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How to be a Data-Driven Investor

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RavingFans® – how can it be used in growth and expansion-stage companies?
15 January
Why Did You Guys Meet in Hong Kong?
12 February
Published by Eliav Alaluf at 7 February

The tech investing industry is undergoing a massive transformation. Smart private investors, venture capital firms, and leading private equity and hedge funds are beginning to realize that the days of relying on the old ways are over.  

Once upon a time, it was enough to have money and a good reputation – you would “spread your net”, people who know people would approach you, and deals would flow your way.

You would sit in your meeting room together with your team, view entrepreneurs’ pitches, and take your time reviewing them.
You make decisions based on “rules of thumb”, also known as heuristics: take shortcuts to make decisions based on past experience instead of with data, analytics, or math.
But in today’s hyper-competitive environment, that’s getting more and more difficult.

 

Many of the great deals don’t even show up on your radar. Meanwhile, your team is busy going through cold emails filled with enthusiastic entrepreneurs claiming to have the next billion-dollar idea.
Suddenly, almost everyone invests in tech deals, and that means big-name serial entrepreneurs don’t come to you for money – they are flooded with it.  

Where can you gain a competitive advantage that will separate you from the crowd?  What do you need to do?

You already know the answer: become data-driven.

Technology and data are transforming the way we make investment decisions. The Data-Driven Investor capitalizes on the power of data to pre-filter investment opportunities with superior potential.
Making money is no longer viewed simply as the result of the insightful decision making of geniuses and wizards. Rather, creating returns from tech exits are seen to follow from rigorous research and the use of advanced tools. Investing is becoming increasingly evidence-based. That has important implications for anyone in investing.


While some people feel that investment is more of an art than a science, innovative investors understand that technology is here to help them, rather than replace them. Just as MRIs, CT technology, and various medical diagnostic tools make doctors better, investment algorithms should save investors precious time scanning and pre-filtering opportunities. They could also provide an easy way to check whether those ventures that you’ve already invested in are on track or not.

 

It is quite evident, at least to most of us, that the winners in 10 years will be data-driven investors who incorporate their experience and intuition with hard data and qualitative research to develop a superior approach to decision making.

When examining the alternative approaches in the market, one can see that a data-driven approach in private equity is very private.
Many leading venture capital firms have their own data analytics tool, but very few, if any, are inclined to share it.  

Correlation Ventures, Google Ventures, Kleiner Perkins, Deep Knowledge, Ironstone, E.Ventures, Right-Side Capital, Follow[the]Seed, Signalfire, Ulu Ventures, Y Combinators, WR Hambrecht+Co, and Venture Science are among the venture investing firms that are using algorithms and / or data science as part of their decision making.

Obviously, taking the approach of developing an algorithm or a data science department in-house could be quite a risky endeavour. For most professional investment firms, it would actually make more sense to partner with a firm that is already doing it.  

While a minority of these firms will be open to discuss co-investments, most of them typically will not share their methodologies or even consider allowing other firms to use their tools for better investment decisions.
Actually, one of them would be willing to share its algorithm as a service.

Follow[the]Seed, a venture capital firm active in Silicon Valley, Tel Aviv, Sydney, and Beijing, is (at least for the time being) allowing professional investors to use its algorithm to scan investments.

The algorithm, aptly named RavingFans®, is designed to detect products and services that have managed to create a strong emotional connection with their customers. It processes usage data in the product/service, looking for patterns of irrational behaviour—obsessive, compulsive, and addictive behaviour—by a critical mass of users.

It is focused on habitual products and services that we use often, typically on a daily or weekly basis (games, music, social media, eCommerce, food delivery, content, etc.), rather than things we buy or use only once every several months or years (travel, gadgets, etc.)

Virtually all investment firms developing algorithms have a very finite, competitive view of the investment space, and this is why they are not willing to share their algorithms and know-how.
The Raving Fans® open approach is that one can generate much more value by sharing, rather than limiting access to, its platform. Raving Fans believe that there’s a huge attainable market of many funds and professional investors who are interested in deploying such an analytical framework but cannot afford to develop it on their own, and even when they do have the capital, they don’t have the skills and competencies to do so (or the legal authorization to do so, for that matter).

Allowing cooperation and co-investment will open a world of opportunities and allow for a win-win solution.

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Terms and Conditions for assessment by RavingFans™



Please read the terms and conditions set out below.
If accepted by you, they will govern the relationship between us regarding the matters described below:

1. You have asked us to consider an investment by Follow the Seed Australia Venture Fund, I.L.P or by such other investment vehicle (“Fund”) in your company or in an Affiliate of yours (“you” or “your” or the “Company”).

For the purpose of this paragraph 1, “Affiliate” of a person means any other person, directly or indirectly, controlling, controlled by or under common control with such person, where “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, and includes (a) ownership, directly or indirectly, of more than 50% of the shares in issue or other equity interests of such person, (b) possession, directly or indirectly, of more than 50% of the voting power of such person or (c) the power, directly or indirectly, to appoint a majority of the members of the board of directors (or any equivalent governing body) of such person, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

2. One of many initial criteria we use when considering possible investment opportunities for a Fund, is the data generated from our RavingFans™ assessment technology (“Technology”).

3. By requesting our Software Development Kit (“SDK”), which includes, amongst others, a description of the Technology and the nature of the data it will generate for us and you have requested that we assess a specific part of your business, relating to the use of your business' applications (“App's”) by end users, using this Technology.

4. No fee is payable for performing the assessment using the Technology.

5. In consideration of us undertaking and performing an initial assessment of the Business, as a potential investment opportunity, using the Technology, you agree that:
(a) you will not attempt to copy, modify, duplicate, create derivative works from, download, display, transmit, or distribute all or any portion of the Technology in any form or media or by any means; or
(b) you will not access all or any part of the Technology in order to build a product or service which competes with the Technology; or
(c) you will not use the Technology to provide services to third parties;
(d) you will not license, sell, rent, lease, transfer, assign, distribute, display, disclose, or otherwise commercially exploit, or otherwise make the Technology available to any third party; or
(e) you will follow the implementation instructions of the SDK to ensure that the Technology is able to operate effectively and properly.
(f) we and/or our licensor owns all intellectual property rights in the Technology and the Results (as defined in paragraph 5.1(b) below) and nothing in these terms and conditions gives you any rights to, or in, patents, copyrights, database rights, trade secrets, trade names, trademarks (whether registered or unregistered), or any other rights or licences in respect of the Technology or the Results (as defined in paragraph 5.1(b) below).
(g) nothing herein or the provision of the Results to you or to any third party should be construed as an assurance by us or anyone else that the Fund will make an investment in the Business. Any decision to invest in the business will be at our sole and absolute discretion.
(h) nothing herein or the provision of the Results to you with any third party should be construed as the provision by us of any investment or financial product advice or any endorsement of your business or a recommendation to make an investment in the Business.

6. Limitation of Liability
6.1 This paragraph 5 sets out our entire liability (including any liability for the acts or omissions of our officers, directors, employees, agents and sub-contractors) to you:
(a) arising under or in connection with these terms and conditions;
(b) in respect of any use made by us or you, of the results of our assessment of your business using the Technology (“Results”);
(c) in respect of any representation, statement or tortuous act or omission (including negligence) arising under or in connection with these terms and conditions.

6.2 To the fullest extent allowed by applicable law:
(a) we assume no responsibility for the Results or for any conclusions drawn from or action taken or not taken, based on the Results, and all warranties, representations, conditions and all other terms of any kind whatsoever implied by statute or common law are, to the fullest extent permitted by applicable law, excluded from these terms and conditions;
(b) we will not be liable to you whether in tort (including for negligence or breach of statutory duty), contract, misrepresentation, restitution or otherwise for any loss of profits, loss of business, depletion of goodwill and/or similar losses, or pure economic loss, or for any special, indirect or consequential loss, costs, damages, charges or expenses however arising under or in connection with these terms and conditions.

7. Confidentiality
We may disclose the Results to a third party without your prior written consent.

8. Personal Data
We confirm to you that the Technology will not gain access to, copy or collect the personal information of any persons.

9. Termination
We may cease or suspend any assessment or analysis we are undertaking on you at any time and for any reason whatsoever.

10. Law
These terms and conditions do not confer any rights on any person or party (other than us and you). These terms and conditions will be governed by the law of New South Wales, Australia.

To accept these terms and conditions please click here