It’s no secret that venture capitalists are loving big data right now.
The partners at Correlation Ventures, though, are doing more than investing in companies turning big data into insights. They’re doing some of their own number crunching and predictive modeling based on investing and exit data they’ve been collecting for nearly a decade.
The hope is that data-driven insights can help make quicker and hopefully smarter investment decisions.
Led by managing director David Coats, the San Diego-based firm calls itself an ideal co-investor, in that it removes some of the hassle from the tedious, time-consuming process of raising a VC round. Time, after all, is an entrepreneur’s biggest asset, Coats said.
Coats was previously managing director at Hamilton BioVentures, an early-stage life science fund, and an entrepreneur before that. His Correlation co-founder, Trevor Kienzle, has a similar background in IT investing and company management. Together, they wanted to solve the challenges that companies and lead investors face when they’re looking to fill out a round.
Their firm co-invests up to $2 million in a company from the seed stage up to growth equity stage. It doesn’t take a board seat and promises startups an investment decision within a few weeks and without repeat due diligence. To do that, it relies on guidance from predictive models that its analytics team has built based on a comprehensive investment and exit database nearly a decade in the making. While there’s still some of the typical objective discussion around each company, Coats said the team will only consider opportunities that look attractive in this model.
San Diego-based Correlation closed its $165 million fund in 2012 and has used it to co-invest in more than 70 companies so far across life science, IT, clean tech and consumer industries. In the healthcare realm, it’s invested in a handful of pharmaceutical companies (including Galera Therapeutics and cancer therapy firm Mirna Therapeutics), a few medical devices and several health IT startups, including corporate wellness company Retrofit.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Coats talked with MedCity News about the firm’s unique approach to investing.
Tell me about this database and how it guides your decision-making process.
We’ve been building this database over the last nine years, and we believe it’s the most complete and accurate database of venture financing out there. We have developed a model that’s similar to a FICO credit score. We receive the documents that I mentioned before (term sheets, cap tables, financial history, and the like), input the relevant information to generate a quantitative analysis, and we base our investment on that output.
The things that it looks at would not be surprising to entrepreneurs or investors. It looks at who the syndicate is, management background, terms of investment, what’s been happening in industry sector, the makeup of the board of directors, the financial history of the company, etc.
So what happens when you decide to invest in a company?
If we invest, we state our total commitment up front. We automatically follow the lead investor and participate in future rounds until we meet that total. We don’t take board seats, and we’re flexible on size – we’ll invest anywhere from $100,000 to $2 million.
One requirement we have as a co-investor is that there’s at least one other venture firm that’s also making its first investment in the company at the same time.
So how does that help other investors?
(In the past) when I was the lead investor, it would be very important to add value as part of the board of directors and to do classic due diligence. But – how many active lead VCs do we really need in each company? Once we’d get past one or two active lead VCs in almost every company, the last thing everyone wanted in the next investor was another lead VC.
Your portfolio is very diverse, both in terms of industry and geography. What does your data say about where companies are located? Does that make a different?
Looking at the facts, there’s no geographic region of the country which consistently under-performs or outperforms another if you look at average returns. If you hear that all the best deals in life sciences are in the Bay Area or New York or Boston, the data does not support that. So that’s one of the reasons we’re actively seeking investment across the U.S.
It’s been two years since you announced the fund. Any exits yet?
We close about two new investments a month, and we’re about halfway through investing this first fund, so we’ll be continuing at that pace for the next couple years. We’ve had one exit that’s been public: Virsto was acquired by VMware. The financial terms were not disclosed, but it was an attractive exit.
