GV, Formerly Known as Google Ventures, For Years Has Used an Algorithm That Effectively Permits or Prohibits Both New and Follow-on Investments (axios.com)

Dan Primack, reporting for Axios: When most venture capitalists want approval to make a new investment, they go to their partners. When venture capitalists at GV do it, they go to something called "The Machine." Axios has learned that the firm, formerly known as Google Ventures, for years has used an algorithm that effectively permits or prohibits both new and follow-on investments. Staffers plug in all sorts of deal details into "The Machine" -- which is programmed with all sorts of market data, and returns traffic signal-like outputs. Green means go. Red means stop. Yellow means proceed with caution, but sources say it's usually the practical equivalent of red. It was initially designed and used as a due diligence assistant that could be overruled but, according to three sources, it has evolved into a de facto investment committee.

Comments

Re:But does it work?

[dj245]

It doesn't really matter unless there is data on whether the system works or not. Nothing in the article seems to mention this.

This is actually 2 questions. Whether it worked in the beginning, and whether it works now.

There is presumably no data available for initial or follow-on investments that were not made. The investment either wasn't made at all, or it was invested by someone else so Google probably doesn't have good or any data. Therefore, any adjustments to the algorithm based on greenlighted projects that then failed will probably overfit due to incomplete data on yellow or redlighted projects that could have succeeded. Unless Google deliberately invests in Yellow or Red projects to test the algorithm, the algorithm may get more and more conservative over time.