Traditionally speaking, venture capitalists make investment decisions using "rules of thumb". Scientifically speaking, this approach is called heuristics. It is when you make decisions based on "past experience" and not "data." But today, there's more data about startups than ever. In an industry driven by data and analytics, it only makes sense to have a rational approach in investing using data. This is what we do.
In a nutshell:
- We select investment opportunities through the lens of multi-factor analysis.
- We deploy capital in a calculated way.
- We build risk-condensed portfolios.
Our funds are formed based on a three tenets: bias-free selection, calculated deployment, and risk concentration.
1. Cognitive biases are toxic when it comes to making investment decisions. That's why we evaluate startups for their merits in terms of technology and business.
2. Instead of deploying capital arbitrarily from deal to deal as it's been done traditionally, we perform complex stochastic calculations to determine check sizes, re-up levels and dry powder similar to the way it's done at legendary funds such as Pimco and Berkshire Hathaway.
3. Risk concentration is key in venture capital. Many managers deploy capital to way too many companies particularly in the beginning which leaves very little room for mistakes and caps the upsize. This is why the term "spray and pray", "chasing homeruns" or "seeking unicorns" are commonly heard in discussions regarding fund returns.