VC and the "Moneyball" strategy
A Moneyball-style revolution is taking place in venture capital. Just as the renegade general manager of the Oakland A’s flouted assumptions about baseball and replaced gut feelings and outdated statistics with more effective quantitative analysis, a new breed of venture capital firms are throwing out their Magic 8-balls and are using computer-based models to make smarter investments.
Is this becoming a new trend in VC?
Check out Correlation Ventures, they raised the largest first vc fund since Andreessen Horowitz. They promise an investment response within two weeks of the first meeting largely because they use predictive analytics. Jury is still out on this model as it takes a good amount of a fund cycle to prove it out obviously.
http://correlationvc.com/
[quote=TheBigBambino]Check out Correlation Ventures, they raised the largest first vc fund since Andreessen Horowitz. They promise an investment response within two weeks of the first meeting largely because they use predictive analytics. Jury is still out on this model as it takes a good amount of a fund cycle to prove it out obviously.
http://correlationvc.com/[/quote] This looks like they only do coinvest. Is that true?
If so, it would be easier to believe that this would work, since someone else has done a lot of the heavy lifting and they would basically be able to figure out who to piggyback off in which scenario with their models.
Direct VC doesn't lend itself to quant modeling in my mind. At all.
It appears you may be right. It looks like they do some pretty heavy hitting syndicates but never take lead. Still means they have to do a lot of due diligence and make a final call but I get your point. This makes a lot more sense to me, I was having trouble figuring out how they did their sourcing while relying on these models but it's a bit more clear now.
I think the model is interested. Obviously I think people will matter more than a predictive model but I'm really interested to see their fund performance in 5-7 years from now. If the strategy works well to mitigate financial risk and still produce 2x+ returns for their fund sounds like they figured something really cool out to me.
It may work as a screening tool, but I'm not a believer that this will drastically alter how VC investments are made. Baseball and elections are very different than the startup world. Past correlations and statistics don't mean much in an ever changing marketplace and environment where imperfect data sets exist. Monitoring job postings may be great, but wouldn't it be better to look at actual hiring patters, which can't be captured due to the private nature of startups?
Human bias is necessary in business because deals and selling still get done by humans. I believe that trying to remove the human element is a mistake (although it doesn't appear that's really what the VCs mentioned here are doing). The true value of a startup is in its human capital.
For growth capital stage companies this might make more sense as you can measure capital intensiveness relative to growth and other metrics that might lead to different decision making.
Bingo.
Does anyone know if there are publically-available examples of these quantitative models? Are they based on PE models?
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