EQT Ventures partner reveals why AI is the future of venture capital

“When we invested in them, they
were a team of 15 people based out of a small town in Germany,”
said Mitchell. “They weren’t on anyone’s network. They weren’t on
Pitchbook or Crunchbase, they hadn’t raised any angel money or
talked to investors. But they had built an amazing bit of
software.”

With Motherbrain, Mitchell and
his firm have taken a bold stance in an important debate at the
center of the venture capital world: In an industry that drives
technological innovation, how much should technology itself
influence the way firms invest?

‘The VC fund of the future will not be based purely on
the old boy’s club of internal partners’

For EQT Ventures and its team, data is the key to not only
informing whether or not a startup will be a good investment in
the future, it’s a route to discovering great companies as
well. 

“Clearly the more startups you
see, the more likely you are to find the better deal,” said
Mitchell. “It’s a data-based problem. The more data you have, the
more companies you see, and then you can make better decisions
faster.”

Typically, investors rely on
their professional and social networks to hear about interesting
companies and notable new technological innovations. But even the
most well-connected investor will fall short of a software
program that’s tasked with the exclusive job of combing the
internet in search of undiscovered startups. 

“It seems totally ludicrous that
this process of discovering companies could not be dramatically
improved through the use of modern data and AI,” said Mitchell.
“It’s a pretty obvious conclusion that the VC fund of the future
will not be based purely on the old boy’s club of internal
partners, but on the data and software they use to source and
pick those companies.”

While Mitchell declined to
disclose the exact specifics of how Motherbrain’s proprietary
technology works, he said that its AI-powered software discovered
AnyDesk’s software by tracking down the large number of web
downloads it regularly received. 

“We wouldn’t have been able to
discover this company without Motherbrain, because there’s no way
we would have known to look for it,” said Mitchell.

Mitchell also said that
Motherbrain’s data revealed that AnyDesk was poised to outpace a
$2 billion competitor in its field, meaning that EQT was going to
get in on the deal early.

In addition to AnyDesk, Mitchell credits Motherbrain with one of
EQT’s best investments in a fast-growing Finnish gaming company
called Small Giant Games. 

“It’s an unbelievable unicorn company. It’s gone from taking in
$50,000 in a month to $15 million a month in just over a year,”
he said.

Mitchell said that the decision to invest was almost entirely
based on Motherbrain’s insight.

“We entirely made the decision to invest in them based on data,”
“We looked at the trends within the data, and the potential
monetization. From that information, we were able to make an
investment.”

Can a machine invest as well as a human?

While data typically plays a
large role in traditional venture capital, firms differ in their
approach. 

In multiple conversations with
Business Insider, many venture capitalists have said that their
investing decisions are based on a number of contributing
factors. Tangible data like metrics and analytics are big part of
the process, they say, but there’s also a fundamental human
element that goes into calling a good deal, as well.

Some call it intuition. Others
describe it as emotional intelligence. Still others describe it
as instinct; a gut feeling that guides the final
decision. 

Or, as Deven Parekh, managing
director at Insight Venture Partners puts it: “At the end of the
day, for now at least, venture capital is still a human decision
business. Determining a good deal still requires human
judgement.” 

But does it?

According to Mitchell, venture
capital’s current reliance on human insight has placed the
industry abysmally behind the data-driven approach traditionally
used by institutional investors.

“Venture capital is probably 20
years behind given the fact that the stock market has been
trading algorithmically for many years,” said Mitchell. “Right
now, the classic phrase that investors would use is that the
industry is about 98% human pattern recognition. 2% is based on
data.”

This paradigm, said Mitchell, is deeply flawed. While Mitchell
said that EQT Ventures currently relies on a 50/50 split of human
insight and AI-powered data, he suggests that an ideal investing
model would rely more heavily on algorithms and machine-driven
analytics. 

“I think we’re going to end up around 80% data and 20% human
insight and personal experience,” he said. “In venture capital,
we’re investing in technology, but the industry itself is so far
behind. The irony is never lost on me.”

Not every VC loves having that much data

While most venture firms typically use at least some data to
inform their deals, there’s been debate over just how much of
that information should be a part of the decision-making process.

After Silicon Valley venture firm Social Capital announced plans
to move to a more data-informed investment approach last
year, several partners left the firm. In conversations with
Business Insider, multiple people familiar with the firm
suggested that the departures had resulted in part due to its
move to data-driven investing.

See more: 

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launch an offshoot fund: ‘It’s like Social Capital without
Chamath’

“As soon as you move to algorithms and you’re just purely
data-driven, you’re going to lose the sensibility of a company,”
one person familiar with the departures who asked not to be
identified told Business Insider at the time. “I don’t care if
you’re the founder of a tech startup or a VC. Being disconnected
from the touch is damaging.”

Social Capital is far from being the only venture firm to
express a growing interest in data. GV (formerly Google Ventures)
has long distinguished itself as leader in data driven investing.

In a 2013 interview with the New York Times, a managing
partner at the firm said that data was a critical component
of  its decision-making process.

“We have access to the world’s largest data sets you can
imagine, our cloud computer infrastructure is the biggest ever,”

he said. “It would be foolish to just go out and make gut
investments.”

This could be the future of VC

Mitchell predicts that data-driven investing is still only in its
very nascent stages. In the upcoming years, venture firms will
run with a deeper reliance on AI-sourced insights, he said. 

“In the future, you’re going to see the rise of small startup
investment shops that will be run exclusively by engineers,” he
said. “They’ll say, ‘Oh, we can run this better than everyone
else and raise money off the back of the software we make.'”

Not every investor seems sure about the algorithmic future of
investing.

“Oftentimes, the best deals aren’t clear,” said Insight Venture
Partner’s managing director Deven Parekh. “When you put an algorithm against an
investment, I worry that the algorithm will focus on the lowest
common denominators in the investment process.”

While Parekh said that data
informs a large part of how his firm invests, he’s speculative of
the idea that AI-driven investing could be the future of venture
capital.

“But who knows?” Parekh
continued. “Will this evolve over the next thirty years? I don’t
know. But there’s probably a lot of livelihoods that are at risk
before we get to venture capital.”

For Mitchell, running a venture firm that actively cultivates its
own proprietary tech is essential not only to investing but to
attracting startup founders as well. 

“Our founders love it,” he said.
“They’re on the cutting edge of data. They love that we have a
team of 10 data scientists, and that we’re iterating and testing
our own software. We’re not sitting in an ivy tower saying that
we have the best insight based on our own gut feeling.”