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An Algorithm to Decide Who Gets a Meeting with VC’s

With so much talk of “big data” disrupting industries, can it radically change venture capital? Technology Review had a piece recently on a new VC firm using algorithms to help it screen investments:

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. The effort adds efficiency to the investment process. And for entrepreneurs, it means far faster answers: rejections come in as little time as two days.

To run its model, Correlation Ventures, which is based in San Diego and Palo Alto, California, asks startups to submit five basic planning, financial, and legal documents. It enters these into a program similar in function to credit rating software.

A top-ranked score leads to a 30-minute interview with both the startup CEO and the outside venture firm leading the investment, plus a quick legal review and background check. As a co-investor, Correlation Ventures always relies on some vetting by the primary investor.

The last time I wrote about something like this, I talked to VC’s who emphasized the importance of relationships in this process. Remember: the best entrepreneurs get to choose which VC’s they go with, and might not like being filtered by an algorithm.

What I do like about this is how data is being used to improve, rather than replace, VC expertise. If the algorithm can act as a reliable filter, that frees up time for VC’s to do even better due diligence on the companies that are under consideration.

The other thing I brought up in my previous post was that this kind of modeling could potentially be really useful in the crowdfunding space. As I wrote then:

Someone is trying to bet $1,000 on a startup that the data indicates has an extremely low chance of making it to its next funding round according to the Compass’s modeling. That investment could be prohibited or, even better, just set off an alarm that raises the requirements for completing the investment. Want to invest in a company that the data suggests is about to fail? No problem, but you have to talk to a platform provided investment officer first to ensure you understand what you’re doing.

I’d love to see crowdfunding platforms seeking out partnerships to make this happen.

Anyway, to sum up, I’m hopeful that data will [continue to] improve the ability of venture capitalists to do their jobs better. To supplement their abilities, if not replace them. As for total disruption, I doubt it.

from BostInno http://bostinno.com/2012/07/18/an-algorithm-to-decide-who-gets-a-meeting-with...