Can software replace VCs?July 1, 2011: 9:57 AM ET
Taking the Moneyball approach to venture capital.
By Lisa Suennen, contributor
Can I be replaced by a piece of software?
Apparently there is a new data analysis product called Quid that is able to detect what sectors in a given industry are ripe for innovation, and direct venture capitalists toward the best opportunities. Since that is a key function of what me and my colleagues do, it is a relief to think that I can outsource it to someone (something?) who won't bring their personal issues to the office or drink the last of the coffee without replacing the pot.
According to Venture Capital Journal, you can visualize Quid as follows:
But imagine plugging data into a computer, such as hiring trends and past rounds of funding for thousands of companies in a sector, and then having software that crunches the numbers and predicts what areas are untapped by startups and ripe for investment opportunities. That way, when a gung-ho entrepreneur walks in a firm's door with a startup idea that goes after the market sector predicted by the algorithm, a VC knows whether to listen to the pitch, or play on the iPad while the entrepreneur talks.
Guess I won't have to expend all that extra energy paying attention to at least half of those who visit my office. iPad, here I come.
Quid was developed by Sean Gourley, who originally invented the technology to predict insurgency in war-prone nations. Gourley is reported to "have used public information culled from cell phones, texting and attack data from media reports, nonprofit organizations and the United Nations to look for signatures of insurgency. He ran his statistics through a computer program and discovered universal patterns of war. The characteristics looked the same across Afghanistan, Sri Lanka, Columbia, Rwanda and Peru."
I like the war metaphor, as it is perfect for the male-dominated business of venture capital. What better than a war-detection machine to identify the killer app to destroy the competition? Venture capital in a nutshell (artillery shell?).
So applying that warrior spirit to data, Quid amasses company-specific "key words, patents and press mentions to create a graph that shows how the companies are connected. Each dot on the graph represents a company." The trick is to find the eye of the needle—the spots on the graph where there are breaks in the ranks, leading an investor to the ideal marketplace in which to do battle.
I have a vision of sitting back on my perch like Dr. Evil, eating bon bons and petting a Chihuahua while my squadrons of data bots root out insurgent companies laying in wait to explode onto the market with a bang. Awesome.
The idea of relying on software where observation and intuition traditionally rule is an interesting concept associated with some controversy. Certainly it has been proven time and again that the human capacity for analysis leaves a lot to be desired. It is too difficult for most people (even bad-ass warrior types) to separate their biases and personal filters from data such that they can see it clearly. Many industries, even those that have historically been known as ones where instinct is key to success, have learned the hard way that information wins out in a battle against gut feel. The Oakland A's and Boston Red Sox have made a mission out of this idea, relying on so-called Sabermetrics, instead of cigar-chomping scouts, to craft the ideal baseball team.
On the other hand, there is something to be said for experience and instinct. While data can lead you to patterns that would be obvious if you could remove your self-colored glasses, it cannot replace that sixth sense that some people have that lets them see data in a way no one else could or would interpret it. Sabermetrics has its advantages, but the A's haven't won the World Series in a really long time.
So wither Quid? The good news is that it will not demand carried interest in exchange for its insight. The bad news is that it will probably not be able to free my colleagues or me entirely from the drudgery of working for a living. I can hear the disappointment as those forced to interact with VCs realize that they are probably not going to be completely replaced by software after all. But having done this for a while, I have no doubt that the spoils of war in venture investing are won through a combination of data analysis, intuition and good old-fashioned luck.
Alas, back to work.
Lisa Suennen is a co-founder and Managing Member of Psilos Group, a healthcare-focused venture capital firm with over $577 million under management.