Moneyball in later stage venture !?

Sequoia was one of the earliest funds to launch a scout program. Since then many funds did the same.

The idea of a scout program is simple – pick a group of relevant scouts – typically founders and angel investors, and give them ability to write $25K – $50K checks.

While the investment team at Sequoia can’t spend time writing small checks, they can get dozens of scouts to do it on their behalf.

In addition to the scout programs, later stage firms are active investors in early stage funds. Either a single partner or a fund can write a small check into an earlier stage fund.

On the surface both ideas of scouts and investments in early stage funds seem simple – the goal of them is to generate deal flow.

But there is something likely much deeper going on.

I believe we are experiencing the onset of Money ball in the later stage venture. Let me explain.

What IF Series B fund could get perfect information about every single startup they SHOULD be tracking starting with the Seed stage ?

By perfect information I mean literally month-over-month (MoM) metrics on the growth of each of these startups.

If you could do that, then you could literally build a Money Ball-like model that would track startups, detect when they break out within certain parameters, and then flag them.

Contrast this model with the old model of analysts and associates mapping out markets and reaching out to companies. The old model is not comprehensive and is not inefficient.

Conversely, IF you could get all the information, tracking and ranking becomes automated.

So where would later stage firms get this information about the Seed companies ? Precisely from scouts and downstream funds. Each of these programs comes with information rights asks – a special clause to get regular access to the company’s growth data.

My hypothesis is that increasing number of later stage firms aren’t just doing these programs for sourcing, they are doing it to get FULL information on the market.

Like with everything else around us, in baseball or in Venture capital, the abundance of data changes how the game is played.

So what does this mean for VC future ?

It means that we will be seeing more and more later stager firms hiring Data Science teams and building increasingly sophisticated sourcing models. In a few years, the firms that won’t have this infrastructure in place will be at a huge disadvantage.

But the growth data won’t be the only thing tracked.

The firms will be tracking founders, employees, customers, and many other aspects of the startup in their databases.

The increase in data tracked, will in term will lead to more and more algorithmic selection at the later stage – after all if you have COMPLETE information about a company, then algorithm would be better at picking vs. a person.

While it is hard to imaging AI doing venture selection (although a few firms already do exactly that), it is likely that AI will play an increasingly important role over the coming decades in the later stage firms.

What about pre-seed and seed ? The problem there is much harder, as there are a lot more startups, a lot more noise, and much harder to capture the information completely.

So the early stage Venture game will likely remain the same for now.

Trends

Alex Iskold View All →

Engineer, Immigrant. Vegan. 3x Founder, Managing Partner @2048vc. Previously ran @techstars in NYC. I write #startuphacks: http://alexiskold.net .

4 Comments Leave a comment

  1. Thought provoking!

    I am stuck on how being on the cap table translates to perfect information about the business. Maybe I’m in the dark about the level of reporting that startups are able to deliver at Series A stage? I feel like even public companies with duties to disclose and lots of compliance resources have a hard time wrapping their arms around everything and everybody in the business each month.

    I believe this is easier in CPG where there are fewer variables that matter, and that is where Circle Up has taken a very interesting moneyball-esque approach. This podcast has excellent details: http://investorfieldguide.com/caldbeck/

    Liked by 1 person

    • Hey Pavel,
      The information may not be perfect, but they will be able to increasingly refine the data. If you actually have information rights you should be getting monthly updates and those typically contain monthly growth data.

      Like

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