Computer modeling vs. crystal ball: VCJ

Angel investor turned full-fledged venture capitalist Matt Oguz has announced plans to raise a $200 million fund that will utilize a quantitative modeling strategy rather than what he calls the herd mentality that now predominates deal-picking.

Oguz, founder and managing director of boutique firm Palo Alto Venture Science, located in Palo Alto, California, will be following in the footsteps of other firms, such as San Diego-based Correlation Ventures, that are using analytics and other computer modeling technologies to determine investment strategies.

The Turkish-born Oguz, who developed his expertise while doing business intelligence consulting for Coca-Cola, Dow Corning and General Electric, said he has developed a two-pronged approach:

1. Crunch the data derived from each deal to find the best.
2. Suggest how much capital to deploy in that deal.

“When you come across a funding opportunity, you then ask, ‘How much do you put in?’” he said. “Right now, these numbers are determined quite arbitrarily in venture capital.”

Under the relaxed rules now allowed by the SEC, Oguz said he will use the services of financial web portal SecondMarket to market the fund to accredited investors and ensure that they qualify.

Oguz said his model informs how much money to commit, an amount that depends on the company as well as the round, along with several other considerations factored in.

Overall, he is looking to achieve a return of at least 5x for his fund.

He has already scored an exit following a $50,000 seed investment he made in Seattle-based restaurant website builder Appetas two years ago. Google acquired the company in May for an undisclosed amount.

Oguz said he ran his model on Appetas, crunching the data on such factors as the industry, the product, the market and the competition.

“They had a viable product from day one,” he said, “They were a little under the radar, but up and coming, so we decided to invest.”

Using historic data from the National Venture Capital Association, Oguz said he has been able to develop a system to help improve the odds of picking profitable deals.

In 48 percent of investments, VCs saw a zero return, while in 6 percent of the investments, they achieved a 7x return, he found. VCs achieved a 50x to 100x return in 0.15 percent of their deals, and a lucky few achieved a 100x return or better in 0.2 percent of the deals.

“If you have a good understanding of how returns are distributed, then you get a good idea of what to expect when it comes time to deploy the money,” he said. “If I put in this much money, what do I expect to get out of it?”

Right now, “these numbers are determined quite arbitrarily by venture capitalists,” he said.

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the full story here. To subscribe to VCJ, click here for the Marketplace.

Photo of Matt Oguz, founder and managing director of Palo Alto Venture Science, by Oscar Urizar, Red Eye Collection, for VCJ.