New San Diego VC Firm Emerges as ‘The Moneyball of Venture Capital’

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lead investors and companies to quickly put a round together.

Coats says a final bit of inspiration actually came from reading “Moneyball,” which describes how the Oakland A’s used “Sabermetrics”—essentially a whole new dimension of player statistics—to upend 100 years of conventional wisdom about evaluating baseball players.

“That kind of distilled it,” Coats says. At the time, he had been reviewing the outcomes of his previous venture investments, and found “some of my best deals were the ones that I had had trouble raising funds.” By the same token, Coats could find no correlation between the hot deals (where investor demand was highest) and the hot outcomes.

[Corrects to say Coats studied Markowitz, instead of consulting with him.] Coats says he met with some experts to discuss the idea, notably Matthew Rhodes Kroft of the Harvard Business School (who was then at Columbia University) and the University of Chicago’s Steven Neal Kaplan. “They both got very excited about the idea,” says Coats, who says he also studied the work of Harry Markowitz, a pioneer in portfolio theory (now a professor of finance at UC San Diego’s Rady School of Management).

Markowitz guided Coats’ thinking in terms of diversifying the firm’s venture portfolio through a variety of life sciences, technology, cleantech, and financial services deals, and by various stages to avoid correlated risks to the extent they can. Coats says their underlying thinking was sophisticated enough to attract more than 30 venture capitalists to invest personally as limited partners in Correlation Ventures’ first fund, along with college endowments, pensions, funds of funds, and other conventional investors.

“Raising the firm’s initial $165 million was a three-year overnight success,” Coats says. After beginning their … Next Page »

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