Venture capitalists can no longer rely on outdated statistics and gut feelings.
As we reported, a Moneyball-style revolution is taking place in Silicon Valley, and other tech hubs around the world. Prestigious venture capital firms are investing in data science teams and quantitative tools to track the private markets. The younger firms are going one step further by creating an entire investment thesis around data.
“Algorithms will be the heart and soul of due diligence — it’s not just a sanity-check mechanism,” said Matt Oguz, the managing partner of new investment firm Palo Alto Venture Science. “It’s the only way to cut through human bias.”
A group of three friends, self-proclaimed “ex-Hedge Fund quant nerds,” have been tracking this shift for years. In the height of the recession, they decided to quit their steady corporate jobs to launch Bright Sun Group. The goal is to help investors find the “diamond in the rough” investment, and not just fight for the attention of the trendiest startups. (See herd mentality.”)
Data-driven investing is a hotly disputed topic in Silicon Valley. Venture capitalists like David Hornik believe that algorithms are a non-starter. “If you are a good venture investor, you are better off applying your own judgment than you are collecting data on how everyone else invests and performs,” Hornik told me.
Cofounder Stephen Piron is aware of the discord, but believes it’s only a matter of time before investors embrace the data. “There has been a sea change [and] things are shifting very quickly,” he explained.
We meet at a coffee shop in London to discuss how to track private companies. Piron, who formerly worked on the analytics team at Man Investments and ITG Canada, has been heads down building the technology for a number of years. ”We’re living in a world where even the discretionary funds have some kind of electronic component,” said Piron.
Piron doesn’t believe that Bright Sun’s technology will replace human investors entirely. But it can be used in concert with traditional methods, like in-person interviews and due diligence. The tools are designed to help investors source deals, and track dozens of companies at any given time.
The company is already working with a handful of venture firms, including OMERS Ventures, the investment arm of one of Canada’s largest pension funds. “They feel they need to be more data-driven to compete with the guys in California,” Piron explained.
Piron pulls up a demo to demonstrate how it’s done, a few weeks prior to the company launch at the Wired Money conference in London. Perform a simple search for a private tech company on Bright Sun, and browse a company profile. Investors can immediately gain access to relevant information, including the amount of funding that the startup has raised to date, its burn rate (typically a best guess), approximately how much money is in the bank, a prediction of whether the startup is currently looking for funding, backgrounds of the founders, and more.
Bright Sun is plugged into a variety of data sources, including CapitalIQ, CrunchBase, AngelList, Appstores, Alexa rankings, company head counts on LinkedIn, press articles, and sites that the government use to track private companies, like CompanyHouse.
The system will alert investors if a drastic change has occurred, so they can move quickly. For instance, it might be worth knowing if a portion of the team is suddenly fired or laid off, or a startup receives 100,000 downloads of its new app in the space of a week.
Piron has yet to determine which of the signals are strongest, but hopes to get a better gauge on the key indicators of startup success over time. I suggest that he take a look at a Bay Area research project called “Startup Genome.” By analyzing data-sources, the researchers found that investors have a better shot at making a return if they bet on larger teams, and companies that have shifted product focus more than once — but not more than three times. Read more on the results here.
Bright Sun’s technology has proven most useful to smaller venture firms or non-U.S. based funds. To market the beta product, Piron and his cofounders are relying on their personal connections from the finance world.
In future, they may come up against strong competition from MatterMark, an Andreessen Horowitz backed startup that operates under the tagline “big data meets venture capital” (hot tip: if you’re interested in startups, it’s worth subscribing to the the free newsletter). Likewise, AngelList helps investors curate opportunities, and 500 Startups’ Paul Singh is working on a startups investing and insights toolset dubbed Dashboard.io.
Bright Sun is a privately-funded effort to date, but Piron and team are considering raising a small round of investment so they can expand the product and team.
Filed under: Enterprise
Tags: big data
, herd mentality in VC
, Venture Capital
, venture capitalists