Imagine the scenario of a senior executive on a business trip. Before the executive heads out to dinner a restaurant selection is in order. Enter Rearden Commerce and their virtual personal assistant. The executive simply opens the platform and receives restaurant recommendations. How? The platform already knows meal preferences, price ranges (per diem rate) which are approved for the trip, and how far away each restaurant is from his current location (think GPS here). Rearden Commerce offers a virtual personal assistant which offers corporations a value proposition of significant savings in travel budgets, and offers travelers a single interface for their entire trip (plane, car, hotel, food, entertainment, taxi, and the list goes on). Patrick Gradey, CEO and founder of Rearden shares his story with us.
SM: Where do you come from?
PG: I grew up in the suburbs of New York. My parents were immigrants from Ireland. My mother was from England and was a nanny. It was the great American dream.
SM: What was the evolution of that story? Where did you go to college?
PG: Due to a number of family-related issues I had to stay close to home, so I went to Pace University. My father had passed away when I was 13, and I needed to stay close to home to help my mother. I interviewed on Wall Street for a summer internship and dropped out of college the next day. I left school before my twentieth birthday to go to Wall Street.
This was in 1987. In New York in the 1980s there was a guy named Michael Milken. His original thesis coming out of Wharton was around something that became known as fallen angel bonds. He said if you go back over the last seven or eight decades and had bought a basket of these fallen angel bonds they actually outperformed all other asset classes. If you took a portfolio approach, the risk score would profile as such, the coupon prices were high enough, and the default rate was sufficiently low enough that you would outperform other indexes.
Coming out of Wharton, he interviewed everywhere. He ultimately chose a small boutique investment bank, which was Drexel. He saw that in a liquid market predominately around entrepreneurs who had very large capital requirements, who wanted to either restructure businesses or disrupt current industries, and who did not have access to capital, would also not have the EBITDA to get bank financing. He saw an enormous and illiquid market that he brought liquidity to. He ultimately funded entrepreneurs like Ted Turner and Rupert Murdock.
I would argue the Michael Milken should be known for being the greatest venture capitalist, versus the guy who may or may not have committed securities violations. His methods created entire industries and hundreds of thousands of jobs. Those are industries that the US still dominates today.
I was very enamored with all of this. I wanted to do something along the same lines. I put my head down and started writing a business plan at 19. I started looking at all of the other asset classes to see if there were other inefficient markets to which I could bring liquidity to bear and lower the cost of capital.
Lower cost of capital is always good when done naturally. What we have seen from the Federal Reserve in recent years is that if you lower the cost of capital artificially and keep it suppressed, it falls apart. Nothing good happens when cost of capital is artificially low for a sustained period of time. We end up with bubbles. The first victim in a bubble is discipline. There is no due diligence.
I came across an asset class called venture capital. This was in the late 1980s and it was hardly a mature industry. The data was overwhelming: 90% of the world’s venture capital resided in the US, nearly 90% of that resided in California on a place called Sand Hill Road. The majority of that was in the hands of a dozen or so mega funds which was a $100 million fund. Today that is seed capital.
SM: That was the right size! Things have completely spun out of control!
PG: I completely agree! There are not that many great ideas or great entrepreneurs. The more and more analysis I did on this market, the more I realized the cost of capital was extremely high for entrepreneurs. It was almost an oligopoly. I am not suggesting the folks on Sand Hill were not playing by the rules or were unfair, there was just an overall lack of competition.
If you were an entrepreneur coming out of MIT or Stanford and had an idea for a new networking company, you would probably see the same suspects. Those VCs would then get on the phone and call each other because their funds were small. Your company would get a value associated with it which may or may not have reflected its actual value.