Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.
Image: American Kennel Club; Giphy

There’s a new way to vet a startup’s founding team: Algorithms

A canine competitor gets inspected at a dog show

Hello and welcome to Pipeline. This week: searching for a more objective way to vet startups, the wrong kind of exit at SoftBank and the meltdown at Ozy Media.

Overheard

  • A billionaire's weapon of choice? A good ole PDF. Elon Musk's comments accusing Jeff Bezos of stymying SpaceX's progress at the Code conference clearly got under his (and his company's) skin. Amazon unsolicitedly responded with a 13-page PDF of lawsuits that SpaceX has filed over the years.
  • The "West Coast Offense" = hype over substance, Toast's president Steve Fredette told CNBC. His company, which went public last week at a $20 billion valuation, largely eschewed West Coast investors and instead went for the East Coast version: "substance first and not enough hype." Toast even avoided expanding into the Bay Area to stay under Sand Hill Road's radar.
  • A farewell to Oz(y). The Silicon Valley media company shut down days after the New York Times reported that its COO impersonated a YouTube exec on a fundraising call with Goldman Sachs. Puck's Teddy Schleifer reported that Laurene Powell Jobs and her Emerson Collective had been trying to wash their hands of the company for years. Even Sharon Osbourne got mad! She told CNBC that founder Carlos Watson falsely claimed she and husband Ozzy Osbourne became investors after the Osbournes filed a trademark lawsuit against Ozy.
  • Ron Conway took the nuclear option: SV Angel surrendered its Ozy shares prior to the shutdown — a now-symbolic gesture, but still a powerful statement of disapproval. Even when Spark backed away from Dispo after a scandal erupted around founder David Dobrik, it only said it would seek to make sure it didn't profit from those shares, not surrender them. I'm curious if this is truly a rare occurrence or something that happens more than the industry likes to acknowledge. Email me at biz@protocol.com if you know of more examples.

Biz on Biz

Startup founders, ranked

Pattern-matching is still pervasive in Silicon Valley: Investors chase the next Mark Zuckerberg by investing in anyone like Mark Zuckerberg. But it can be a flawed and problematic approach. Too often it means investors invest in founders who look like themselves, which perpetuates the Valley's lack of diversity. The question now is: Can an algorithm do better?

CB Insights is now scoring management teams to find the most impressive company builders. It released its new management "Mosaic Score" in early September and has already released lists on the most impressive YC founders and the Uber mafia.

  • CB Insights co-founder Anand Sanwal said management team rankings were one of the most asked-for features after the company had already developed algorithms to track market, money and momentum. Those were important but not the whole picture, with teams being a huge part of the decision-making process.
  • Figuring out how to score a management team was harder. The research firm looked at historical data of successful companies (from M&A and IPOs to decacorns with publicly available valuations), giving more weight to recent exits so it's more reflective of the current ecosystem.
  • The scores, ranking management teams from 0 to 1,000, are supposed to reflect the most impressive founder teams. Among the Uber mafia, it gave a score of 970 to the founding team of Tortoise, a maker of remote-controlled delivery robots. Its co-founders include Dmitry Shevelenko, a former biz dev director at Uber. Right behind at 960 was Kitch, a Portugal-based restaurant software company with ex-Uber co-founders Rui Bento and Nuno Rodrigues.

Pattern-matching in the "pre-algorithm times" was problematic, but Sanwal is hoping to make it less subjective.

  • One goal is to help surface teams that are strong candidates but may not have the Silicon Valley inroads it often takes to get funding. "There's no introduction, no secret handshake," Sanwal said.
  • The other goal is to help investors from over-pivoting on one point, like pattern-matching on college dropouts. (In fact, CB Insights said it found years of experience in the field is a stronger indicator of company success.) People aren't good at taking in more than a few factors when they're judging someone so they'll fixate on just a few things rather than all the data points CB Insights is using, he argues. "We end up with these sort of overconfident assessments of people based on where they went to school and their age when they dropped out and how charismatic they are," Sanwal said.
  • Still, CB Insights will have to be careful that their scores actually make things more objective versus just reinforcing existing pattern-matching results that float already well-networked, well-educated founders to the top. In 2018, Amazon had to scrap a resume-scanning AI tool after the company found that it was biased against women when evaluating talent.

The management mosaic is meant to be more than just shallow resume scanning, Sanwal said. While investors throw cash at basically anyone walking out of Stripe, Sanwal says his firm is looking a level deeper. It doesn't just give points to any ex-Apple or ex-Facebook employee.

  • An Uber employee who joined as the third product manager is given more weight in the job category than someone who joined as the company's 2,000th employee.
  • CB Insights also found some counter-intuitive trends. Founders who had MBAs were actually a negative signal, but if the CTO had an MBA it was a stronger signal, Sanwal said. Years of experience in the field was more important than education, and unlike everyone wanting to invest in the next Zuck, the algorithm found no correlation between being a dropout and success (sorry, Thiel Fellows).

It's a shortcut meant to help investors cut through an already crazy environment (like the growing Y Combinator batches of nearly 400 companies).

"The number of companies is exploding, and you know it's hard to tell them apart, right? They all have impressive backgrounds and funding from impressive investors," Sanwal said. "This becomes another way to separate players from the pretenders."

A MESSAGE FROM AFFINITY

The venture investing landscape has changed. New investors are forgoing long due diligence and deploying capital faster than ever before. See which best practices have emerged to ensure venture capitalists can find, manage, and close deals using relationship intelligence. Click below to watch the webinar.

Learn more

Inside Track

  • "The 'new normal' is going to be 'we don't make competitive investments within a FUND, but we will make competitive investments within a FIRM,'" lays out Homebrew's Hunter Walk in his piece on how the rise of multi-stage funds is going to shift the rules on investing conflicts (and what founders should be thinking about as a result).
  • "Blitzscaling itself isn't the goal," said Reid Hoffman, who invented the term for prioritizing speed over efficiency. Instead, he clarified at a TechCrunch Disrupt session, it's an uncomfortable reality founders have to accept during periods of uncertainty.
  • "I'm not going to lie, at first I was overwhelmed by the business model," wrote Forerunner Ventures' Kirsten Green on the Warby Parker founders' pitch for a vertically integrated eyeglass maker. It's not just another self-congratulatory congratulations post, though you can't blame Green, since Warby Parker ended the week worth more than $5 billion after going public.

Need to Know

  • General Catalyst wants to buy startup revenue. In a move that could make it a competitor to Pipe, General Catalyst has filed to launch a "Structured Opportunities" fund which would "purchase account receivables from operating companies."
  • AngelList takes on Carta. It unveiled AngelList Stack, which will help companies from starting with incorporation to cap table management.
  • It's Kleiner's best year of exits in the last decade at 26 including Robinhood, UiPath and Duolingo, according to Crunchbase, but it's also slowed its deal pace.
  • A windfall for universities. This year's VC performance has translated into huge gains for university endowments, including the University of Minnesota (up 49.2%) and Brown (up 50+%), according to the WSJ.
  • The SoftBank Vision Fund has lost its last senior managing partner. Deep Nishar is leaving the firm after six years. "36 investments: 8 IPOs, 2 M&A and 2 SPACs to date," Nishar wrote in a LinkedIn post. "What an amazing six years!"
  • This week in Theranos: The grilling of former lab director Adam Rosendorff continued all week, along with revelations that Elizabeth Holmes used to write notes to herself to compare herself to Steve Jobs.
  • On Protocol: How IBM lost the cloud.
  • Also on Protocol: Building a diverse and inclusive workplace is more than doing an unconscious bias training and saying you're done. Protocol did a deep dive into building an inclusive workplace, including the 10 people changing the game.
  • Your weekend reading: The Markup's in-depth overview of the $12 billion location-data industry.

Five Questions for...

QED's Laura Bock

Laura Bock was promoted from principal to partner last week at QED. She's made investments in startups like Spinwheel, The Muse and insurtech companies Trellis and Decent. The New York City-based investor is also a fan of pickleball and board games, and is a Princeton graduate.

What is the biggest issue that your partners are thinking/talking about at your Monday partner meeting?

The venture market continues to evolve in real time, so the QED team is constantly thinking about how to be the best partner to talented fintech founders. We are seeing the contraction of the investment decision process across the industry, and we are grappling with how to be efficient while doing our homework and ensuring alignment on approach and vision. We are also looking for chances to invest in more pre-seed and seed businesses as we see a rapid acceleration in ambitious entrepreneurs seeing the opportunity in fintech. QED has changed a lot in the three years since I joined. We have entered new geographies, expanded our investment scope, welcomed new LPs and added new faces to the team, but the opportunity ahead of us has never been more exciting.

What was your first job, and what's a skill you still use from it?

My first job was teaching toddlers and babies how to swim at the local pool. While few skills are directly applicable to venture, I think I learned some interesting life lessons. Singing silly songs for "Mommy and Me" classes taught me not to worry about making a fool of myself, and watching kids suddenly figuring out how to float and swim independently taught me that progress isn't always linear and that patience is key.

What problem do you want to see a startup solve?

Americans are struggling with historic levels of debt: 80 percent have some form of consumer debt, and the average debt burden is $90,000. For most people, stress and anxiety around how to repay their loans is the No. 1 pain point they face when it comes to dealing with money. I'm eager to see how fintech companies can increase access, choice and transparency, to help alleviate the burdens of living with debt. To date, QED has invested in a handful of exciting companies in the space, including Resolve, Summer and Spinwheel.

Aliens visit Earth and you can only show them one movie. What would it be?

I'd want to show aliens a movie that gives them a lens into human feelings and behavior. For this purpose, "Inside Out" comes to mind, with its main characters representing five different emotions.

When you're evaluating a pitch deck, which part do you like to spend the most time on (team, financials, vision)?

The must-have that comes to mind first for me is a founder who can compellingly and concisely describe what they are building and why it is important to build it now. Not only are the answers to these questions critical, the ability to communicate a vision to others is essential for attracting the talent and funding necessary to build a successful business.

A MESSAGE FROM AFFINITY

Affinity is the top CRM for venture capital. Automatically log every email and calendar event, unifying your team's collective network. Affinity enriches contact data, so you're always up to date. With relationship intelligence, close deals faster, easily manage your pipeline, and know the status of every deal.

Learn More

Thanks for reading this week's Protocol Pipeline. If you like what you're reading, sign up here to get it in your inbox. Send story tips and newsletter feedback to biz@protocol.com.

Recent Issues