Tribe Capital
- Tribe Capital developed a model to discover the best seed-stage VCs.
- It was designed to notice investors with consistent extraordinary skill.
- Tribe used it internally to find partners, and it became the basis of Insider's lists of top VCs.
- Read the Seed 100 list of the best seed VCs and the Seed 25 list of the best female seed VCs.
There are tens of thousands of institutions and people who are early-stage investors in the US.
Despite such vastness, seed investors are a tight-knit, interwoven community. They work together to find and support young startups, work that we see as a highly skilled vocation: From our research, we know that the best VCs perform a lot better than the average ones, and they have repeat success.
Our team at Tribe Capital is a group of technologists and engineers who harness data science every day to identify the most significant companies of our generation. We look for what we call the "N of 1" opportunities, where a company is capturing a new atomic-size unit of value - such as oil, idle cars, equity, or the friend graph - that, when captured, has the potential to catalyze an immense wave of innovation. These opportunities are easy to spot in retrospect, but very difficult to predict.
So, we wondered, out of all the investing partners available, which ones consistently spot those "N of 1" opportunities? Those are the relationships we should develop and how we should spend our time. But how do we find them?
These questions drove us to develop a model for ranking the performance of the seed community. This methodology is how we determined the Seed 100 and Seed 25 lists.
We sought out VCs whose seed investments:
- have performed well as indicated by initial public offerings or exits meaningfully above liquidation preference, meaning returns were achieved because the companies became more valuable, not because they raised a lot of money.
- showed early signs of future success because their portfolios have cured well at the early stage, but have not yet exited.
- tended to reach growth stage as indicated by Series B+ follow-up rounds.
- had well-rounded success, showing well across all attributes we measured even if they didn't have a single strength.
Our search began with a review of Crunchbase and PitchBook, two representative databases that track venture deals. The model analyzed each person's performance in about 25 areas. The total population of people who met our criteria was about 1,000. (We excluded all members of the Tribe Capital investing team.)
Of the 1,000, about 450 had enough indicators across many areas of our criteria to produce a strong level of confidence in their estimated investing proficiency.
Then, once we narrowed the list, we did our own due diligence.
Everyone has different strengths, and our model is designed to notice when an investor possesses extraordinary skill and shows a high likelihood of continuing to be outstanding.
That said, many great investors aren't on either list.
Because our model looks at funding and exits, it typically takes a few years to gauge the quality of seed investments. So we eliminated from contention any investor who is no longer active and those who had fewer than five investments between 2007 and 2020.
Women and diversity
Venture capital has historically been entirely driven by who you know, not what you know. That's one of the problems our models are designed to change. (Read: How Tribe Capital's Arjun Sethi uses data, not feelings, to choose the startups his fund backs.)
For that reason, the venture industry has been, for decades, dominated by men and has largely overlooked people of color. As a result, historical data on the performance of investors by gender or racial diversity has been difficult to measure.
By including historical analysis in our model, our list reflects the still somewhat lacking diversity in the industry today, which we expect may evolve over time. In the set of 450 people who met our criteria, the ratio of male to female was about 12-to-1. Racial data on investors was not available.
There are many excellent seed investors, particularly from a growing rank of newly funded investors from diverse backgrounds, who simply didn't have a long enough track record as of yet on enough deals, with data that could be validated, to be in contention. In future years, these successes could be expressed in our model, and we expect our list to grow more diverse over time.
All of this motivated us to share our work so that entrepreneurs at the early stage have more resources and guidance when choosing whom to partner with.
We're excited to see how the entire industry engages with the Seed 100 and Seed 25, as well as for the partnerships that are created by what we have to share with you.
Jake Ellowitz is a partner at Tribe Capital and the data scientist who pioneered Tribe's startup- and venture-capital-industry mathematical models.
from Business Insider https://ift.tt/3dlK86w
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