Springboard to Funding #14 - VCs Eat Their Own Dogfood

Added Tuesday, November 13 2018

Eating your own dogfood is a particularly delightful American expression. Our nearest equivalent is perhaps taking some of your own medicine. However, in the case of Venture Capital companies, I know there are some people who will relish the mental picture of a VC and bowl.

The point here is that Artificial Intelligence is ‘hot’ these days. VCs are investing large sums of money, $12bn according to KPMG, in this area. As they should since AI will clearly be one of the major disruptors in coming years (and earlier). Even in Northern Ireland, our own Catalyst Inc research suggests that 420,000 jobs ie around 50%, will be affected by AI in the next decade.

However a picture is starting to emerge of VCs not just investing in AI, but fundamentally changing their business model to embrace it as a key part of their internal methods of operation.

Traditionally VCs are swamped with incoming companies, typically 1000 applications from which they do 5 deals. Some receive so many would be applications that they now restrict themselves to only accepting these from companies referred to them by a trusted contact or organisation.

Clearly this is very inefficient with so much time spent evaluating what will become unsuccessful proposals. However, they are haunted by the fear of missing out on good deals, so they keep scanning large numbers of applications.

But what if AI or Machine Learning could be used to help, instead of just being an exciting area in which to invest? This is where the dog food bit comes in.

I’m not aware of any VCs who are replacing themselves by technology which evaluates the applications. Instead a completely new approach is taken to research so they actively reach out to companies which the machines’ data suggests could make interesting investments. Indeed this approach can mean that a company receives a call from a VC before they are even on the market for funding.

One example is InReach Ventures which invests primarily in early-stage European technology companies. Roberto Bonanzinga, previously a partner at Balderton Capital, has gone public on the software they’ve created to analyse data on potential companies in which to invest.

This looks at things like their hires, the products they are developing and the traffic on their website. It has been used on over 100,000 companies and produced a short list of 2% of these which warrant human follow up. Interesting numbers when developing the software has cost £5m.

Oberlo, a Lithuanian start-up, was identified as an investment target because it was advertising for engineers to solve a particular type of ecommerce problem. “We did a deal before any other VC firm in Europe even knew they existed,” Mr Bonanzinga says.

Another example is San Francisco based SignalFire. It took eight years and tens of millions of dollars to build what founder Chris Farmer calls a “mini-Google”. He claims his software now tracks 8m start-ups across the world, drawing on sources from sales data, to academic publications, to financial filings. Companies that are outperforming or doing something notable are flagged up on a dashboard. 

A third example is Stockholm-based EQT Ventures, who say around 30 per cent of their investment decisions now come through Motherbrain - a data-analysis platform they have built. It monitors around 2m companies per day. 

So perhaps the world of VC is changing? None of companies above believe that jobs are at risk in the VC industry, however they suggest it will be a sea change in how they use their resources. Expect more data and computer scientists and what used to be the IT department moving to the front line of their operations.

And if you are an ambitious start-up, perhaps make the right noises and wait for the machines to tell the VCs to come to you.

AI will be very good for filtering out the noise, but the decision to invest or not will always be about human instinct at the end of the day.

For now, Rover’s food is safe.

Alan Watts is the Director of Capital Match at Catalyst Inc (formerly the NI Science Park).  For more information about Capital Match or to contact Alan, go to capitalmatch.catalyst-inc.org