2014-01-20

Co.Labs

How VCs Are Coping With The Startup Boom

Investors say they need a new set of analytics tools to help them separate the wheat from the chaff.



Until recently, venture capitalists and early-stage investors had to rely on their intuition and hand-rolled spreadsheets to know which companies were worth funding. But with a glut of new companies to screen and track, investors told Fast Company they need new ways to keep track of the movers.

"One of the biggest challenges at the seed stage is that there's an ever-increasing number of new startups founded each year," says Noah Lichtenstein, a partner at seed investor Cowboy Ventures. Ready-to-run database solutions like Amazon Web Services and backend-as-service tools like Parse are the cause. These days, he says, "early-stage investing is kind of like digging for needles in an increasingly growing haystack."

Sites like Mattermark and Dashboard track publicly available data about startups, from social media buzz to regulatory filings about new investments. AngelList works like a LinkedIn for tech companies, letting startups post their own profiles and letting people know when they're hiring or raising money. And Product Hunt provides a daily curated list of new web companies and apps, letting investors see them before they take off. And DataFox works like Bloomberg for small private tech companies.

"The amount of data and the amount of ways you can track things now are such orders of magnitude beyond what they were before," says Josh Elman, a partner at VC firm Greylock Partners. "But some of these things are really new approaches, like AngelList--you never had a directory of companies that are raising angel funding before."

And Product Hunt, which takes suggestions and comments from a limited set of in-the-know members, can help investors find startups before they blow up, he says. Elman cited the now-famous story of Lightspeed Venture Partners' Jeremy Liew, who was able to invest in Snapchat ahead of the curve after hearing about the app from a teenage early adopter.

"In the early days of a product, what's interesting to a few people who get really passionate about it is sort of what cascades into something that gets bigger later," Elman says. "By the time you track the data, it would be too late."

The tool can also draw attention to novel ideas arising from outside familiar Silicon Valley circles, says SV Angel's Abram Dawson in an email.

"A 22-year-old founder in Nebraska is going to have a much harder time connecting with a VC in the Valley since they don't have those relationships or connections," he wrote. "Now that same person can post his/her product on Product Hunt and let vetted community members critique it. It levels the playing field."

Product Hunt draws a mix of investors looking for opportunities, startup founders who want to stay abreast of the competition, and ordinary early adopters looking for apps to use, says its co-founder Ryan Hoover.

"The investors--particularly early stage investors--use it to source deals and just see what products are out there," he says. And they can turn to tools like Mattermark, Dashboard and the TechCrunch-affiliated startup directory CrunchBase to find more information about companies, he says.

Having a reliable set of company data can help investors distinguish startups working in the same general area, says Dashboard founder Paul Singh, who was formerly a partner at accelerator and seed funding firm 500 Startups.

"At the early stage, I kind of want to get a sense for what web traffic might look like for the competitors; I want to know where the competitors' founders are hanging out," he says. "I look at that via public Facebook checkins, event RSVPs, and things like that."

Many VCs are using Dashboard not only to find new opportunities but also to track and guide startups they've already invested in, he says. Since the tool pulls in social media data, they can see whether founders are actively promoting their companies--whether they're giving talks and speaking at meetups, RSVPing for industry events, and checking in at customer offices--and even whether they're checking in at a restaurant with VCs from another firm.

Public social media posts can also help founders and investors see what kind of innovations customers want, Singh says.

"Let's say you've got an idea about some sort of food startup," he says. "Twitter will be an interesting way to find out what people are complaining about within that entire market."

And seeing which companies are being tweeting about helps distinguish competitors in a crowded startup landscape, says Mattermark founder and CEO Danielle Morrill.

Mattermark collects data on companies' web traffic, app downloads, social media mentions, along with information on fundraising and hiring. When VCs hear of a potential investment opportunity, Mattermark will often already have historic information about how the company's been growing, she says.

Using Mattermark saves investors the trouble of building their own spreadsheets of company stats or coding their own in-house tools, she says. And storing historic data makes it difficult for companies to game their social media and web traffic rankings, says Morrill.

"If you gamed Mattermark, you'd probably actually be a successful company," she says."The most valuable thing that you can do is have your business actually be successful as a business."

As useful as the tools are, they're no substitute for traditional techniques like face-to-face networking with startup founders and the rest of the tech community, emphasized Cowboy Ventures' Lichtenstein.

"These tools I think are great--I use CrunchBase and AngelList and LinkedIn every single day," he says. "These are tabs that I keep open on my browser, because somebody says, 'have you heard of such-and-such?' or 'our biggest competitor is such-and-such.'"

But equally important is talking to founders and investors about new ideas and potential customers about what they need, he says.

"I think human intelligence still is the most important component of early-stage investing," he says. "It's really using your network, talking to people and trying to constantly be listening and trying to understand, what are the problems out there that people are looking for solutions to."

[Image: Flickr user George Alexander Ishida Newman]