Venture Capital: Data Driven vs Traditional Strategies

Subscribe

The top venture capitalist of this age gets paid the big bucks because they claim they have a special eye for the billion dollar companies. They claim that they are able to identify early the best companies based on markets, team, product, trend or whatever it might be. This is that "gut" feeling. But that's the exact reason that traditional venture capitalists have failed to return good returns and that Venture capital as an asset class generally does not fare well against the market.

But what happen if we take a data-driven approach to venture capital?

So far I can think of a few firms that do this. Correlation VC, 500 Startups, Google ventures. Correlation VC actually takes historical data and invests based off of that. PAVS invests along the same lines. 500 startups involves both a quant and traditional approach in that they make smaller bets based off of gut instinct at the earliest stages.

Dave McClure of 500 startups had argued that due to low cost of startups these days, it's now possible to try to aim for larger number of base hit companies rather than that home run company. Steve Blank also argued that following a more data driven approach will statistically result in the success rate of raising capital and succeeding.

With the wealth of venture capital firms out there today, what strategy will represent the future of Venture Capital? Would love to hear some thoughts from VC industry people here.

Comments (4)

 
Jan 13, 2014 - 11:12am

Interesting post. I would echo what mb666 mentioned about the black swan events. The challenge and danger of using historical data to predict future performance is that we often forget to take into consideration the risk involved. Just as there can be upside to blackswan events, there can be large downsides, and more often than not, relying on historical data tends to hide those risks creating false sense of security. Very difficult to draw causative links between historical data and future performance. (Check out Nassim Taleb's writing on the topic)

VC all seems about the management of great teams. When working at such an early stage, having the right people in place often trumps the great idea. The ideas often change multiple times before the company becomes successful. Experimenting and learning quickly from you mistakes requires a great team, and I don't think historical data can help guide that decision.

The error of confirmation: we confirm our knowledge and scorn our ignorance.
 
Mar 31, 2020 - 11:44pm

I've spoken with both Correlation (Anu P.) and GV (Tyson C.) on their quantitative strategies. GV intrigues me most as it is what I try to use. According to related models I have seen, their take has more to do with systems theory and taking individual transaction data and developing a sensitivity analysis around it. Monte Carlo is used as well in some cases to discover mean scenario in a frequency distribution. Correlation's take is proprietary according to those I've spoken with. But I have a hard time understanding their data sources for the predictive analytics that guides their decisions.

Start Discussion

Popular Content See all

Received my PWP rejection email!
+91IBby Prospective Monkey in Investment Banking - Mergers and Acquisitions">Prospect in IB-M&A
Is Evercore the next Bulge Bracket bank?
+24IBby Intern in Investment Banking - Mergers and Acquisitions">Intern in IB-M&A
I got a top IB SA offer thanks to WSO
+17IBby Prospective Monkey in Investment Banking - Mergers and Acquisitions">Prospect in IB-M&A
Is Liontree the next bulge bracket bank?
+16IBby 1st Year Analyst in Sales & Trading - Equities">Analyst 1 in S&T - Equities
Virtual Summer Interns - which banks sent you WFH gear?
+15IBby Intern in Investment Banking - Industry/Coverage">Intern in IB - Ind

Total Avg Compensation

October 2020 Private Equity

  • Principal (6) $693
  • Director/MD (14) $640
  • Vice President (53) $361
  • 3rd+ Year Associate (60) $272
  • 2nd Year Associate (112) $246
  • 1st Year Associate (241) $222
  • 3rd+ Year Analyst (23) $162
  • 2nd Year Analyst (52) $141
  • 1st Year Analyst (150) $118
  • Intern/Summer Associate (17) $66
  • Intern/Summer Analyst (167) $60

Leaderboard See all

1
LonLonMilk's picture
LonLonMilk
98.4
2
Jamoldo's picture
Jamoldo
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.8
5
redever's picture
redever
97.7
6
Addinator's picture
Addinator
97.6
7
Edifice's picture
Edifice
97.6
8
NuckFuts's picture
NuckFuts
97.5
9
frgna's picture
frgna
97.5
10
bolo up's picture
bolo up
97.5