EARLIER THAN EARLY STAGE
If Target can figure out a teen girl was pregnant before her father did, venture firms should be able to identify founders before they start companies. As with Target, all it takes is the right data.
That’s where venture capital — ever evolving — is headed. As Mark Suster pointed out last week, the VC landscape has become increasingly bifurcated. Seed funds are springing up everywhere, representing 67% of all new funds created, and large funds have gotten even larger. For the early stage investors, this means increased competition and frothy valuations. By the time a founder sets out to raise a seed round, the startup’s valuation might be $10 million.
One way to get around that is to invest even earlier. Invest before the company is a company. Before the founder even knows they’re a founder. Bloomberg Beta, the venture investment arm of Bloomberg LP, has been doing this for a year now.
After an unsuccessful attempt to build a database of “future founders” on its own, the firm teamed up with Mattermark, the deal intelligence company founded by Danielle Morrill. The results could have ramifications for the way investment decisions, typically driven by gut instinct and intuition, are made.
Mattermark identified the most likely career paths of successful founders, creating a pool of 1.5 million people who were connected by one to two degrees of separation to tech startups, but were not founders yet. By analyzing the people that started companies over nine months, Mattermark mapped out the strongest predictors of starting a company: A person’s education, which previous companies they’ve worked for and how senior they were, their geography and their age. The goal was to find things that didn’t fit the standard path to entrepreneurship. As Morrill pointed out, “Anything that looks like a pattern, people will already find it.”
The resulting mix of people were older but less senior than you’d expect. Almost 40% of those in the dataset were over 40 years old. Almost half of the people in the data set had worked for a VC-backed company, but two thirds were not in senior leadership positions. Management consultants were twice as likely to start companies. Bloomberg Beta narrowed the list to 350 potential founders, and invited them to parties in New York and San Francisco.
Cold-emailing people based on data could feel like a creepy invasion of privacy, like Target’s maternity ads. Hi, our algorithm knows your career dreams! Indeed, some people thought it was a scam. But for the self-selecting group of around 75 people that turned up at each party, it was validating.
“People would say things like, ‘I thought about becoming a founder but I had never even told anyone,’” Morrill says. “When someone believes in you before anyone else – that’s what is really cool here. … You can actually reinforce a dream they held very closely but never considered seriously.” Morrill admitted that telling people they were in the study probably changes the results, as well.
Bloomberg Beta head Roy Bahat was pleased by the diversity of the group. “The data doesn’t discriminate,” he says. “A lot of the people, this was the first time they ever got tapped on the shoulder for something like this.”
Whether any of Bloomberg Beta’s potential founders have actually founded a company yet is another story. (It’s only been a few months; Bahat says “a bunch” are in the process.) Likewise, the project has not resulted in any deals for Bloomberg Beta. (“It was expected to be a long term process of getting to know people, so even if we fund zero people for the next two years, that’s fine by me,” he says.) But using data creatively to get a leg up on deal flow will only become more common. Mattermark re-ran a blind version of its study and found its model has a 25x better chance of predicting a founder.
This is one way to boost venture investing with data. Another way? Add a robot to your board of directors, like Deep Knowledge Ventures, a firm in Hong Kong. The firm’s robot board member uses machine learning to predict the best life sciences deals, taking historical data sets to reveal trends that aren’t so obvious to human VC investors. As senior partner Dmitry Kaminskiy explained to Betabeat, the robot takes emotion out of the process:
“Humans are emotional and subjective. They can make mistakes, but unlike the machines they can make brilliant intuitive decisions. Machines like VITAL use only logic. The intuition of the human investors together with machine’s logic with give a perfect collaborative team. The risk of the mistake will be minimized.”
Sure, it’s novel. But why not? “Whenever people are skeptical that you can use data to do something that previously only people had done, that makes us want to try it,” Bahat says. “When Bloomberg rolled out its first product, people were saying, ‘No, human beings have to be the ones to price bonds.’ Turns out a computer can do some of those things better.”
Sidenote: Mattermark actually raised new funding last month, and Morrill’s blog post about it is worth a read for its dissection of fixed funding rounds — seed, Series A, B and so on — and why they don’t seem to matter anymore. This was a hot topic of discussion at a Brainstorm Tech breakfast last month, where investors were split. Does a continuous IV drip of venture funding, regardless of “series,” make any sense? Most investors, and a few of the founders in the room, liked the forcing function of hitting certain milestones before raising new funds.
Endnote: Dan returns to Term Sheet next week and I’ll return to reporting on startups and tech companies. Thanks for all your feedback these past two weeks and enjoy the weekend!
THE BIG DEAL
• Kabam Inc., a San Francisco-based mobile gaming company, has raised a $120 million investment from Alibaba, valuing the company at $1 billion. www.kabam.com/
VENTURE CAPITAL DEALS
• Lazarus Effect, a Campbell, Calif.-based medical device company focused on the development of novel interventional devices to facilitate removal of blood clots, raised $5 million in new financing. www.lazarus-effect.com/
• ViralGains, a Boston-based video marketing startup, raised $2.3 million in venture funding led by Hub Angels, with participation from Dave McClure, Pallasite Ventures, LaunchCapital and angel investors including the rapper Nas. The round has room to go up to $3.3 million. www.viralgains.com/
• Skeleton Technologies, a Bautzen, Germany-based manufacturer of ultracapacitor technology for energy efficiency, has raised €3.9 million ($5.4 million) in funding led by UP Invest AS, an Estonian venture capital firm. skeletontech.com/
• Efficient Drivetrains, Inc., a San Jose, Calif.-based developer of drivetrains, raised $3.5 million in Series A funding led by Jinyuan Development Company with participation from Silicon Valley China Venture Partners and Shanghai Gui Guo Assets Management Partnership. www.efficientdrivetrains.com
• Stripe, a mobile payments company based in San Francisco, has invested $3 million into Stellar, an open source project currency exchange network. www.stellar.org/
• Gen9, a Cambridge, Mass.-based synthetic biology company, has raised $25 million in new funding, according to an SEC filing. www.gen9bio.com/
• Settle, a Ukraine-based mobile payment service for restaurant-goers, has raised $1.5 million in funding from Life.SREDA, a Moscow-based venture fund. hellosettle.com/
• Resy, a New York-based restaurant reservations app has raised $2 million in seed funding led by Vayner/RSE and Lerer Ventures, with participation from Panarea Capital, A-Grade Holdings, Slow Ventures and Ken Austin. resy.com/
Wantable, Inc., a Milwaukee, Wis.-based online discovery service for beauty and apparel, has raised $1.5 million in Series A funding from undisclosed investors. www.wantable.com/
• Bandar Foods, a San Francisco-based maker of Indian food condiments, has raised an undisclosed amount of funding led by August Capital Partners, alongside Karl Ulrich. www.bandarfoods.com/
• KnowledgeVision Systems, a Lincoln, Mass.-based provider of multimedia presentation software, has raised up to $1.2 million in Series A-2 Preferred stock. www.knowledgevision.com/
• Vakast, a Newport beach, Calif.-based online vacation rental booking service, raised $1.3 million in seed funding from Chinh Chu, Ken Pansuria, and Nicky Nguyen. www.vakast.com
• Eye Networks, Inc., an Austin, Texas-based security and operations video management system provider, has raised an undisclosed amount of Series B funding from MSD Capital, L.P., the investment firm for the Michael Dell family, as well as Austin Ventures Enrique Salem, former CEO of Symantec. www.eagleeyenetworks.com
PRIVATE EQUITY DEALS
• Nautic Partners acquired Custom Window Systems, Inc., a Ocala, Florida-based designer and manufacturer of impact resistant and non-impact windows, doors, and porch enclosures, for an undisclosed amount. www.cws.cc/
• Adcole Corporation, a Marlborough, Mass.-based maker of cylindrical coordinate measuring machines, has agreed to sell to Artemis Capital Partners for an undisclosed amount. www.adcole.com/
• The WellMark Company, an Oklahoma City-based flow control company serving the oil, gas and petrochemical industry, has sold to Dover Corp for an undisclosed amount. WellMark was owned by Platte River Equity. www.wellmarkco.com/
• Banker Steel Co., a Lynchburg, Va.-based structural steel fabrication business, has agreed to sell to atlas Holdings and Bridge Fabrication Holdings LLC, a company backed by Turnspire Capital Partners LLC. www.bankersteel.com
• The Wright Group Services, a Denver-based provider of employee benefits, property and casualty insurance and retirement services, has sold to AssuredPartners, a GTCR-backed insurance brokerage investor based in Lake Mary, Flor. www.twgservices.com/
• Cheminova, the Research Triangle Park, N.C.-based crop protection unit of Auriga Industries, has been put up for sale, with interest from Bain, CVC, EQT, and Adama Agricultural Solutions, according to Reuters. www.cheminova.com/
• Diamond Mind, a Potomac, Md.-based provider of payment services for schools, has agreed to an investment of undisclosed size from Serent Capital. www.diamondmindinc.com
• CardCash.com, a marketplace for secondary gift cards, acquired the assets of Plastic Jungle, a San Mateo, Calif.-based startup. CardCash.com is backed by Guggenheim Partners. Plastic Jungle raised at least $23.4 million in venture funding from Shasta Ventures, Jafco Ventures, First Round Capital, Bay Partners, Redpoint Ventures, Harrison Metal, Western Technology Investment and Citi Ventures. www.plasticjungle.com/
• Mobileye NV, an Israeli accident avoidance software company, has priced its IPO at $25 per share, the company said, valuing it $5.31 billion. Mobileye’s investors include Goldman Sachs (17.5% pre-IPO stake), Fidelity Investments (7.8%), Enterprise Holdings (7.1%), and BlackRock (5.7%). www.mobileye.com
• SpotXchange, a Westminster, Colo.-based ad-tech startup, has sold a 65% stake to RTL Group, a European media company, for $144 million. SpotXchange has raised $12 million in venture funding from investors including HIG Capital. www.spotxchange.com/
• 3i Group has put portfolio company Agent Provocateur, a UK-based lingerie retailer, for sale, seeking to fetch around GPB 200 million ($337.5 million), according to the Financial Times. www.agentprovocateur.com/
• Mitro, a New York-based password security startup, has sold to Twitter. Mitro raised $1.2 million from Google Ventures and Matrix Partners. labs.mitro.co/
FIRMS & FUNDS
• Venrock, a New York-based venture capital firm, has raised $450 million for its seventh healthcare and technology-focused fund. www.venrock.com/
• Lexington Partners will acquire $1.5 billion in capital commitments to a fund managed by Metalmark Capital from Citigroup. www.metalmarkcapital.com/
• American Securities LLC will seek $4 billion of for its next private equity fund, a jump from its prior fund, a $3.6 billion pool raised in 2012, Bloomberg Businessweek reported. www.american-securities.com/
• Iliad, the French telecom company, has offered $15 billion in cash for 56.6% of T-Mobile US, at $33.0 per share. T-Mobile had previously agreed to sell to Sprint for $32 billion. Read more at Fortune.com.
MOVING IN, UP, ON & OUT
• Peter Garvey and Jonathan Cosgrave have joined Carlyle Group, based in Ireland. Garvey was previously executive director at Goldman Sachs Asset Management, focused on secondaries and co-investmentsin London. Cosgrave previously was a principal at Warburg Pincus, in London. The pair will act as directs of Carlyle Cardinal Ireland Fund, a vehicle raised alongside Dublin-based firm, Cardinal Capital Group. www.carlyle.com/