t’s no longer sufficient in venture capital for firms to wait for companies, people and trends to come to Sand Hill Road. Seeing a startup on Demo Day at Y Combinator used to be the pipeline for scouting an early deal. But these days, YC companies are raising from angels before demo days. This is a sign of the times in the venture world. To start competing for deals, VCs have to be prospecting people, companies and trends well before events like Demo Day. And how are VCs trying to do this? Through complex data mining and pattern recognition.
In the past two years, Sand Hill Road has seen a number of changes, including the explosion of angel and seed-stage investors, the agency model that Andreessen Horowitz is building, and rise of the operator VC. The latest trend is the role of the data scientist within a firm, and how a firm’s data is being used to help VCs scout better deals and entrepreneurs and eventually create better returns for their LPs.
“The venture capital industry had previously been a closed network, where a handful of funds had access to the Googles and Facebooks of the world,” says Chris Farmer, a VC who has held investment roles at General Catalyst and Bessemer Venture Partners, who is building a new fund fundamentally based on data. He’s building the platform and plans to start raising a fund early next year that will intelligently take the massive amount of data available to investors, such as information from CrunchBase, social media, web metrics and a number of proprietary data sources to identify the best opportunities and be able to add value to companies in a scalable way.
As Farmer explains, it used to happen that deals came to VC firms based on their past deals (i.e. Google or Yahoo) and through an investor’s previous network (i.e the PayPal mafia). But entrepreneurs are no longer forced to flock to VCs for the first check, because they can now also raise the modest capital they need from angels, seed funds and accelerators. In the web and mobile world, the bar (and price tag) is also lower to build a company. There are more startups launching in the current climate than there ever have been before. Sites like …