The secret algorithm one VC firm uses to pick entrepreneurs

63 Comments

Credit: Sony Pictures Digital, Inc.

Statistics and big data took over baseball scouting some years ago, with the rise of Moneyball. More recently, those tactics have spread to the political world, with presidential candidates using big data to maximize their vote, and Nate Silver using algorithms to correctly predict outcomes in all 50 states.

Now we’re doing it, too. Instead of relying on the gut instincts, punditry and armchair quarterbacking that VCs are notorious for, our firm is pattern replicating to decide which entrepreneurs to fund.

Here are the components of a secret algorithm I developed that we use to score and rate potential investments with entrepreneurs.

1. We look at (and score) what you read

What content has been uploaded into your cerebral cortex via apps, websites, PDFs, books and other miscellaneous educational all matter to your eventual success outcome.What books have your founder team read and what have you posted in your social media feeds? If they’ve spent time reading Technology Ventures, Gear Up, Four Steps to an Epiphany and tweeting knowledge nuggets – quoting chapter and verse – that could lift their entrepreneurial success score via our proprietary algorithm. Posting to Twitter your snowboarding pictures from Lake Tahoe might say something else.

Chris Sacca has been quoted as saying he goes right to Twitter and reads the last 50 tweets before he even considers taking a meeting. In our new VC algorithm, you can scrape and evaluate multiple social media streams for what founders have read, uploaded, integrated, and executed. Quality is great, but we are really looking for the quantity of entrepreneurial material comprehended.

2. Age of cellphone number and time of first daily phone call

The age of an entrepreneur’s cellphone number reveals so much: their relative stability, how old they are, whether their number was a jettisoned friends-and-family program or an imported landline number. We get the age of cellphone number through a process called cellphone underwriting, which reveals all of the above and more, and which is perfectly legal but secretive enough that I won’t reveal how it works. At the end of the day, we’re looking for entrepreneurs who are young, stable, middle class, and who have the support of family and friends networks — and the age of the cellphone number tells us all those things.

So, I take the approximate age of a founder’s cellphone number and then during due diligence, I get a stat: The average time of their first phone call in the day. If you and your entrepreneur team are making and taking calls at 6:30 a.m PT, you’re probably talking with people back East and there’s a 50-50 shot you’re making north of a million in revenues.

So revealing data like this, that we used to W.A.G. (wild ass guess), we can now find out by using our firm’s make-shift cellphone underwriting API, which hooks in with Verizon and AT&T – the two main carriers of the iPhone. (And by “makeshift API,” I mean have our associate do it manually.)

3. How Othman Laraki are they?

Othman Laraki is a tale that is told inside of the VC community. He sold something big to Twitter. He has degrees from both MIT and Stanford, but also has a ton of street smarts. As an example of his street smarts, he squatted in 2,000 square feet of office space at Stanford’s Engineering building. That duality of street smarts coupled with academic smarts is a critical component of my firm’s algorithm.

A fund that is now underwater used to troll for deals in the basement of the CS lab at Stanford without taking into consideration the street-smart component. They failed to realize that you can’t just replicate what other people already did super long ago — you have to innovate a quarter step. That team of VCs is now begging for LP money in the pay-for-play conference known as “Venture Alpha.” (Spoiler alert: They will not make it to their next fund.)

We don’t talk about the data inputs for this street-smart metric but as a hint: Augie Garrido once said, “Question authority but follow the rules.” We are looking for entrepreneurs who question the status quo and tip-toe the fine line, but still firmly understand rules and existing hierarchies.

4. Stanford University founder team formula

If you reverse engineer the biggest exits, you can see that the whales in every fund’s portfolio had two or three founders from Stanford, with an odd-ball founder from some other school tossed into the mix. YouNoodle released public data on this observation. Our algorithm does not say “just Stanford.” It does say two or three founders from a good school with at least one in the litter that is not exactly like the others – think Cal, NYU, CMU, Illinois or MIT in a pinch.

Recently, Mark Suster, blogged about the phenomenon of overly homogenous founder teams. He argues that if teams are too similar where “all founders even have the same phone,” the founders will likely follow versus lead.

Remmy Oxley is the pseudonym of a Silicon Valley VC. Follow him on Twitter @RemmyOxley. 

63 Comments

Nick Farina

This is one of the worst articles i have ever read, and I hope dearly it’s a joke. Utter nonsense. Funny, actually. I feel really bad for any VC who lives this advice. And if I pitched you… my bad.

Zain ul abedin Shah

We had A Great Platform For the Entrepreneur In University Nust Islammabad
the entrepreneur Selected By there Ideas There Presentation Skill And Lot Other .

jmcoa

This is all total nonsense. The average age of entrepreneurs is middle aged. Many successful entrepreneurs are over 45 when they started on their own.
Cell phone numbers come an go now for a variety of reasons. People leaving Blackberry for Apple, etc. If you change jobs a few times, you might keep your 212 cell number before your contract ends. then change to a 408 number, etc.
What people read about entrepreneurship is also silly since 80-95% of the books are out of date or hokum the day they come out. I’d rather an entrepreneur or partner have read classics in fiction and non fiction as well as just generally keeping abreast of the field they are in. The key is a great liberal arts education on its own or while in a science or design program as electives and later as an interest. Here is a great web site that shows how you can be incredibly innovative and read some pretty incredible no business works: http://www.designersandbooks.com/
As far as the top schools mentioned here, yes, all great and a sort of “filter” before you look at someone. But, there are plenty of other schools out there where a partnership can arise. Ohio State, Maryland, UMBC, etc.
What is most important is not the past schools but what might seed the *future* entrepreneur partnership. The consensus is that DESIGN is the model moving forward (and I am not talking about engineering design or, the Design MBAs out there – which has little to do with actual design innovation or creativity). Look for one or more partners from design programs (Graphic Design, Industrial Design) found in schools like RISD, Art Center, CCA, MICA, VCU, CMU (yes, they have that too), Yale (MFA GD only), University of the Arts London, and other lesser known but top design programs found around the U.S., in NYC, the UK (where did Ive go?), and the Netherlands.
Caution: focus should be on Design. Often fine art programs sell themselves as having graduates prepared for design jobs when it was only a BA or BFA in fine art. Look for programs that offer a BFA or MFA with a portfolio admittance and/or review and rigorous sequence of design courses in the major. Resulting in a BFA or MFA in graphic design, web/interactive design, or industrial design.
Caution also with programs from marketing, advertising, journalism that sell themselves as design. They are not nearly as rigorous as something like a design BFA or MFA from RISD, CMU, VCU, etc.

jmcoa

This is all total nonsense. The average age of entrepreneurs is middle aged. Many successful entrepreneurs are over 45 when they started on their own.
Cell phone numbers come an go now for a variety of reasons. People leaving Blackberry for Apple, etc. If you change jobs a few times, you might keep your 212 cell number before your contract ends. then change to a 408 number, etc.
What people read about entrepreneurship is also silly since 80-95% of the books are out of date or hokum the day they come out. I’d rather an entrepreneur or partner have read classics in fiction and non fiction as well as just generally keeping abreast of the field they are in. The key is a great liberal arts education on its own or while in a science or design program as electives and later as an interest. Here is a great web site that shows how you can be incredibly innovative and read some pretty incredible no business works: http://www.designersandbooks.com/
As far as the top schools mentioned here, yes, all great and a sort of “filter” before you look at someone. But, there are plenty of other schools out there where a partnership can arise. Ohio State, Maryland, UMBC, etc.
What is most important is not the past schools but what might seed the *future* entrepreneur partnership. The consensus is that DESIGN is the model moving forward (and I am not talking about engineering design or, the Design MBAs out there – which has little to do with actual design innovation or creativity). Look for one or more partners from design programs (Graphic Design, Industrial Design) found in schools like RISD, Art Center, CCA, MICA, VCU, CMU (yes, they have that too), Yale (MFA GD only), University of the Arts London, and other lesser known but top design programs found around the U.S., in NYC, the UK (where did Ive go?), and the Netherlands.
Caution: focus should be on Design. Often fine art programs sell themselves as having graduates prepared for design jobs when it was only a BA or BFA in fine art. Look for programs that offer a BFA or MFA with a portfolio admittance and/or review and rigorous sequence of design courses in the major. Resulting in a BFA or MFA in graphic design, web/interactive design, or industrial design.
Caution also with programs from marketing, advertising, journalism that sell themselves as design. They are not nearly as rigorous as something like a design BFA or MFA from RISD, CMU, VCU, etc.

The Poster

Gentlemen (and lady), GiggetyOm dot com got my article wrong in one important way: The last paragraph in my introduction should have read, “Here are the components of a secret algorithm I devalued that we used to score and rate potential investments with entrepreneurs.” Note that GiggetyOm misspelled “devalued” to read “developed” and–far worse–left off the ‘d’ in the word ‘use’. I am in virtual mourning over these egregious errors Giggety made, and my lawyers are viciously on the case from here in Uruguay to force–Force–them to make clear that my article was meant as an instructive on what does NOT work. Dangit. Thank you. -the Poser–I mean “Poster” (damn these autocotrrectors to hell!!…actually, my firm funded that program, too.)

BP

I got it! The Algorithm described would have put people like my self, and many others (Steve Jobs, Bill Gates, etc…) just stuck out. We all have to start somewhere/somehow. The beginnings of great things usually start from something that can’t be Predicted With Math.

Michael Sinsheimer

It’s very hard to use a quantitative tool in early-stage investing to predict future success. Certainly, it is possible to use some analytical tools as a screening tool to screen out some prospective investments. There are really no quantitative tools to project how a team is going to perform (diligence helps to gauge this by individual, not team), how an idea is going to be received in the market (focus groups and other market tools may give an indication), how or if competition will develop and how that will impact the idea, etc. As I’ve built my portfolio of early-stage companies, I always get a read on what others think of the technology’s potential for adding value or providing paradigm shift prior to getting involved. With my new effort at Flash Purchase, we are using the lean start-up model to get to product/market fit which will be based on actual results and not some algorithm. The market being the jury is really the best way to know whether you have something or not plus you can assess the team as it gets there.

Wesley

interesting concept but my guess it’s going to take awhile to perfect as how to structure available information about the candidates relevant to the potential of their success

Shai Goldman

I expect this kind of article on Techcrunch or Business Insider. GigaOm you are losing my respect.

Ralph Barbagallo

Sounds like the kind of scheme hatched after snorting way too much coke off of the boardroom table.

Derp

This is the dumbest sh*t I think I have ever read. This is exactly the kind of reach-around jerk off fest I would expect to occur if I put a bunch of fart sniffing MBA’s into a conference room and asked them to come up with a formula to invest in small companies.

If anyone is looking for one of those red flags that gets thrown showing that something is seriously wrong in technology prior to a massive tech investment bubble explodes – this article is one of them.

Whats next? Investing based on # of facebook friends, # of linkedin contacts times Klout score + questions answered on Quora?

Hilea Kelley

According to this article, I have a rat’s chance in hell of ever being of interest to a VC.

1. Over 50 with a really old cell phone number
2. Female
3. UC Santa Barbara grad (in education!), no affiliations with Stanford
4. Tweet about edtech

I guess I’ll have to make it on my own, yet again.

Upstate Entrepreneur

Yet again we have a VC looking to get attention in
public. Since this VC is writing anonymously, he’s
not looking for deal flow or to make money but
likely and apparently just looking for some
stimulation of his ego.

Did someone mention that VCs are arrogant, regard
themselves as the smartest guys in the room, get ego
thrills from patronizing, insulting, and
denigration entrepreneurs, and get more ego thrills
by getting attention in public from even total BS?

Right: Only a tiny fraction of all the VCs in the
US are qualified for a slot as CTO, CIO, software
development manager, software team leader, software
architect, advisory programmer, senior programmer,
or junior level coder. And the VCs rarely have good
university technical backgrounds, and, instead, a
major fraction majored in history and got a law
degree. So, they are not ‘technical’. But they can
and do drive high end BMWs and live in multi-million
dollar houses in Silicon Valley and, clearly as in
this thread, look down on the entrepreneurs living
on Ramen noodles. Did I mention arrogant egos?

Of course, they have big egos, but, we have to
understand, technically they are just totally
incompetent!

And, yes, they are technically totally incompetent,
but, we have to understand, over the past 10 years a
large fraction of VC funds actually lost money, only
a small fraction made more than the S&P, as in a
Mark Suster post over the past 10 years the number
of US venture partners fell by about 1/3rd, which
may be worse even than residential housing
carpenters, and on average the returns of the
venture ‘asset class’ just sucked.

Yes, on average their financial returns suck, but,
we have to understand, nearly none of them have the
qualifications to be a problem sponsor at DARPA,
NSF, or NIH.

And nearly none of them have ever published a
peer-reviewed paper of original research or are
qualified to be a tenure track professor of
business, computer science, electrical engineering,
or anything having to do with either technology or
business.

Yes, they are arrogant, incompetent, insufferable,
useless, and losers, but otherwise maybe they are
kind to their pets.

Here I attempt to drive a stake through the heart of
this VC nonsense, hopefully once and for all. I
will explain the main points so that we can all
understand and, hopefully, see less of this nonsense
in the future.

Point 1. Look for the hidden agenda.

Long ago I heard a piece of advice, “Always look for
the hidden agenda.” So, the advice was not to take
too seriously a surface appearance and, instead,
suspect that somehow there is an attempt to
manipulate you, fool you, take your money, etc. We
need only see the movie ‘The Music Man’: He was not
at all concerned about pool tables and instead just
wanted to manipulate the town into buying stuff for
a boys band and then take the money and the first
train out of town. So, we should keep in mind that
maybe this blog post is not what it appears and,
instead, has a hidden agenda.

Point 2. The Media

When we seen what looks like nonsense in the media,
as in this blog post, we have to wonder how this
could be. That is, how can the media continue to
exist passing out nonsense, blowing their
credibility, etc.?

Here’s an explanation: The main role of the media
is just to get attention from people who are bored
and want to procrastinate and be entertained and not
receive solid information or think very much. So,
only a tiny fraction of the media content is based
on solid information; the rest is just to get
attention; being absurd doesn’t much hurt; and the
‘credibility’ of the media was lost centuries ago
and has not mattered much since.

Point 3. Business

The venture partners are supposed to be interested
in building businesses, startups, and helping to
handle all the really severe, obscure, and tricky
aspects. Hmm …. Well, about business, we can
observe: All across the US, coast to coast, big
cities down to cross road villages, there are what
we might call Main Street businesses often run by
sole proprietors with no MBA or LLB degrees. We’re
talking many millions of such entrepreneurs.

Next we can observe that at the larger bodies of
water, say, on the coasts or the Great Lakes, most
of the yachts of 50′ or so are owned by some of the
more successful such Main Street entrepreneurs,
e.g., who might own and be doing a good job managing
10 fast food restaurants. We will find nearly no
yachts from anyone who ever took a check from a VC.
So, we begin to conclude that business is not so
obscure, and that taking a VC check is not one of
the main ways to do well in business.

Of course on the coasts, some of the yachts are
owned by venture partners. So, they made their
money based on other people’s money and other
people’s work?

Point 4. Dart Throwing

Suppose we have 20 guys who actually know what they
are doing and 1 million who are just throwing darts.
Then we wait five years and look at the 10 most
successful and see if those 10 knew what they were
doing or were just throwing darts and got lucky.

Likely most of the 10 will have just been lucky.

So, the VC of this blog post is not looking at
causality of business success or even correlation
with business success. Instead he is willing to
look at evidence no better than reading tea leaves.
Why? Hmm …! Moving on now ….

Point 5. Human Nature

There are some points about human nature:

(A) A single man of 35 successful in business will
start to want a home and family and look for a wife
and pay less attention to his business.

(B) A man successful in business will want to enjoy
the perks of his high position, that he believes
that he so greatly deserves due to his rare business
acumen, begin to work less hard, and hire a lot of
employees who are eager to please him and do the
work he used to do.

(C) A man with a rapidly growing business can easily
feel securely successful and, finally, less careful
with money and be willing to take a check for equity
funding on terms that are for him just an awful
business deal. He can be like the Bogart character
in ‘The Treasure of the Sierra Madre’ eager to light
his cigars with $100 bills.

(D) Making a lot of money is challenging, but, then,
keeping that money and not letting it slip through
the fingers or blowing it on foolish nonsense can be
comparably challenging.

Now with these cliche points (A)-(D) on human
nature, we see that an entrepreneur, well acquainted
with Ramen noodles, peanut butter and jelly
sandwiches, and canned beans, who has worked hard
and has a successful and rapidly growing business
could be seen as the cliche “A fool with his money
are soon parted” and a target for a bad business
deal with someone with a checkbook and a lot of
vague promises about “deep domain knowledge”, a big
Rolodex, great help with ‘recruiting’, good
connections with the tricky investment banking crowd
and the mysterious IPO market. Maybe they also can
supply band uniforms.

So, it may be that some of the venture partners are
just looking for naive businessmen who can be talked
into making a bad business deal. To this end, of
course, the venture partners need to put up a big
image, much as the Wizard in the 1939 ‘The Wizard of
Oz’.

Point 5. The VC Side of the Table

Where is a venture partner going to look for deals?
Is he going to concentrate on tiny fraction of
entrepreneurs who really know what they are doing,
or are the venture partners just going to wait until
some entrepreneur, from luck or whatever, happens to
be doing well and maybe can be talked into making a
bad business deal and, thus, talked out of much or
even all of their money? I’ll give you three
guesses, but you will only need one.

Point 6. The Entrepreneur’s Side of the Table

The good approach to success for the entrepreneur
can be quite different from that of the venture
partner. E.g., a venture partner might get rich
from entrepreneurs who were lucky from throwing
darts although on average the people throwing the
darts went broke. The people knowing what they were
doing have the best chances, but they are such a
small fraction of the entrepreneurs that the venture
partners can make more money exploiting luck than
smarts.

For the entrepreneur, the basic story remains fairly
simple:

(A) Business. The work is business, and a good view
of just what that is is readily available on Main
Street in nearly any community in the US. The work
is not a big mystery.

(B) Information Technology (IT) Entrepreneurship.

At one time there were big opportunities in animal
husbandry with horses, sheep, goats, cattle, hogs,
chickens, rabbits, falcons, etc., working silver,
gold, copper, and tin, open ocean sailing, printing,
iron, steel, steam, electricity, gasoline, wireless,
radio, TV, etc. Now there are big opportunities in
IT writing software and exploiting the hard/software
readily available in mobile, desktops, servers, and
the Internet. Broadly the opportunity is to deliver
high value from inexpensive automation.

(C) Computer Science.

The blog post, in its attention to tea leaves, also
hinted that a good qualification was a Stanford
computer science background. Not really: Only a
small fraction of computer science professors are
well qualified for software development in an IT
startup. The professors get paid for research in
“fundamentals” of ‘computer science’ and have no
hope of getting good skills with and staying up
with, say, several thousand Web pages of
documentation at Microsoft’s Web site on Microsoft’s
.NET Frameworks 1, 2, 3, 4, 4.5, ASP.NET, ADO,NET,
SQL Server, C#, Visual Basic, Visual Studio,
JavaScript, HTML 5, iPhone and Android programming,
etc.

The entrepreneurship does require software
development, but that doesn’t really require
computer science.

(D) The Problem

Usually the best place to start is with a problem;
find a problem where a good, new solution is, in
total, very valuable to customers. So, might
deliver a little value to each of 1 billion Internet
users or a lot of value to each a 100 big
businesses.

For the problem, computer science may be relevant
but is not crucial.

(E) The Solution

For this high value, have to deliver a solution.
For this, the computing does the automation, but it
is still necessary to know what work is being
automated. Or, an automatic kitchen still needs
some good recipes to know what to do.

For the ‘recipe’ part of the solution, computer
science may be helpful but is not crucial and,
really, not the most powerful material.

(F) The Moat

Buffett mentions a ‘moat’ by which he means a
barrier to entry to competition. That barrier might
be special technology difficult to discover,
duplicate, or equal, F. Wilson’s “large network of
engaged users”, some patents, a brand name, a
network effect, or more.

Those are the main points.

An advantage is, on the Internet no one knows if you
are in PJs or are even a dog. That is, the
interaction with the users and even the advertisers
is quite simple.

And the blog post here gave next to nothing on
(A)-(F).

Again, people with high promise of success with
(A)-(F) are so rare that the venture partners mostly
ignore them and, instead, concentrate just on people
who have accumulated some value, via luck or
whatever, and the venture partners don’t care and
know that they can’t figure it out in advance, and
might make a bad business deal. So, the venture
partners can talk about total BS, as in this blog
post, and still hope to do well from “A fool and his
money are soon parted.”.

Test User

What I’d like to know is the profile of such VCs so we know who to avoid. Clearly these folks have no clue about judging the technology/product.

picturenetcorp

What a nightmare. #1. Narcissism breeds success and good management skills. #2. Absolutely nonsensical. #3. Duh. #4. Cardinal colored myopia. Nice. Surely this piece is a send up. Pseudonym is a good idea. Hey, get out to Tahoe and go snowboarding.

Rob

Cellphone underwriting? WTF? It’s not April 1 is it?

If cellphone underwriting really exists and I don’t know what kind of other info you can pull from it, this is such a violation of privacy words can’t explain. And it’s legal? In a NSA sense or the public?

If this VC actually exists, take his money and keep an eye out for a peeping Tom outside your window analyzing your stroke whilst having sex.

Greg

Can we all be honest here? VC’s ask for way too much compared to what they bring to the table unless you are already a runaway success story.

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