A Reuters PE HUB report said an increasing number of venture capital companies are looking to get good deals based through algorithms. The report cited the example of investment banker William Hambrecht who engaged the services of Thomas Thurston in February. Thurston is the Founder and CEO of Growth Science, a big data firm. Hambrecht hired Thurston to look for investments for his San Francisco-based publicly-traded holding firm Ironstone Group.
Now the CTO and Fund Manager of Ironstone Group, Thurston said he is looking for businesses that focus on disruptive innovations through the use of algorithms he wrote himself. In an interview with Reuters PE HUB, Thurston said, "We're looking for industries with big margins and that are relatively stable, and then [to] find startups that can disrupt that sector." Thurston added that the financial services, law, healthcare, transportation and real estate industries are good candidates for disruption. As far as the transportation industry goes, the airline industry holds the most promise.
However, he said that algorithms don't work well with the pharmaceutical industry. He explained that delays when it comes to getting approval from the Food and Drug Administration or FDA are unpredictable and has an effect on startup firms.
Matt Oguz, an expert in data science, also launched Palo Alto Venture Science in August. The firm will pour money in firms that utilize models from Wall Street software that are used to price stocks. Oguz said he intends to raise USD 200 million to USD 250 million for the company.
San Diego-based Correlation Ventures is already making investment decisions for its fund worth USD 165 million through the use of analytics.
Thurston told Reuters PE HUB why algorithms are important to venture capitalists. Thurston said, "The algorithms will let us do high-quality investments at scale, something VCs have never been able to do before. Not only do yields go up, but they can scale in line with the science, so they don't have to do large, large deals to get the money out."
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