I have been intrigued for years that a huge financial sector has continued to rely on intuition while industry after industry has discovered that using analytics give you a better chance to succeed. Moreover, it is a sector that brags about the fact that it fails 99 percent of the time yet fails to embrace methods to improve those odds. I am talking about venture investing, the venture capital industry.
Moneyball and the venture community
For those who have seen the movie or read the book Moneyball, which I have written about multiple times, one of the most poignant scenes is the Oakland A’s smoke filled draft room where scouts with years of experience determine the best prospects to select based on their gut of what makes a great baseball player. When I first read about it, the parallels to how game company executives select what games to green light were incredibly apparent and I was certain you would see a similar transformation of the game industry. We did, with analytics driven social game companies putting many old school game companies out of business.
The venture capital space has uncanny parallels to the pre-Moneyball baseball industry. You have investors with years of experience sitting in Red Bull filled rooms deciding which investments to pursue based on intuition. The claim that they are investing in the management team is another way of saying they are selecting those leaders who feel like rock stars; who they think look like a star. They are basing it on measurable that they feel are important but have not proven empirically are the keys to success (just as baseball executives undervalued walks and over-valued defense).
Correlation Ventures, the Billy Beane of VC
A recent article in Forbes, “Venture By Numbers,” shows this situation is changing. Correlation Ventures started in 2011 with the philosophy to bring a quant-based approach to venture investing. Their mission was to stockpile 25 years of data on every venture deal consummated, evaluate this data with proprietary algorithms and then pick investments via pattern-matching software. Continue Reading…