Venture capital has traditionally an industry that revolves around relationships. VCs invest in the idea of a startup, but their belief comes from the people behind it. This largely makes sense, because investing in a startup usually also involves entering into a long-term relationship.
But backing companies based on the founder’s allure hasn’t always worked out. In fact, it often causes investors to get stuck in companies that are destined to collapse for one reason or another. And depending on warm intros or networks also limits the number of startups an investor will consider, further alienating founders who don’t share the same networks or come from non-traditional backgrounds.
An increasing number of venture firms believe the solution to cutting through the noise lies in incorporating data science into their deal sourcing process. This in itself wouldn’t be a bad idea as investors from other asset classes such as institutional investors, hedge funds and public market traders are already embracing data-driven investing, but so far the risk has been largely ignored.
Our belief is that this is one of those things that leaves you behind if you didn’t start it. Mark Sherman, Managing Partner, Telstra Ventures
A few venture firms, such as Correlation Ventures, SignalFire, and Rocketship.vc, have long taken this approach, but this number seems likely to grow.
Change is in the air
This week, Austin, Texas-based VC outlet Ensemble announced it has closed a $100 million debut fund to invest in early-stage startups using a data-driven approach that sorts and tracks companies based on the quality and depth of their entire team.
Ensemble’s co-founder and managing partner, Collin West — a Correlation Ventures alum — told australiabusinessblog.com that the company wants to support companies that have the strongest team, but that would be too hard to follow without using data science to narrow down the list.
“Using software, we can track all the people at all the startups, which is ultimately way more information than any human brain can handle, and especially any venture venture,” said West. “We are effectively sorting the industry by team quality in a very objective way, knowing which companies to focus on, and spending a lot more time on fewer companies.”