trend that, for obvious reasons, we're laser focused on right now as a firm. We're trying to help enable and foster that in any way we possibly can because we think it's gonna be a really exciting year.
VN: You mentioned COVID, and it's been in the news that schools like Harvard are going to be offering classes online in the coming semester. There was also a recent rule from the Trump administration that if a school is going to be doing their classes online that foreign students won't be allowed in the country (Note: the Trump administration has since reversed this decision). How do rules and changes like that affect your ability to invest in these kinds of founders?
ET: Obviously, we think that the latter part, foreign students not being able to stay in the U.S, is a bad decision, and one that's going to probably result in a lot of pain for both the students themselves but also the university's budget, given that international students typically pay full tickets. We've also seen scores of entrepreneurial people come to universities from abroad explicitly because it's their gateway to building a company in the U.S.; at least to some extent, it's their Ellis Island, basically, and we've funded several companies that way. When you remove that, you turn those people away, obviously the U.S. loses out in a pretty significant way.
That said, education has been unbundling for a while: online classes, alternative programs, the Lambda Schools of the world, have been growing in popularity and in mindshare. So, while unfortunate, and absolutely not something that we would advocate for, we expect that social layer for talented young people to continue shifting either online or just to alternative groups like Contrary, where they have the ability to still meet like-minded peers, to collaborate with like-minded peers and to, ultimately, build company with companies of like-minded peers, even if it's done virtually. That's how we think about it.
VN: What is the size of your current fund and how many investments do you typically make in a year?
ET: We haven't publicly announced our second fund yet, which is the one that we're currently investing out of, so unfortunately I can't disclose the exact number but it's in the low tens of millions. In terms of how we invest, we run a pretty concentrated portfolio: we do about a dozen investments a year, which, given our stages, is quite concentrated.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
ET: We mostly do pre-seed investing. We also do a little bit of seed investing, but the majority is pre-seed. An initial check for us is typically between $250,000 to $500,000.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
ET: We rarely do idea-stage investing. We're typically investing where there's maybe an MVP built, maybe one or two early customers, albeit on a smaller scale right. If there's some evidence that what they've built is exciting to people, that's usually enough, but we rarely do idea-stage investing, partially because we think that, while everybody says that ideas are cheap, it turns out that ideas actually aren't that cheap. Simply going zero to one and getting a handful of non-friend customers is actually really hard. So, it significantly derisks the business in our eyes. That said, we absolutely have done some idea-stage investing, so it just depends.
VN: What do you need to see in the team to make you want to invest?
ET: Sbove all else, is this person deeply knowledgeable or sophisticated about the space that they're pursuing? And then there's three sub-factors, which are: is this person highly technical? Are they a good build person? And, are they scrappy? You'd be lucky to find somebody that had three out of the four of those traits and it would be unbelievable if somebody had all four. Most people probably just have one or two out of those four, so that's really what we're looking for.
For example, we invested in a computational biology company, and the founder had an immigrant family. His parents are faculty members at UC Davis, so he grew up on campus there, and had been doing synthetic biology research while as freshmen in high school. So, for nearly a decade prior to starting the company he had a ton of sophistication and experience for it, he was deeply technical and when you talk to him he's just an extraordinarily good salesperson. He's very friendly, amiable and super scrappy and hardworking. That's the rough archetype of people that we get excited about investing in.
VN: Since most people only have one or two of those qualities, I would imagine that you'd like to see a team where each person has one of those different qualities that they can bring to the company.
ET: Optimally, one person has all of those but that's a lot to ask for most people and so, yeah, if they can bring that to the table in a complimentary way then that's great.
VN: What do you think about valuations these days? How have they been affected by COVID?
ET: It did become harder to raise capital. What happened is a lot of the marginal capital fled the ecosystem, so individual angel investors, people like that. So, yeah, it got harder and the bar rose but I don't think it became impossible. We've had several companies raise rounds, all that kind of stuff. Valuations maybe have dipped a little bit, but not too much at all. There's been nothing massively tangible. From what we've seen over the past couple of months, the only thing has been that deals are still getting done, but the bar is higher, and it's just taking a little bit longer than it might have in January or February, which I don't think is a bad thing. It weeds out teams that, perhaps, should never have gotten capital at all in the first place.
VN: Do you think that it's gonna make it harder for companies potentially raising the next round? What kind of effect do you think it's going to have on that?
ET: It'll make it harder for companies to raise the next round but all the more reason to be investing in robust businesses, or companies that have the potential to become robust businesses, from the very beginning. It's going to be hard but the best businesses will be able to get it done.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
ET: Fundamentally, we're doing something very different, which is we've built the de facto platform for early career people. We're not a two person and a dog kind of stage venture fund that is chasing the same deals as everybody else is. We've taken a platform-driven model, we have 10 nationwide brands, nationwide scale and the ambition has always been to build the next great venture franchise. When we present, not only do we differentiate the model, with our 100 scouts across 40 schools, etc. but we also have a really compelling track record and a really robust team to support us. I think it's pretty clear that people see that we are actually doing something differentiated here.
I'd almost argue that, for us, the differentiation has been the least of our concerns, actually, on that front.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
ET: 60 percent plus of our LPs have started billion dollar plus tech companies over the past decade. We have founders from Facebook, Tesla, SoFi, Mulesoft, you name it. And that's just something that most others can't compete with, and those are other people who are active and investing alongside us.
The second is just our track record, our body of work. Basically all, meaning over 90 percent, of our companies are raising capital at the next round and the vast majority of those, about 70 percent or so, are raising from tier one funds at the next stage: Sequoia, etc. That's about double what's common for a fund at our stage.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
ET: One of them is a company called Vise. They're basically building next generation portfolio optimization software for registered investment advisors. One of the team members was originally out of Penn and the two of them are just extremely talented. It was clear that it's a gigantic market opportunity; it's a trillion dollar plus industry, it's just gigantic, and really a space that's seen very little innovation, so it's kind of a no-brainer for us. We were the first institutional investors in that company and they're doing very well. They raised almost $15 million from Sequoia that they announced in April and they're doing well.
We did another one called Memora Health, which is building patient readmission software. They were originally out of Georgia Tech and the idea was that if you can have patients, when they leave a healthcare facility, follow a simple set of protocols then their readmission rates drop significantly. They've been doing very well integrating with a bunch of hospitals and healthcare systems, things like that. We're super excited about that and they're growing very quickly, so that's another good one.
VN: What are some lessons you learned?
ET: My path to VC was very atypical: I never really had a massive interest in being a VC specifically, but it just so happened that I was pretty convinced that there was an opportunity here, and that somebody was going to do something about if we didn't. And so, much like any founder, we saw a big opportunity, thought that we were kind of best positioned to execute on it and that's what we've been doing. That was kind of how I ended up in venture.
I've learned a ton. Number one is you learn just how long the time horizons are in the venture world. Number two, you learn just how important it is to really be a dedicated partner for your founders. You're in the service business, at the end of the day, so being available around the clock, being a sounding board for them, building that trust, it's all really important. And then, there have been a lot of firm building lessons along the way as well. Obviously, how do you go raise capital? How that works again over a long time horizon, and a bunch of other things.
VN: What excites you the most about your position as VC?
ET: The reason why we're doing Contrary in general is it's deeply rewarding work for me personally. I found what I wanted to do for the rest of my life when I was in school, which is building companies, and so the opportunity to provide that to the next generation of really career, super talented founders is awesome for me. That alone is my core motivation. So, it's that and the opportunity to build the next great venture franchise. Those two things combined are making it very meaningful and very rewarding work for me.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
ET: We are building a firm at Contrary for the top early career talent, engineering, designers, product folks. We're building a place that people would love to be a part of.
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