Why We’re a Data-Driven VC
We’ve said for years that we are data-driven early-stage investors. But it only just occurred to me that we have never really explained what that means in a public forum. We’ve only talked about our unique approach amongst our team and limited partners.
Since our funds have more than doubled in size this year, it seems an appropriate time to talk more openly about what we do and why we do it.
We believe that data science and AI today create the opportunity for a new, transformational approach to early-stage investment with the potential to deliver stronger, more consistent returns, greater exit optionality, and more precise response to changes in key factors driving entrepreneurial success than ever before possible.
We are dedicated to becoming the acknowledged leader in data-driven early-stage investment.
We are in the Golden Age of data. If this is such an outstanding approach to investing, why hasn’t it been practiced more in the past? The short answer is that data about early startups has been traditionally hard to find. That is why the power of personal networks has been such a critical success factor for yesterday’s venture leaders. Now, though, we live in the golden age of data. Every action by a scientist, entrepreneur, investor, or big company can be seen or gleaned by applying the right techniques at the right place at the right time. The world bears no resemblance to what it was in the 1980s when venture first came into flower and the few startups birthed each year were all spitting distance from Hewlett Packard in Silicon Valley. We are taking advantage of the density of raw data out there across the digital landscape today.
Data propels other forms of investment, why not venture? Everything old, as the saying goes, is new again. If we were day traders, what would be critical for us? Data. If we ran a hedge fund, what would we need to drive our models? Data. Even if we were comparing mutual funds for our modest personal retirement account, what underlies our decision? Data. Data drives every area of the public market and later-stage private investment. That is taken as natural and obvious. However, heretofore, the opposite has been true of venture. Personal connections matter, but data is too sparse to be useful when companies are still in swaddling and haven’t accomplished anything yet that indicates their eventual outcome.
But is that really true anymore? We think not. We believe it is possible today to provoke an information bloom around brand new companies that lets us analyze their similarities and differences in a manner similar to other alternative asset classes. We are simply bringing the old into a new neighborhood with our data-centric approach.
Data alone can’t drive decisions, but it can make human decisions better. While we are committed to using data to help us find new companies, track their progress, get a sense of the people on the team and the culture they have created, we don’t believe that any AI can actually make early-stage venture capital decisions. Finding young companies of great value is a process, at heart, of humans evaluating other humans. What the data can do is strengthen the support for our diverse and scientific team and direct how and where they spend their time most effectively.
Does it work? Our earliest funds, where we used only the most primitive versions of our current data system, have produced dramatically strong returns, with half the companies raising successful downstream rounds, including 5 unicorns. Our current funds, which are all under 5 years old, have 20 companies with valuations over $100M out of a population of 225 investments. So, yes, we think our data-driven approach is delivering just what we hoped it would.
What next? We see an extensive untapped opportunity for the application of data to early-stage investing. The startup universe is too complex, the path to the future is too uncertain, to ever be able to know always on day one how the story will come up. But we believe we’ll be able to ascertain long-term return potential for brand new companies at a better than 50% level within the investment lifespans of our current funds.
By Managing Partner Mike Edelhart