Gadget Blog

A venture capital frm throws out intuition and uses computer models to determine investments.

Aldea Pharmaceuticals, a startup developing an emergency treatment for alcohol poisoning, seemed like an attractive investment to venture capitalist David Coats. But he didn’t rely on a hunch—he consulted the computer model he’d built.

Wenjin yang is research vice president at aldea pharmaceuticals, which got funding thanks to software suggesting that its method for speeding up alcohol metabolism was a good investment.

Two weeks and a few phone calls later, he cut the company a $1.25 million check. “A decision like that would have normally taken a minimum of three months,” says Tim Shannon, who is Aldea’s CEO and a partner with the frm that had led Aldea’s $7 million fund-raising round.

The $1.25 million was a follow-on investment from Correlation Ventures, which calls itself a “new breed of venture capital firm”—one driven by predictive analytics software built over the last six years by founder Coats and his partner Trevor Kienzle.

Correlation Ventures asks startups to submit fve basic planning, fnancial, and legal documents. It enters these into a program similar to credit rating software.

Entrepreneurs with low scores can get their rejections in as little time as two days.
High scores lead Correlation to a 30-  minute interview with both the startup CEO and the outside venture frm leading the investment, plus a quick legal review and background check.

Once it makes an investment, Correlation backs of and doesn’t take a board seat.
That policy is itself data driven: the frm’s analytics show that companies with more than two VCs on the board are less likely to be successful.

What’s not yet clear is whether this system works. Correlation Ventures has so far invested in 26 companies in diverse sectors but says it is too early to grade its success.

None of this might have been possible a decade ago. Harvard Business School professor Matthew Rhodes-Kropf, who advises

Correlation Ventures and is an investor in the fund, says the venture capital industry has only recently worked through enough business cycles to look for subtle trends.

There was also no complete, accurate, public set of venture capital data, so Cor-relation Ventures hustled for it. To build and maintain its database, it partnered with Dow Jones, scoured the Internet, signed nondisclosure agreements with more than 20 venture funds to see their internal statistics, and called hundreds of companies.

While so-called Big Data companies have attracted plenty of investors, the reputation-  driven venture capital industry itself has yet to embrace their tools. (There are exceptions, such as Google Ventures, which uses quantitative analysis to help guide decisions.)

One fnding from Coats’s research is that while top-tier frms invest in a disproportionate share of “winning” companies, the majority of successful investments are led by venture frms that don’t even crack the top 50. So it makes logical sense for Cor-relation Ventures to focus equal time and energy on many companies and co-invest with a diverse set of venture capital frms, he says.

To explain his project, Coats cites Money  ball, the book and movie about how Oakland Athletics general manager Billy Beane rejected the conventional wisdom on evaluating baseball players and built a winning franchise by letting a computer tease out variables that others overlooked. He believes the averages will work out. “We’re not claiming to have a magic crystal ball,” he says. “We’re tilting the odds a little in our favor with each investment.”