Why algorithms should replace pitches

Published 02 November 2015 17:01, Updated 05 November 2015 15:11

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Why algorithms should replace pitches

Entrepreneur Andrey Shirben

As an early stage investor, I’m used to getting around a thousand startup pitches a year. These pitches would come from all over the world, from Africa all the way to New Zealand and after moving to Sydney five years ago, the number of Australian deals was also steadily increasing, reaching 200 last year.

Most of them looked very promising, and of course each entrepreneur is absolutely sure his idea is the one, meaning the stories that you hear during the pitch are passionate and purposeful. My mailbox was getting swamped with requests from entrepreneurs asking for 10, 20, or 30 minutes of my time as they were convinced their idea was the next big thing. As it was physically impossible to meet and properly consider most of the startups, I relied very heavily on my instincts as a result.

This is how I made my best and my worst investments.

In a typical year I would invest in 10-12 companies, which translates to one per cent of all the startups pitching me. The problem was, I still had to spend over 50 per cent of my time on the remaining 99 per cent. This process was proving to be inefficient and detrimental for both myself and the startups that I did end up backing.

There is a light on the horizon, but first, let’s rewind a little bit to the year 1976, at Los Altos, California. Don Valentine, the legendary founder of Sequoia Capital, meets with Steve Jobs & Steve Wozniak, the founders of Apple, in Jobs parents’ garage, which they used as their initial assembly line. Don Valentine refers Jobs to an angel investor: Mike Markkula, who becomes the first outside investor in Apple (a $250K combination of cash and credit line). This was the inception of what today is the world’s largest technology company. This was also one of the phenomenal success stories of venture capital (VC) investments back in the day.

Can you imagine how this story would have unfolded had Jobs & Woz grown up in South Dakota instead of Northern California?

Yet a full 40 years later, not much has changed in the way entrepreneurs pitch for money, nor how VCs make investment decisions. VCs, even while funding innovation and disruption, have not really changed their own operating model in decades. Every entrepreneur that ever tried raising money from a VC knows it’s a long process. It starts from building the relationship and trust first and in most cases, it means that you have to be in a physical proximity to the investors you want to pitch for money. It’s essentially the “Old Boys’ Club” rules. It’s not about what you know, what you do or how well you do it - it’s all about who you know, which is typically related to where you grew up and which school you attended.

Are we doomed? Should we all just move to the Silicon Valley, as it seems like the only place where startups get funded?

Well, not really. In fact, these are exciting times for technology entrepreneurs and VC’s alike. It just requires us to look at the new wave of funding strategies, and understand how these are opening up opportunities for entrepreneurs anywhere in the world:

1.CROWDFUNDING – This area has been booming in recent years, and enables entrepreneurs (without any bias towards gender, ethnicity, religion and location) to get their concept funded via a rewards-based campaign (where the backers are typically getting an early version of the product in return for their financial contribution) or an equity-based one (which unfortunately is not yet legal in Australia, but the Government has announced its intention to legalise it by the end of the year).

2.ACCELERATORS & INCUBATORS – Over the past few years the number of accelerators and incubators, as well as their availability, has been growing rapidly, so that today there’s at least one in almost every capital city, and quite a few attached to universities. There are even a few in regional areas. Most of the accelerators are running three or six month programs, and aim to help entrepreneurs understand whether or not they have a viable business, get them some basic funding and grant them access to experienced mentors to help validate their idea and product – market fit.

3.The one I’m particularly excited about is DATA-DRIVEN APPROACHES to investments, where the entrepreneurs and their products are being considered purely based on their objective metrics around performance. Some call it “big data”, but there isn’t actually much data needed to perform the initial assessment and analysis on a product. In understanding that it takes money to build a significant user base, it makes no sense for VC’s to mandate that they see millions of users on an application before they fund it.

The best part about this approach is that it is completely automatic and the entire initial assessment is performed by an algorithm. This saves both investors the time dealing with the bottom 99 per cent while simultaneously unlocks the ability to look at tens of thousands of opportunities for investment in a year, rather than just a thousand.

The way I see it, democratising access to capital funds is a win-win strategy for the innovation eco-system and it is our duty as investors and VC managers to push for more initiatives like these.

Andrey Shirben is an entrepreneur and is currently raising his Follow [the] Seed fund for ‘habit-forming’ tech startups.