[Corrected 6/5/12, 10:05 pm. See below.] Here’s some big news for San Diego’s innovation economy: There’s a new venture capital firm in town—and its investment methodology represents a fundamentally different approach to the conventional business model for venture investing.
The firm, Correlation Ventures, is using predictive analytics technology to tilt the odds in its favor. In fact, by using analytics software that relies on a different way of measuring risk, the San Diego firm is becoming known in some circles as “the Moneyball of venture capital,” according to David Coats, a co-founder and managing partner. He tells me the firm has made 21 investments since mid-2010, and Correlation now has more than $165 million under management.
“Moneyball,” of course, refers of to the 2003 book by Michael Lewis (and the 2011 film starring Brad Pitt) about the Oakland A’s baseball team—and how general manager Billy Beane began using obscure baseball statistics and a new kind of computer-generated analysis to find under-appreciated talent and build a winning team on a shoestring budget.
Correlation Ventures is tied to a different legacy—HNC Software, which was a pioneering developer of predictive software that was used to assess the risk of credit card fraud. The company and its technology, which are now part of Minnesota’s FICO, are often identified as the progenitor of San Diego’s proliferating cluster of analytics software companies.
Coats says the VC firm spent more than six years and invested millions of dollars to compile a database of key variables from more than 60,000 venture financing deals covering roughly 98 percent of all U.S. venture investments since 1987. Partner Anu Pathria, who helped to develop HNC’s Falcon system for making real-time predictions of credit card fraud, developed a similar analytics system to assess the risk of prospective VC deals.