Thursday, June 27, 2013

"Moneyball" Investing Poised to Disrupt the VC Game? Google Ventures Thinks So

As the new CEO of Manatt Digital Media Ventures, I play, in part, the VC game.  I and others at Manatt actively seek deal-flow and evaluate investment opportunities with early-stage digital media and tech companies in which we can add value.

Venture investing, of course, is a subjective exercise.  One person's "absolutely-in" investment decision is another person's immediate "pass."

Or is it?

That certainly is the conventional wisdom -- i.e., that venture capital is significantly based on individual differentiated intuitive judgment "calls" and gut feelings.  In the words of Matt McIlwain, managing director of Madrona Ventures, "the intuition part is ultimately the biggest factor."

Google Ventures, however, disagrees for the most part -- and takes its "big data" approach to anything into the realm of venture capital.  In a recent New York Times article, Bill Maris, managing partner of Google Ventures said the following:

"If you can't measure and quantify it, how can you hope to start working on a solution?  We have access to the world's largest data sets you can imagine, our cloud computer infrastructure is the biggest ever.  It would be foolish to just go out and make gut investments." 

Google's "big data" analytical approach to venture capital feels awfully like the Oakland A's "Moneyball" big data analytical approach to baseball that disrupted the game of baseball back in the day --  a sport that had been steeped in the subjective gut feelings of old-school baseball scouts who judged the look and feel of baseball prospects.

So, is Google doing the same thing here?

Let's take a closer look.  First, Google Ventures itself does not rely upon big data alone.  General partner Graham Spencer concedes that he is "distrustful of any single factor in determining entrepreneurial success."  Even further, in his words, "We would make an investment in a founder we really believed in, even if all the data said we're making a mistake."

This sounds closer to the traditional model of investment, although Google Ventures' approach falls significantly onto the analytical side of the spectrum.

Let's look at that "traditional" approach.  Yes, some VCs invest purely on "gut" feels.  But, based on my experience, that is the exception, rather than the norm.  Most VCs, instead, do weigh a number of "objective" factors, including the track record of a start-up's founders, CEO.  There are real numbers here.  According to the New York Times article, blue chip VCs Kleiner Perkins and Sequoia, for example, track "how many times a start-up is mentioned on Twitter, or where it ranks in the App Store."  And, of course, any good VC looks at the trajectory of the company's "traction" in terms of adoption when that kind of data is available.

So, yes, some VCs are purely data-driven, essentially throwing out the concept of subjectivity and judgment (Ironstone, for example).  And, some are on the complete opposite end of the spectrum (although these are very few -- and generally are angels).

In other words, perhaps we're all not so different after all?

At a minimum, I absolutely believe that "big data" will play an increasingly important role in the overall VC calculus.

Generally, the more data and factors smartly considered -- objective or subjective -- the better.

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