The venture capital (VC) landscape is undergoing a seismic shift, propelled by the advent of data-driven strategies. The "Data-driven VC Landscape 2023" report by Andre Retterath, Partner at Earlybird Venture Capital, provides a comprehensive overview of this transformation.
The report reveals that the leading 151 data-driven venture firms are setting new industry standards. They were ranked based on community nominations, the number of engineers in their teams, the relative share of engineers in the firm, and the number of segments covered with internal tools.
“This report sheds light on the leading data-driven VC firms and the people behind them driving the revolution, to understand the specifics of their setups, focus across the value chain, preferred tools, and a lot more. Beyond novel insights, it contains actionable guides and content to become more data-driven yourself.”
Dr. Andre Retterath
Interestingly, only 1% of venture capital firms currently have internal data-driven initiatives. However, an overwhelming 84% of VC companies are keen to increase their efforts and resources in this direction, indicating a significant shift towards data-driven strategies soon.
Why become more data-driven
In the fast-paced world of VC investing, time and efficiency are critical. The report demonstrates that embracing data-driven approaches and AI technologies can significantly enhance productivity. By leveraging these tools, VC investors can streamline their workflows, automate data processing tasks, and gain valuable insights to make informed decisions. This allows investors to allocate more time and resources to identifying and capitalizing on the right opportunities at the right time.
Source: Data Driven VC report
Effectiveness is another key aspect explored in the report. The VC industry operates on a power-law distribution, where a small percentage of investors generate the majority of returns. However, missing out on outlier opportunities due to limited deal coverage or inaccurate prioritization can have substantial financial consequences. The report reveals that data-driven approaches, such as machine learning models, have outperformed human investors in deal screening. By embracing these strategies, investors can reduce miss-rates, identify high-potential investments, and enhance their overall effectiveness.
Source: Data Driven VC report
Inclusiveness is a pressing concern in the VC industry, as unequal capital allocation can impede optimal returns. The report highlights the disparities in funding across different regions and limited access to the industry for underrepresented entrepreneurs. Data-driven initiatives have proven effective in mitigating biases and promoting inclusiveness. By leveraging these approaches, investors can make more equitable and unbiased investment decisions, fostering a more diverse and thriving entrepreneurial ecosystem.
Source: Data Driven VC report
Leading the change
The report provides a detailed analysis of market benchmarking in the VC industry, categorizing firms into three groups based on their technological adoption. First, "old-school" VCs rely on manual workflows and basic tools. Second, "productivity" VCs have embraced off-the-shelf tech solutions to enhance efficiency. Finally, data-driven VCs lead the pack by developing their own scalable solutions and establishing dedicated engineering teams to drive their data initiatives. The report underscores the competitive advantage of data-driven VCs, who are better equipped to navigate the evolving VC landscape.
Source: Data Driven VC report
Data-driven VCs are focusing their efforts on the initial stages of the value chain. Sourcing and screening are the most penetrated stages of the investment process, closely followed by portfolio value creation and due diligence. Younger and smaller firms are more likely to build tools across the value chain than their older and larger counterparts. This is mainly due to the fact that newer firms benefit from greenfield situations, while established VCs face friction due to migration requirements, process changes, and cultural reluctance.
To support investors on their data-driven journey, the report features a comprehensive list of influential thought leaders in the space. They provide valuable insights, strategies, and best practices to empower investors to stay at the forefront of the data-driven revolution. Additionally, the report showcases a wide range of tools used by modern VCs, classified by type, and focus across the VC value chain. These tools serve as practical resources for investors looking to leverage data and AI effectively.
We are extremely proud that three members of the Tech Tour Investors Club - Invest
NL, Jolt Capital, and Almaz Capital, have been featured in the Data-driven VC Landscape 2023 report by fulfilling all the following conditions: at least one community nomination, at least one engineer in the team, and proven to develop internal tooling in at least one segment of the value chain.
Preferred tools for data-driven VCs
The VC tech stack is a critical component of the data-driven approach. As firms transition from traditional methods to more data-centric strategies, their choice of tools evolves as well. Initially, old-school VCs rely on basic tools such as Salesforce for CRM, and Slack or WhatsApp for communication. As they progress, they adopt a modern off-the-shelf tech stack, incorporating VC-focused CRM systems like Affinity, automated workflows with Zapier, and knowledge sharing platforms like Notion.
Source: Data Driven VC report
However, the true hallmark of a data-driven VC is the development of their own scalable solutions. These firms capture data, automate workflows, and bring the core of their business in-house, creating a comprehensive and bespoke tech stack that caters specifically to their needs. This evolution of tools not only enhances efficiency but also enables VCs to harness the full potential of data-driven strategies.
Conclusion
The report concludes with a call to action for VCs to become more data-driven. This is primarily to address three main pain points: efficiency, effectiveness, and inclusiveness. By adopting data-driven approaches and AI, VCs can become more efficient, avoid missing out on outlier opportunities due to incomplete coverage and wrong prioritisation, and reduce biased and exclusive allocation of capital, leading to a more optimal utilisation of founder potential.
The data-driven revolution in the VC landscape has just begun. As AI capabilities improve with the availability of large language models and autonomous agent technology, the use of data is becoming mainstream. The future of venture capital is data-driven, and the firms that embrace this shift will be the ones leading the charge in the years to come.
[Download the full Data-Driven VC report to gain comprehensive insights, strategies, and resources for maximizing your investment approach in the digital age.]
Thanks to Dr Andre Retterath, Partner, Earlybird VC for creating such an insightful report.
