Will the quants invade Sand Hill Road? | VentureBeat http://venturebeat.com/2010/10/21/will-the-quants-invade-sand-...
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Will the quants invade Sand Hill Road? October 21, 2010 | Alex Salkever 7 Comments
Will the quants storm the clubby bastions of the venture capital world? That question has been coming up frequently of late. At the Demo 2010 conference, InLab Ventures rolled out a new venture capital program it dubbed VC3.0 that included elimination of carry fees and incentives for board members to spend time with invested startups.
Most importantly, though, the InLab Ventures platform features back-tested screening technology that InLab claims can quickly and accurately identify which startups have a greater chance of success even before initial funding occurs.
In other words, InLab says it has a mathematical and statistical model that can predict startup success. Apparently the technology is decent, as InLab general partner Greg Doyle told me that at least one major consulting firm doing research into VC markets has licensed the model for due diligence purposes.
If InLab’s magical model works and math can replace that vaunted gut judgment that to date has been a critical criteria for deciding whether to invest in a startup, then why should VCs be using their gut to pick investments at all? (a point raised by VC gadfly Paul Kedrosky). Why not let the quants, the propeller-heads that designed trading models for Wall Street and for other hard-to-value asset classes do the same for Silicon Valley?
1 of 11 10/27/10 4:54 PM Will the quants invade Sand Hill Road? | VentureBeat http://venturebeat.com/2010/10/21/will-the-quants-invade-sand-...
InLab is not the only firm challenging this conventional wisdom. We also heard recently about Quid, a Peter Thiel (surprised?) backed startup that is building out new technologies to quantify startup growth and put numbers to what previously had been an opaque market.
Quid is looking to track things like job listings, customer wins and funding valuations at first, second, and third funding rounds to give venture investors a better yardstick — and better quantitative tools — in valuing startups.
From quantitative yardstick to quant model is no great leap. In fact, Quid is an offshoot of YouNoodle.com, a quasi-community that allowed startups to tout their stuff and look for employees but also offered an intriguing and much-maligned calculator that claimed it could predict the exit or liquidity event valuation of startups.
YouNoodle presciently pegged the valuation of formerly hot social applications startup Slide at $124 million, well below paper valuation of $550 million recorded in the startup’s third round of financing. But then Google bought Slide for $182 million in August 2010, an instance where the quant model clearly beat the best brains in Silicon Valley. (Of course, YouNoodle totally whiffed on the exit valuation of TechCrunch. TechCrunch’s Michael Arrington would clearly have loved to have sold for $90 million instead of the reputed $30 million.)
Another factor to consider here is the rapid rise of a Palantir Technologies, a startup that amalgamates disparate data sources and places them in an easy-to-access visually configurable context to drive better decision making in disparate fields ranging from health care to warfare to site location of stores.
Palantir is a platform that represents the coming wave of super-duper quantification tools. Can you say a quantification tool for venture capital startups? Someone out there is probably writing the algorithm already.
No, the quants are not about to take over Sand Hill Road in a mad rush of insanely rosy IRR numbers. This will be a slow, steady process. But aside from the growing number of tools available to create quantitative models for venture success, other pressures are building for the VC biz to make big changes — most particularly, the negative return rate for the latest class of VC funds and the rapid disappearance of LP money from big pension funds and other deep pockets of capital that are likely gone for the forseeable future.
Yes, VCs add real value to companies through mentorship, access to networks and potential clients, and, increasingly, provision of non-core services such as PR, marketing, design and the like. Yes, VCs and super angels will continue to be the gatekeepers in what will always be a high-touch process. But just as Wall Street morphed from a good ‘ol boy
2 of 11 10/27/10 4:54 PM Will the quants invade Sand Hill Road? | VentureBeat http://venturebeat.com/2010/10/21/will-the-quants-invade-sand-...
network to a place where quants became the alpha dogs, Silicon Valley could well follow steps along that path and perhaps do so much faster than we expect.
Sure, relationships and judgment will always be part of VC. But the rise of the automatic VC, where a term sheet is not signed unless the quant model blesses the deal, is a real possibility in the near term.
[photo credit: João Trindade]
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Tags: VC3.0
Companies: InLab Ventures, Palantir Technologies, Quid, Slide, Younoodle
People: Greg Doyle, Peter Thiel
3 of 11 10/27/10 4:54 PM Will the quants invade Sand Hill Road? | VentureBeat http://venturebeat.com/2010/10/21/will-the-quants-invade-sand-...
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PeterA650 6 days ago
Next time someone tells you they have an algorithm that predicts success ask them to prove it by earning money with it.
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Matt 5 days ago
Aren't we at all times surrounded with examples of algorithms that make money?
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NEW Domainers Gate directory 6 days ago
now I know that BAs and VCs NEVER invest in really innovative projects but only where they can quickly make LOTS of money!
but, despite all their efforts to understand which startups can be successful, over 95% of their ventures NEVER make profits or FAIL
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Jennifer Jones 5 days ago
Everything goes in cycles. VCs adding marketing, HR and other services to their firms is what they did in the late 1990s then got rid of them after the crash of 2001. I should know as
5 of 11 10/27/10 4:54 PM Will the quants invade Sand Hill Road? | VentureBeat http://venturebeat.com/2010/10/21/will-the-quants-invade-sand-...
i was the first marketing partner for Mayfield Fund in 2000 after working for them all through the 90s as an advisor. Now i work for 5 venture firms as a marketing advisor. The bottom line is that VCs do have to add value to their portfolio today. All of this is good for the entrepreneurs. VCs must help their companies build a better business and that is what will make them stand out. That's the bottom line.
1 person liked this. Like Reply
ahsanhilal 5 days ago
There is a huge disconnect in this article between what VCs do for startups and what startups actually are. Most startups do not essentially end up exactly how they start, which is to say they change business models quite often and quite rapidly. The whole idea of being an enterpreneur and having a startup is to initialize and iterate and re-iterate, and so on and so forth, until the company comes across a viable business model. Each decision made by the startup can have a drastic affect on the actual future value that the company can possible have.
Now, come to think of this in terms of a mathematical model, and the decision analysis/ probabilistic scenarios required to run a model is so complex that you can never ever really understand the true value of the startup through models. That is why Incubators/Angels/VCs often invest in teams who they believe can make the right kind of decisions and iterate favorably when the time comes up to establish a viable and lasting company. Moreover, if these models are based on past scenarios, then there really of very little value since technology startups specially seek to find new markets and new customers, that are really not there. So considering the value of a startup based on what is here and now, is again almost next to impossible due to the true value of the startup lying in a future state of the world and not necessarily the current state.
As such, given the nature of startups and the investment methodology required, I do not think it is viable business model
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Healy Jones 5 days ago
I doubt that there are enough "numbers" at an early stage startup for hedge fund style quant
6 of 11 10/27/10 4:54 PM Will the quants invade Sand Hill Road? | VentureBeat http://venturebeat.com/2010/10/21/will-the-quants-invade-sand-...
analysis to work. When I moved from a later stage fund to an early stage VC, most of the more numerical-based tools I had used to evaluate companies became useless as there were no numbers to analyze. If a company had actually launched then there were some numbers like visits to the web site and conversion rates, but if you are talking to two grad students about their research I don't really see what numbers their idea could give you to evaluate.
PeterA650 liked this Like Reply
taser_this 5 days ago
It would be nice if the author was more specific about what stage of development of startups the quant capabilities were targeted.
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