Almost every venture capitalist will say they support startups based on the strength of the founding team. But what about the rest of a startup’s employees? New VC store ensemble thinks you have to look beyond the founders to see if a team will actually make a startup successful.
Collin West, co-founder and managing partner at Ensemble, told gotechbusiness.com that unlike other VCs, his new venture capital outlet determines whether a startup is a good investment based on the depth of its whole team. The company uses an in-house, data-driven algorithm to narrow down potential investments based on all of a startup’s employees. The Texas-based company has raised $100 million for its debut fund to try and prove this idea.
West said that when Ensemble’s founding team — which also included Conrad Shang, a former venture LP at UTIMCO, and Gopinath Sundaramurthy, formerly a data scientist at IBM — tried to identify what it was about startups that set them apart from others in same industry, they all agreed that it was the companies that could attract the best talent.
“Even when you meet the company, you only meet the founder and not the rest of the team,” said West. “Often the founders are not the most interesting people in the team. Companies are buckets full of people – people who decide to work together on a specific mission.”
Looking for startups that are good at recruiting isn’t exactly a new approach, but West said it’s quite hard to actually pull it off: Picking an industry and then going through each company’s entire team is labor intensive, largely a waste of time, and essentially impossible to scale.
To combat this, West said the Ensemble team built a data algorithm that tracks employees at a company and helps narrow down companies with investment potential based on the depth of their team. From there, the human members of the Ensemble team start diving in. West pointed out that this data-driven approach is not a panacea, however, which is why the team still performs regular due diligence; Ensemble gets a smaller curated list as a starting point.
“With the help of software, we can track all the people at all the startups,” said West. “That ultimately yields much more information than any human brain can handle, especially any venture venture. [We] Effectively sort the industry by team quality in a very objective way, know which companies to focus on and spend a lot more time on a lot less companies.
Because the algorithm focuses on teams and not metrics that may be more or less relevant to specific industries, it enables Ensemble to be industry agnostic. West said an example of that would be the company’s investment in 3D home printing startup ICON Technologies.
“It’s an incredible company to work with, but it’s a big mission and changes the way housing was done. For many VCs, it was too much of a risk,” said West. “The great thing about using data is that it helps you get rid of your bias and step forward with curiosity.”
The data doesn’t stop with due diligence either. West said one of the added value of the company for their portfolio companies is that they release a full report on a company’s team after their investment. The report aims to find the bright spots, or areas for improvement, to give the startup the best idea of how to recruit in a way that can directly impact growth.
The company’s focus on teams comes at an interesting time in the market as the industry grapples with both layoffs and a war for talent. While every company tries to keep track of where the best laid-off professionals end up, Ensemble’s data-driven approach can help it maintain a better overview than traditional VCs. But that is no guarantee for a stronger portfolio.
“We just want to be where the big teams are, period,” said West. “That’s the beauty of a data-driven team approach. Every company has a team.”