Thursday, July 19, 2018

GV (né Google Ventures) Uses An Algorithm to Decide on Venture Investments

I shouldn't have automatically used the masculine né.
(formerly) Google Ventures could just as well have been the feminine née. Or maybe zée?

Moving on, using an algo for this purpose will get you clones and reboots and sequels. It's why big Hollywood does so little that's original, algos don't 'think' they just replicate what you've trained the a 'puter to recognize.

Now this will change when people start running machine learning programs on quantum computers, in fact the brainiacs seem pretty sure that people won't even understand what led to the output, akin to the Hitchhiker's Guide's Deep Thought laboring for 7 1/2 million years and spitting out:
 "The answer to the ultimate question of life, the universe and everything is 42." Okaaay.

On a more practical level companies like NVIDIA would not have been funded, with an initial $20 mil. round led by Sequoia, very large at the time. And then the company's first two products bombed.
And the current company's markets weren't even envisioned ten years ago.
What the algo would have funded would have been an Intel clone at a couple million which would have been smothered in the crib.

It's a toss-up whether Google itself would have convinced the algo to say yes. There were other search engines, Infoseek, Lycos and Alta Vista are the ones that come to mind so the algorithm would count that as a positive but they hadn't figured out how to make money. A big negative would have been the huge jump from the GOOG's initial $100 K outside funding in August 1998 to the $25 million Kleiner/Sequoia round 10 months later.

Anyway, rant over, here's Axios:
When most venture capitalists want approval to make a new investment, they go to their partners. When venture capitalists at GV do it, they go to something called "The Machine."
  • Axios has learned that the firm, formerly known as Google Ventures, for years has used an algorithm that effectively permits or prohibits both new and follow-on investments.
  • Staffers plug in all sorts of deal details into "The Machine" — which is programmed with all sorts of market data, and returns traffic signal-like outputs. Green means go. Red means stop. Yellow means proceed with caution, but sources say it's usually the practical equivalent of red.
  • It was initially designed and used as a due diligence assistant that could be overruled but, according to three sources, it has evolved into a de facto investment committee.
History: GV was formed in 2009 as one of the first venture firms to employ engineers whose primary job was to work with portfolio companies on technical challenges. But, in the early days, there weren't too many portfolio companies yet, so the engineers were tasked first with building a dealflow management tool dubbed "Vortex," and then with what would become "The Machine."
  • Another impetus was that few of the early GV investors had much, if any, investing experience. So "The Machine" would leverage the firm's strengths (engineering) as a bulwark against its weakness (proven VC chops).
  • The engineers also were asked to have "The Machine" help source deal opportunities, but that wasn't viewed as a terribly successful effort.
  • The first hints of this came in 2013, when then-GV CEO Bill Maris told the NY Times: "We have access to the world's largest data sets you can imagine, our cloud computing infrastructure is the biggest ever. It would be foolish to just go out and make gut investments."...

Using that biggest ever cloud infrastructure the algo didn't say "Amazon will have the world's largest cloud infrastructure in five years. Buy it today at $301 (July 1, 2013) and ride it for a six-banger with liquidity all the way."
Instead it said yes to Juicero, the $700 Wi-Fi enabled juice machine.

On the other hand even Sequoia seems to have left its best days behind it and the algo probably won't lead to headlines like this about Sequoia managing partner Michael Goguen a couple years ago:
Ex-stripper describes 13-year nightmare as tech titan’s sex slave

At least I hope not but who really knows?