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Moneyball, VC Style

Data mining can help venture capitalists find the next big thing. But it can’t be the whole story— at least not yet.

Journal Report

It’s still a business based on gut and intuition, says Mr. Patil, the former chief scientist for LinkedIn. But data-mining techniques, he says, can help venture capitalists be more efficient and effective.

We had a chat with Mr. Patil about how investors can use big data to spot the next big thing. Edited excerpts follow.

Watching Developments

THE WALL STREET JOURNAL: Can data help spot breakout companies?

Eric Millette

DJ Patil

MR. PATIL: We’re seeing lots of interesting signals people can use to understand larger trend changes.

One example is the GitHub platform [a site for hosting online projects]. This is a service that allows people to collaborate on technology, namely code. From this we can look at technologies that the community is starting to follow and adopt.

For example, take Scala, a new computer language. If you look at the number of meet-ups and the total number of participants [working with Scala on GitHub] it becomes obvious that there is serious traction. Once we can tell that there is adoption, talking to customers clearly identifies a problem that the companies have: They can’t scale the technology. As a result, we helped start the company TypeSafe, which makes it easy to build software using Scala.

WSJ: What are some of the challenges investors face using data mining?

MR. PATIL: One challenge is that venture really focuses on the team. You’re not just investing in that space [or technology], you’re investing in people that can execute in that space.

That people aspect can’t always be captured in the data. You need the right chemistry. That’s where the people who have a lot of experience come along.

WSJ: What are some of the most useful data out there for investors?

MR. PATIL: One of the most powerful tools is LinkedIn. You go into a meeting, you already have context about a person. You’re both able to have mutual information about who you know in common, your histories, all of those things. That actually helps get you to a more common level.

Playing by Numbers

WSJ: Can venture capital apply the lessons of Moneyball, the Michael Lewis book about the Oakland Athletics baseball team using stats to rethink hiring players?

MR. PATIL: I’m a huge fan of what Moneyball was doing. They were taking a process that was totally not driven by data and making it data-driven. I think that’s what we’re doing here. The difficulty is not all problems are amenable to data at certain times. If you were trying to do a Moneyball approach, and you were trying to pick the next Mark Zuckerberg [ Facebook ‘s chief executive], that’s probably really hard.

WSJ: Why is it hard?

MR. PATIL: There’s no precursor signal. We don’t often have data signals for finding the next type of major founder. Even finding a signal for who is going to be an amazing quarterback 15 or 20 years in the future is tough.

WSJ: How can data help time investments and get in before the crowd?

MR. PATIL: With the best venture firms, you’re not trying to scoop somebody else. You’re trying to recognize that the market is starting to shift, or that there’s an opportunity where people haven’t recognized value. Venture is not like hedge-fund trading, where you just say, Ooh, let’s have a great, supersmart algorithm, and it determines the minute you do stuff. Venture capital unfortunately doesn’t work that way. It’s more collaborative, a long process.

WSJ: What pie-in-the-sky data source would be most helpful in analyzing companies?

MR. PATIL: A well-built signal to say where people’s skills and passions are. It’s finding people that can make the team go to work. It’s a very hard thing, finding additional expertise that matches your culture.

Ms. Lessin is the senior technology reporter for The Wall Street Journal in San Francisco. She can be reached at jessica.lessin@wsj.com

A version of this article appeared March 11, 2013, on page R4 in the U.S. edition of The Wall Street Journal, with the headline: Moneyball, VC Style.

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