Mark Sherman of Titanium Ventures develops an algorithm to evaluate entrepreneurs.
Scott McGrew 01:29
This week, Titanium’s Mark Sherman. So what I’d like to begin with is talking about quantitative analysis.
Mark Sherman 02:02
Basically, we’re sucking in data sets that we think are relevant and then feeding them into some algorithms that we’ve developed to basically score companies.
Scott McGrew 02:14
Longtime listeners may recall our interview with Chris Farmer of Beacon, who created a computer program to do something similar. And you’ve discovered that your algorithm works?
Mark Sherman 02:48
We’ve made 90 investments and we have 15 companies that are unicorns and four that are decacorns. And so we’ve had a fair amount of success in terms of using data science for our investment decisioning.
And we use it in different phases of the process. So in sourcing, we score all the companies that come in, either things that we find outbound, things that come inbound to us, or just generated by the data science team itself.
We then also use it for benchmarking and so looking at companies and sectors and seeing how they do relative to all the other companies in their sectors. I half jokingly say 95% of the companies that come into us or that we find one way, we can reject within five minutes.
We can take a quick look at where their metrics and scores are and what some trajectories are in different dimensions and make a quick call.
For the other 5% of the companies that do look pretty interesting in the comparative space, we then have more time to do customer growth. Calls to do management checks to spend more time with the team about their vision about their roadmaps about how they want to execute in the future.
Scott McGrew 04:21
Have you had an opposite situation in which the metric said no and you said no and it turned out you missed it?
Mark Sherman 04:34
We’ve definitely missed our fair share, and I think most venture firms do. We would say quantitative analytics is something that is not pure. We always use it as a supporting element for strong investment decisions.
I think we’ve had like a 15% loss ratio in our oldest vintage, which in venture is actually relatively low.
Scott McGrew 06:07
Have you seen resistance within your organization to doing it this way?
Mark Sherman 06:12
Today, no. Five and a half years ago, I think there’s a little bit of skepticism with some folks. Now we’re starting to put elements in between each of those phases so that we get a complete workflow. We’re heading to have a closed loop process where we identify and invest in companies that we want to.
Mark Sherman 07:03
I think it’s always gonna be an investor decision for two reasons. One is we’re an intensely people -driven business and CEOs wanna work with investors that add value to their situation.
Investors want to work with CEOs that are thoughtful and have a differentiated approach to how they’re gonna execute. There’s always a judgment call around is this management team vision very strong in terms of where they’re heading with this specific subsector? And have they thought through some of the financial and analytics that will ultimately drive towards returns that excite us.
Scott McGrew 08:18
Where do you see the future of venture in the next five years? We’re living in odd economic times.
Mark Sherman 08:38
The elements that are gonna be really important are performance because we’re in a business where LP’s give us money and so we have to turn that into great returns.
I think there’s two major elements. One is sourcing and then second is value add.
Using data science gives us a quick tool to say yes or no, because most precious element is their time.
The other element is around value add and different firms have conferences and help with recruiting and helping with marketing. We’ve basically made a call around helping with revenue acceleration.
We have a team of four people who work with founders of companies to generate revenue. We’ve generated $500 million of revenue for our portfolio companies and out of the 90 investments that we’ve made, 45 have generated revenue with us.
A lot of young entrepreneurs, particularly companies that are in one and $10 million in revenue, if we can help them with some early wisps of revenue, that really is a huge value add for them.
I think it just shows that we lean in and are constructive in the building of their companies. And even if we can’t help them on the revenue side, their intuition is that we’ll probably find some other way to drive value over time.
Scott McGrew 12:53
What’s a lighthouse leader?
Mark Sherman 13:00
The term lighthouse is somebody who acts as a focal point for an opportunity and are shining the light of where the world is going.
We’re investing in companies that may have 20 people and we want them to get to 200 or they have, you know, 100 people and we want them to get to a thousand.
There’s a certain amount of smarts, drive, charisma, moxie or grit that make up the components of a lighthouse leader and it’s one of those things that you know when you see it.
Some people are very extroverted and others can be a little bit more introverted, reserved, intellectual, but don’t think that they don’t have just as much moxie or grit as the homecoming king.
Scott McGrew 14:31
I assume you do not have a column for Moxie.
Mark Sherman 14:39
We wish if we could figure out the measure of the Moxie score, we might set that up as a side business. Moxie would be a good example of, how do you quantify that in terms of a company? But it can be a difference maker between somebody actually making a space and being the leader, or somebody being a second or third or fourth or even further down the list.
Scott McGrew 15:21
What other lessons have you learned over the years as far as investing?
Mark Sherman 15:28
It’s all about the people. Anytime I’ve felt great about an investment, it’s almost always because I felt great about the leadership team. Anytime I’ve had hesitancy, it’s because I question some of the choices that the leadership team is making.
A lot of people are very good at presenting themselves. The verification is super important to us as we’re making these investments.
Scott McGrew 16:23
You still make investments in Australia?
Mark Sherman 16:33
We just made an investment in December in a climate tech -related company in Australia.
We started on the balance sheet of Titanium, which is the large Australian mobile operator, they dominate that market in ways that Verizon or an AT &T would kind of dream about.
They’ve been an incredible partner for us. A lot of the revenue that we helped generate with our portfolio companies came by either selling to or through Titanium. They’ve provided us with a significant amount of capital that we’ve received to invest in other companies.
They continue to be our largest and probably most strategic investor, but then we brought in other institutional investment firms to support us as well.
We’re very much independent in terms of my partner and I own the management company. We make all of our own investment decisions and it’s the best of both worlds, the friends with benefits of the venture space.
Scott McGrew 18:05
What is the tech situation in Australia? I’ll tell you about the only exposure I’ve had is Melanie Perkins, who told me the story of how she was creating Canva, which now is one of Australia’s biggest tech companies.
It’s more billions. When she first went out to find money, she didn’t know what a venture capitalist was.
Mark Sherman 18:25
I didn’t even know what a start -up was after I had a company for three years. All we thought was that we couldn’t get a bank loan from the bank because we had no credit history.
It was only after having a brief encounter with an investor at a conference that I learned about venture capital and what start -ups were and there was this whole community of companies like that.
Australia went through a very big boom cycle in the late 90s and early 2000s, which then turned into a bus cycle.
I think there was a little bit of a taint in venture in Australia and they’ve been making up for lost time in the last five years in the amount of capital it’s been raising and that’s been deployed.
Australians are very aggressive in terms of consuming new and interesting technologies. We’ve loved having Titanium as an amazing partner because they’re aggressive about consuming new technologies and new ideas.
Scott McGrew 19:41
What are you most excited about in the next, say, three years?
Mark Sherman 19:45
First thing I’d probably say would be AI. There’s been a lot of heat in the last two, three, four, five months related to generative AI and ChatGPT.
It’s important to note that AI’s been around for decades. I think it also helps to give people a broad sense of use. You can play intellectually with it, but then you can start to see where companies like Jasper might be using generative AI around marketing and how a lot of our cybersecurity companies are using AI around threat detection and malware, ransomware, and all those types of things.
It’s unlocking just tons and tons of possibilities. So AI I think is sort of the most important overlay in software related venture investing for decades.
I think climate is an area that we’re spending an increasing amount of time. There’s a ton of FinTech related things that we think are really interesting. Cloud or cybersecurity or SaaS or some consumer investments that we’ve been making over the last couple of years.
Scott McGrew 22:31
Is AI going to replace you at some point?
Mark Sherman 22:40
I think the short answer is no, but it’s really going to help me. Our head of data science likes to use the analogy of Tony Stark, where Tony is an incredible human, but when he puts the red suit on to become Iron Man, that’s the AI, and he’s better and faster and stronger using AI.
Scott McGrew 23:00
Mark Sherman, managing partner at Titanium Ventures.
