As a former engineer, I love me some data. So this week I was interested to see renowned data-driven blogger and VC Tomasz Tunguz share a great post on the limitations of data. In particular he highlights that while data can be valuable in assessing a startup’s growth trajectory, data only tells one small part of a business’s story.
I find this an interesting topic in the context of asking whether venture capital will one day be disrupted by algorithmic investing similar to how the public markets have been impacted by algorithmic trading. While venture investing is still a highly qualitative business, and no VCs have moved to a purely data-driven approach, many are exploring the idea. New firms such as SignalFire have emerged with the concept of being a more data-driven VC firm, and others like Social Capital have built tools to help standardize and analyze startup customer growth data. Particularly now, with the rise of SaaS business models, which offer many more metrics to analyze, investors are trying to use this data as much as possible to make better decisions. In the consumer space VCs will often track whatever publically available data they can get their hands on, such as web traffic, social data, app store rankings ect, to try and catch a glimpse of a rising star before other investors.
Like most professionals who want to believe their job is too difficult and nuanced to be performed by a robot, I think most VCs dismiss automation as a credible threat to their business. Although, some have been a bit more open-minded about the potential for robot VCs to emerge in the future.
Tomasz’s article illustrates how difficult it currently is to make investment decisions purely based on data. And I tend to believe that he is correct on this front, particularly in a field where success is dependent on being contrarian, thus making it very difficult for a robot to use typical prediction methods to pick successful startups. However, if the history of technology has taught us anything, it is that every profession that has been replaced by automation at one time thought it was immune from robots that could perform the job better or cheaper. Therefore my guess is that it is just a matter of time before some sort of algorithmic approach transforms at least a portion of the VC investment making decision process.
-Editor, Mike Droesch