Silicon Valley-based venture firm Palo Alto Venture Science is launching a $200 million fund. The focus will be on startups in various stages.
PALO ALTO, CA (July 8, 2014)—Palo Alto Venture Science (PAVS), a next generation venture capital firm in Silicon Valley, is launching a $200M fund. PAVS is utilizing financial models instead of the traditional heuristic approach. Matt Oguz is leading the firm as the founding partner.
Over the last three years, Oguz and his team researched the underlying economics of the asset class. Influenced by quantitative investing and behavioral finance pioneers such as Kelly, Thorpe, Shannon, Kahneman and Tversky, PAVS developed a quantitative investment strategy to target returns exceeding 3x, a commonly accepted benchmark in venture capital. “The limited partners were unhappy about venture capital returns in the past because very little has changed about the way capital was invested. By having a novel mathematical approach, we can produce consistent returns exceeding the cost-of-capital,” says Oguz. He adds, “We question every ‘gut-feeling’ decision. The asset class suffers from too much self-confidence, herd mentality and the home-run mindset. We’d much rather do the math when making fund-related decisions.”
Oguz and his team tested their models and applied numerous simulations against historical data. The results provided proof-of-concept for the approach. They then put the strategy to use at various demo events, evaluating hundreds of startups and assigning risk scores based on multi-factor analysis. Using the models developed, Oguz, an angel investor himself, funded Appetas, a restaurant-tech startup which was acquired by Google in May 2014, just 18 months after its inception. Keller Smith, the cofounder of Appetas, said, “It was a pleasure to work with PAVS. They provide science bias-free advice and invest in making the business succeed, a quality that any entrepreneur should seek in investors.”
This new fund dissects complex venture capital decisions into several calculable problems: multi-factor analysis for selecting startups and application of financial models to calculate investment levels, re-ups, and dry powder. When discussing how the firm determines check sizes, Oguz explains: “Even if you manage to attract the most promising startups, you still need to solve for how much you put in. Imagine a $10M round. How much do you invest? $2M, $2.5M, $4.2M? Deploying too little or too much causes the fund to either underdeliver or take on unnecessary risk. We calculate our participation levels based on the nature of the return distributions.” Sharing the knowledge his team accumulated, Oguz wrote two articles for TechCrunch as a guest columnist explaining the model-based approach.
The fund will back startups in various stages and multiple verticals.
“Our research shows that single-stage investing limits the ability to participate in consecutive rounds, significantly reducing the upside. We invest in multiple stages based on risk/return profiles of startups, sometimes re-upping while other times, choosing to participate in later rounds,” says Oguz when discussing the focus of the fund.
Oguz estimates the “sweet spot” for a venture fund to be in the $200 million range, which is the fund’s target. Georgia Tech Professor Dave Goldsman, an advisor to the fund states, “Instead of setting arbitrary fund sizes driven by popularity and demand, one must calculate an optimal fund size large enough to invest in multiple stages to reach at least 3x. Too large of a fund size causes haphazard capital deployment levels and leads to overinflated valuations.” The firm estimates it will invest in around 80 companies over the lifetime of the fund.
“A disciplined selection process is far more effective than placing frenetic bets. If you want to invest in every startup out there, you’re better off investing in a Russell 2000 index fund,” adds Oguz.
“Not every stage yields the same return. At this point, we’re looking to deploy 32% of our fund to seed and early stages, 26% to the expansion stage and 42% to later stage venture investments. These percentages are derived from the return expectations per stage based on PwC MoneyTree data,” concludes Oguz.
Mahendra Ramsinghani, author of The Business of Venture Capital, said, “PAVS’s approach to VC is disruptive. A proactive approach to add math to intuition when it comes to selecting opportunities is longoverdue in the valley.”
The firm will seek funding opportunities in the United States, ranging from $500k to $5M in multiple stages and technology subverticals.
The fund is open to institutional and accredited individual investors.
To request an invitation, please visit www.venture-science.com/invest.
Download the fund’s executive summary at http://goo.gl/Lz5SOs.
About Palo Alto Venture Science
Palo Alto Venture Science is a leading quantitative venture capital firm headquartered in Palo Alto. Leveraging its proprietary deal analytics platform, the firm seeks to invest in innovative technology companies at multiple stages and verticals with a calculated approach to fund management based on financial decision models.
Palo Alto Venture Science – http://www.venture-science.com
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