#190
Mathemagic
Published:
Jul 28, 2018
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The game of venture capital is difficult. Investors must evaluate entrepreneurial talent and product-market fit without substantial observable data. As the data arrives, the alpha departs.
But what if VCs could simply enter deal information into a “stop sign” algorithm – producing a reliable green, yellow, or red?
Google Ventures has been doing just that. Their algorithm, known as “The Machine,” incorporates market and deal-specific variables. Any prospective investment that receives a yellow or red signal is dead on arrival. Several other firms (including Social Capital and Correlation Ventures) are taking a similar tact by leveraging predictive models to supplement their human processes.
Despite the appeal of “The Machine,” it’s unclear how well it works in practice. “The Machine” can only be effective when there is data to feed it – eliminating many early stage deals. When the data is available, the best signals are often the most obvious ones – e.g. having a blue-chip lead investor.
Moreover, the models assume that past success indicators will retain their strength in the future. However as any signal gains broad adoption, its opportunity gets arbitraged away.
Ultimately, investing (and specifically venture capital) will likely require human judgement to execute effectively - as much as we’d love for math alone to produce unicorn magic!
Mathemagic
Correlation Ventures: taking the “gut feel” out of VC - Founded in 2006, Correlation Ventures didn't make any investments over its first 4 years. Instead, the founders amassed the most complete database of VC financings and built a predictive model that enables them to make many investments very rapidly. Read more
Scoop: Inside Google's venture capital "machine" - Google Ventures leverages an algorithm called "The Machine" when making investment decisions. The algo accounts for a broad variety of market and deal data (e.g. round size, syndicate partners, past investors, sector, etc.). Read more
Industry News
CoinDesk releases Q2 2018 state of blockchain report - To use crypto terminology, the second quarter was a painful one if you were HODLing (especially as measured by exchange activity and price action) – but a productive one if you were BUIDLing (usage and tech developer work charging forward, and major milestones hit around BTC and ETH). Read more
Unlike in China, UK fintech start-ups aren't eating the banks' lunch just yet - A recent mobile data study of just over 1.5m mobile users in the UK between April 9 and July 1 this year found the top ten most-used “banking” apps, which include the fintech hopefuls, were all traditional high-street banks. Read more
Institutional investors swap Bitcoin futures for physical BTC in Wall Street first - The CME EFP Bitcoin transaction, facilitated by ED&F Man and itBit, saw two institutional traders swap a position in CME's bitcoin futures market for an equivalent amount of the "physical" asset itself. Read more
Chinese investors reel as internet lenders close - As a slowing economy and tighter regulatory controls bite, over 200 Chinese online lenders have shut their doors since June, stranding investors. Read more
In data dispute with Capital One, Plaid stands alone - As other aggregators have met Capital One’s security requirements, Plaid now faces scrutiny on their willingness to meet these higher standards. Read more
Pumping and dumping in crypto markets - The FT explores some of the blatant “pump and dump” schemes on Telegram. Other examples of market manipulation that are thought to be rife in crypto land include front-running, wash trading, and spoofing. Read more
Nigerians bury cash in backyards as mobile money stumbles - Bloomberg explores why Nigeria (which vies with South Africa as the continent’s biggest economy) is struggling to get mobile money off the ground as it has elsewhere in Africa. Less than 6% of Nigerians use their handsets to spend mobile money, compared wth 73% of Kenyans. Read more
Google wants to bring blockchain technology to its cloud services - Google Cloud has revealed that it will offer distributed ledger solutions to customers in partnership with Digital Asset and BlockApps. Read more
How E-Commerce Is transforming rural China - An extraordinary must-read from the New Yorker on how JD.com has expanded its consumer base with drone delivery and local recruits who exploit villages’ tight-knit social networks vs. online adverts to drum up business. Read more
eBay & Square partner on business loans, with Apple pay coming to eBay this fall - Square Capital, which has already facilitated more than $2.8bn worth of SMB credit, is extending its reach through a partnership with eBay to provide up to $100k in credit to sellers in as little as one day. Read more
Winklevoss twins revised bitcoin ETF rejected by SEC (again) - The proposed rule change was not enough to get SEC approval for the "Winkevoss Bitcoin Trust" - the news led many to believe that other proposals for cryptocurrency ETFs from others such as VanEck and BitWise will face similar fates. Read more
Select Financings
Divvy - Utah based free, real-time expense software platform raised $35m in a Series B from Insight Venture Partners. Read more
Equidate - SF based marketplace that makes privately held shares available for purchase to accredited investors raised a $50m Series B from Financial Technology Partners. Read more
Flywire - Boston based payments company that helps universities, hospitals, and businesses accept foreign-currency payment raised a $100m Series D led by Temasek. Read more
Kredivo - Indonesia based digital credit card raised $30m in Series B funding led by Australia’s Square Peg Capital. Read more
Metromile - SF based car insurance platform that allows drivers to pay based on their actual hours on the road has raised $90m in a series E round of funding co-led by insurance companies Tokio Marine Holdings and Intact Financial. Read more
OpenInvest - San Francisco based socially responsible investing platform OpenInvest has raised a $10m Series A led by QED Investors. Read more
PatientCo - Atlatna based patient billing and payments technology company raised $28m in Series B led by Accel-KKR. Read more
ScaleFactor - Austin based provider of accounting and payroll management as a service raised $10m from Canaan Partners. Read more
Tally - SF based automated credit card debt management app has raised a $25m Series B led by Kleiner Perkins. Read more
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