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The Future of Work
Aldea Pharmaceuticals, a startup devel-
oping an emergency treatment for
alcohol poisoning, seemed like an attrac-
tive investment to venture capitalist David
Coats. But he didn’t rely on a hunch—he
consulted the computer model he’d built.
Two weeks and a few phone calls later,
he cut the company a $1.25 million check.
“A decision like that would have normally
taken a minimum of three months,” says
Tim Shannon, who is Aldea’s CEO and a
partner with the firm that had led Aldea’s
$7 million fund-raising round.
The $1.25 million was a follow-on invest-
ment from Correlation Ventures, which
calls itself a “new breed of venture capi-
tal firm”—one driven by predictive ana-
lytics software built over the last six years
by founder Coats and his partner Trevor
Correlation Ventures asks startups to
submit five basic planning, financial, and
legal documents. It enters these into a pro-
gram similar to credit rating software.
Entrepreneurs with low scores can get
their rejections in as little time as two days.
High scores lead Correlation to a 30-minute
interview with both the startup CEO and
the outside venture firm leading the invest-
ment, plus a quick legal review and back-
Once it makes an investment, Correla-
tion backs off and doesn’t take a board seat.
That policy is itself data driven: the firm’s
analytics show that companies with more
than two VCs on the board are less likely
to be successful.
What’s not yet clear is whether this sys-
tem works. Correlation Ventures has so far
invested in 26 companies in diverse sectors
but says it is too early to grade its success.
None of this might have been possible a
decade ago. Harvard Business School pro-
fessor Matthew Rhodes-Kropf, who advises
Correlation Ventures and is an investor in
the fund, says the venture capital industry
has only recently worked through enough
business cycles to look for subtle trends.
There was also no complete, accurate,
public set of venture capital data, so Cor-
relation Ventures hustled for it. To build
and maintain its database, it partnered with
Dow Jones, scoured the Internet, signed
nondisclosure agreements with more than
20 venture funds to see their internal sta-
tistics, and called hundreds of companies.
While so-called Big Data companies
have attracted plenty of investors, the
reputation-driven venture capital industry
itself has yet to embrace their tools. (There
are exceptions, such as Google Ventures,
which uses quantitative analysis to help
One finding from Coats’s research is that
while top-tier firms invest in a dispropor-
tionate share of “winning” companies, the
majority of successful investments are led
by venture firms that don’t even crack the
top 50. So it makes logical sense for Cor-
relation Ventures to focus equal time and
energy on many companies and co-invest
with a diverse set of venture capital firms,
To explain his project, Coats cites
Moneyball, the book and movie about how
Oakland Athletics general manager Billy
Beane rejected the conventional wisdom on
evaluating baseball players and built a win-
ning franchise by letting a computer tease
out variables that others overlooked. He
believes the averages will work out. “We’re
not claiming to have a magic crystal ball,”
he says. “ We’re tilting the odds a little in our
favor with each investment.” n
An Algorithm to Pick
a venture capital firm throws out intuition and uses computer
models to determine investments.
By JeSSICA leBeR
More on the
Future of Work
Read seven more stories at
Can Creativity Be
computer algorithms have
started to write news, compose
music, and pick hit songs.
the next Wave
of Factory Robots
Robots that work
alongside humans could
Kiva’s Robots do
the Heavy lifting
Fast pace, low margins
have online retailers looking
to automation to keep up.
Wenjin yang is research vice president at aldea
pharmaceuticals, which got funding thanks to
software suggesting that its method for speeding
up alcohol metabolism was a good investment.
8/7/12 3:58 PM
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