The venture capital game is not all IPOs and sunshine, statistically or emotionally, as our friend Fred Wilson recently explained. The majority of VC funds would not beat an indexed market portfolio, and according to a New York Times article this past weekend, big data is now putting VCs in the same existential pickle as those they claim to disrupt.
Google Ventures — the 10th-most successful VC firm of 2012, based on the number of private exits financed — uses big data to find patterns, analyze success rates and drive decisions. This, apparently, is at odds with the two-martini lunches and back-slapping intuition of, say, a Ron Conway.
Thomas Thurston of Growth Science tells The Times that “Some people fear a world where algorithms can do this…’If an algorithm can do better at picking than me, will that put me out of a job?'”
Welcome to the world of disruption, VCs! We’re sure the journalists, factory workers and teachers displaced by ‘moon shots’ will embrace you with open arms.
Google insists that the ‘science of the deal’ does not establish any black-and-white rules, but only helpful benchmarks and indicators of success — managing partner Bill Maris insists that if opportunity came knocking, they wouldn’t miss out on the next college-dropout tech mogul.
So what contrarian lessons can big data teach us?
A) A start-up’s founding team has only 12% predictive value for success
B) Only 20% of analysis is based on the company itself, and the rest is on the market its entering
C) It’s better to start a company in a good year and end with mediocre results than start a company in a mediocre year and end with good results — the former shows a better sense of market timing.