The VC industry is getting a tech upgrade

A clubby business where things have long been done by email and spreadsheets is embracing the kind of tools it’s been funding for years.

Seven Seven Six’s Alexis Ohanian

Alexis Ohanian uses software built in-house called Cerebro for investing.

Photo: Michael Nagle/Bloomberg via Getty Images

In the opposite of how a pitch normally goes, this time it was Seven Seven Six partner Alexis Ohanian giving the software demo. It was a competitive deal, and his fund had submitted a term sheet to win it. That’s when Ohanian fired up Cerebro. Like its X-Men namesake, Cerebro let Ohanian search through the more than 40,000 contacts in the fund’s network for potential introductions to help the founder.

“The CEO cut me off in the demo and he said, ‘We're taking your term sheet,’” Ohanian said. “I've never had that happen before. I've also never done a demo as part of a close, but I think that's the move going forward.”

Despite investing in high-tech industries, venture capital has been a low-tech business, built on intros and handshakes more than atoms and bits. That’s changing, though, as more firms embrace software and data. Some tools are built in-house, like Seven Seven Six’s Cerebro or IVP’s "Minority Report"-inspired Early Detection System, while other resources come off the shelf.

“Investors never really used a lot of tech. The tech you were competing with in venture was coffee at the Creamery in SoMa and a notebook,” said IVP’s Jules Maltz. “That’s an area where venture as a whole really had to catch up.”

When Ray Zhou first started approaching venture capitalists seven years ago about his CRM company Affinity, he found a lot of reticence from the investor community. Venture capitalists are habitual guinea pigs, open to trying the latest and greatest note-taking app or productivity tool, but because they’d also seen so many products come and go through their course of business, Zhou sensed hesitance from venture firms actually going all-in on the time investment to try new things.

“What we were seeing back then was people were either trying to deploy these old, heavyweight CRMs or they were just going to the most simple thing possible, a spreadsheet,” Zhou said.

These days, it’s a different conversation as more firms are realizing that their spreadsheets aren’t keeping up with the times, and there’s more value in tools that can automatically scrape emails and build a contact database for them. Affinity’s now processed over 18 trillion emails and calendar invites to help investors build records of who they’ve talked to and when, Zhou said. It also paired that info with a deal tracking system that’s akin to Asana, with its venture capital clients keeping tabs on an average of 290 deals a month.

“I've personally seen the proliferation of just how massive venture capital as a field exploded over the last five years. I think it got a lot bigger than anyone's ever realized,” he said.

Some venture firms are reaching for tools geared toward the venture capital space, but investors don’t need their own specialist toolset in every category.

As a new fund, Avid Ventures built its tech stack by mixing venture-oriented tools like Affinity or PitchBook with a mix of tools its portfolio companies use. Founder Addie Lerner is a “die-hard” Zoom fan and a loyalist to Google Workspace. All the firm’s documents are managed between Dropbox, DocSend and DocuSign. She’s built recruiting pipelines in Airtable and scours LinkedIn to find people. Some of the boards she’s on even have their own Slack workspaces.

“Especially as venture firms grow, and especially as having access to data and speed and efficiency become competitive advantages, I do think that there will be more demand and budget for buying additional products,” Lerner said. “There are real firms out there, like Tribe, that have built proprietary datasets and data models and that is their edge, but I don’t think that’s how the majority of firms differentiate.”

It may not be a core differentiation, but venture firms are turning to data sources and building their own analysis layer on top of it to help them gain a competitive edge.

At IVP, that software is called the Early Detection System, or EDS. Inspired by the film “Minority Report,” each week it spits out five to 10 names of startups in red and partners will almost always reach out to them, Maltz said. To spot the “red alert companies,” as it calls them, the firm feeds in data from companies like PitchBook and some of its investments, like App Annie and enterprise software review site G2, so it can tell what companies are taking off. Part of the job of a VC now is connecting those data sources together in a way that gives a strong signal for the type of investing they like to do, Maltz said.

“Twenty years ago, that signal was a lunch with another VC and you'd ask him or her, ‘What are your best companies?’ That doesn't scale, and obviously is no longer how the industry works, so we now use technology to help us get those same signals about what's growing quickly,” Maltz said.

While IVP’s software tools are mostly used in-house, other firms like Scale Venture Partners are making it part of its selling pitch to founders.

Operating partner Dale Chang had been trying to understand the performance of Scale’s portfolio companies, both on an individual level and in aggregate to the industry. He started seven years ago building everything in Excel until it got to the point where he couldn’t open it on his laptop without it crashing.

The firm ended up hiring some engineers to build out what it now calls Scale Studio. It has a database of over 1,000 private companies so it can quickly benchmark how well a company’s performing, increasing the team’s efficiency in evaluating new investments and turning around feedback to founders much faster. There’s even a public version that’s been simplified so founders can use it even if they’re not pursuing a term sheet from Scale. (The data inputted isn’t shared with the Scale team.)

“We can very quickly assess how well the company's performing against the benchmarks and how we think that this company will perform in the future, almost going so far as to make some predictions about what the trajectory will look like,” Chang said. “We share this back out to the entrepreneurs so it really serves almost as a marketing tool for us as well.”

The venture capital industry is clearly catching up on its adoption of software, but Ohanian still wonders how many hours venture firms are really spending in their software products or whether it’s just bells and whistles. Having built Reddit and then the VC fund Initialized, he’s seen both sides of things before. When launching his new fund, Seven Seven Six, he says the mindset going in was, “We are a startup that just deploys venture capital.”

As a result, he now spends nearly his entire day working in the firm’s software Cerebro. In the notes section, everyone at the firm logs the introductions they’ve made, media interviews they’ve done and pitches they’ve listened to. It’s tracked in a timeline so people within the firm can see how everyone is spending their day. Any feedback on deal memos is given anonymously in comments so that anyone feels empowered to speak up. There’s a campaign function so the firm can help founders run large-scale reach-outs for partnerships and be able to track it in the system.

“The reason this is all valuable is because we're ultimately in a business where it behooves us to maintain the best and warmest relationships with the folks who are most supportive to the firm,” Ohanian said. “No one human should remember that, a database should. And that way, whether we're doing year-end gifts or whether we're inviting people to an event, we're prioritizing the people who are actually most beneficial to the firm.”

Tracking everything is one way that Seven Seven Six’s partners can hold each other accountable for their work in an industry that doesn’t have a lot of standards for OKRs. It’s also in service to founders. While “how can I be helpful” is now a meme in the venture industry, Cerebro allows Seven Seven Six to show founders the receipts on the value the firm is actually adding.

“What matters most — the reason we continue to win deals, the reason we get to see the best companies — is because the best founders say that they would be likely to recommend us to another great founder,” Ohanian said. “So if you work backwards from that, it becomes very obvious why you should be building software to optimize every part of that relationship.”

Climate

A pro-China disinformation campaign is targeting rare earth miners

It’s uncommon for cyber criminals to target private industry. But a new operation has cast doubt on miners looking to gain a foothold in the West in an apparent attempt to protect China’s upper hand in a market that has become increasingly vital.

It is very uncommon for coordinated disinformation operations to target private industry, rather than governments or civil society, a cybersecurity expert says.

Photo: Goh Seng Chong/Bloomberg via Getty Images

Just when we thought the renewable energy supply chains couldn’t get more fraught, a sophisticated disinformation campaign has taken to social media to further complicate things.

Known as Dragonbridge, the campaign has existed for at least three years, but in the last few months it has shifted its focus to target several mining companies “with negative messaging in response to potential or planned rare earths production activities.” It was initially uncovered by cybersecurity firm Mandiant and peddles narratives in the Chinese interest via its network of thousands of fake social media accounts.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (ljenkins@protocol.com).

Some of the most astounding tech-enabled advances of the next decade, from cutting-edge medical research to urban traffic control and factory floor optimization, will be enabled by a device often smaller than a thumbnail: the memory chip.

While vast amounts of data are created, stored and processed every moment — by some estimates, 2.5 quintillion bytes daily — the insights in that code are unlocked by the memory chips that hold it and transfer it. “Memory will propel the next 10 years into the most transformative years in human history,” said Sanjay Mehrotra, president and CEO of Micron Technology.

Keep Reading Show less
James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Fintech

Ripple’s CEO threatens to leave the US if it loses SEC case

CEO Brad Garlinghouse said a few countries have reached out to Ripple about relocating.

"There's no doubt that if the SEC doesn't win their case against us that that is good for crypto in the United States,” Brad Garlinghouse told Protocol.

Photo: Stephen McCarthy/Sportsfile for Collision via Getty Images

Ripple CEO Brad Garlinghouse said the crypto company will move to another country if it loses in its legal battle with the SEC.

Garlinghouse said he’s confident that Ripple will prevail against the federal regulator, which accused the company of failing to register roughly $1.4 billion in XRP tokens as securities.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

Policy

The Supreme Court’s EPA ruling is bad news for tech regulation, too

The justices just gave themselves a lot of discretion to smack down agency rules.

The ruling could also endanger work on competition issues by the FTC and net neutrality by the FCC.

Photo: Geoff Livingston/Getty Images

The Supreme Court’s decision last week gutting the Environmental Protection Agency’s ability to regulate greenhouse gas emissions didn’t just signal the conservative justices’ dislike of the Clean Air Act at a moment of climate crisis. It also served as a warning for anyone that would like to see more regulation of Big Tech.

At the heart of Chief Justice John Roberts’ decision in West Virginia v. EPA was a codification of the “major questions doctrine,” which, he wrote, requires “clear congressional authorization” when agencies want to regulate on areas of great “economic and political significance.”

Keep Reading Show less
Ben Brody

Ben Brody (@ BenBrodyDC) is a senior reporter at Protocol focusing on how Congress, courts and agencies affect the online world we live in. He formerly covered tech policy and lobbying (including antitrust, Section 230 and privacy) at Bloomberg News, where he previously reported on the influence industry, government ethics and the 2016 presidential election. Before that, Ben covered business news at CNNMoney and AdAge, and all manner of stories in and around New York. He still loves appearing on the New York news radio he grew up with.

Enterprise

Microsoft and Google are still using emotion AI, but with limits

Microsoft said accessibility goals overrode problems with emotion recognition and Google offers off-the-shelf emotion recognition technology amid growing concern over the controversial AI.

Emotion recognition is a well established field of computer vision research; however, AI-based technologies used in an attempt to assess people’s emotional states have moved beyond the research phase.

Photo: Microsoft

Microsoft said last month it would no longer provide general use of an AI-based cloud software feature used to infer people’s emotions. However, despite its own admission that emotion recognition technology creates “risks,” it turns out the company will retain its emotion recognition capability in an app used by people with vision loss.

In fact, amid growing concerns over development and use of controversial emotion recognition in everyday software, both Microsoft and Google continue to incorporate the AI-based features in their products.

“The Seeing AI person channel enables you to recognize people and to get a description of them, including an estimate of their age and also their emotion,” said Saqib Shaikh, a software engineering manager and project lead for Seeing AI at Microsoft who helped build the app, in a tutorial about the product in a 2017 Microsoft video.

Keep Reading Show less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories
Bulletins