"An Algorithm to Pick Startup Winners"

Part of Technology Review's series on Artificial Intelligence, Robotics and Work.
From MIT's Technology Review:

A venture capital firm throws out intuition and uses computer models to determine investments.
Aldea Pharmaceuticals, a biotechnology startup developing an emergency treatment for alcohol poisoning, seemed like an attractive 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, which is based in Westport, Connecticut, a $1.25 million check. "A decision like that would have normally taken a minimum of three months," says Tim Shannon, a partner with Canaan Partners, the firm that had led Aldea's $7 million fund-raising round.

The $1.25 million was a follow-on investment from Correlation Ventures, which calls itself a "new breed of venture capital firm"—one driven by predictive analytics software built over the last six years by founder Coats and his partner Trevor Kienzle. The effort adds efficiency to the investment process. And for entrepreneurs, it means far faster answers: rejections come in as little time as two days.

To run its model, Correlation Ventures, which is based in San Diego and Palo Alto, California, asks startups to submit five basic planning, financial, and legal documents. It enters these into a program similar in function to credit rating software.

A top-ranked score leads to a 30-minute interview with both the startup CEO and the outside venture firm leading the investment, plus a quick legal review and background check. As a co-investor, Correlation Ventures always relies on some vetting by the primary investor.

Correlation Ventures will then often deliver a check from its $165 million fund, closed last November, in less than two weeks. "That's unheard of in the venture industry," says Coats.

Once it makes an investment, Correlation 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....MORE

Upcoming in the series:

July 18

The Future of Telepresence

July 19

Rise of the General Purpose Robot

July 24

Automating the Creative Process

July 25

Robots and Renewable Power