IT Moneyball: A person who considers startups

Starting a business is dangerous ...

A big competitor can bring down prices. Someone may sue you for patent infringement. Others, because your product does not fulfill the promise. The market may not be interested in what you are selling. According to the US Bureau of Labor Statistics, about half of all enterprises go bankrupt during the first five years.

Thomas Thurston thinks that scientific evidence can help avoid some of the risks. For the past nine years, he has refined statistical methods for evaluating business plans and called them imitation business modeling. In some ways, the methods obtained are somewhat like Moneyball for investors.

According to him, the calculations correctly predicted the growth of Snapchat, Uber, and Airbnb. At the moment, the calculations show a 66% chance of continuing the work of these companies over the next five years. He adds that calculations make it possible to predict the failure of almost any company in 88% of cases.
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The simulation turned out to be so successful that Tom now uses it to make money. He works for Growth Science , a research firm that sells its predictions to large companies, and uses them for investment in partnership with the Ironstone Venture Fund. In the long run, the author of the methodology believes that the models can have quite a strong influence on the business world as a whole, because they will help people avoid unimportant investment decisions.

Tom recognizes the imperfection of the model, but believes that a model that gives the correct result only in half of the cases will already reduce the number of incorrect investment decisions that look like excellent opportunities for the inexperienced eye. If fewer companies fail, he reasons, the whole economy will become more stable and everyone will benefit.

Tom Thurston is not alone in applying Moneyball-style scientific data in investments. Google Ventures uses a data-driven approach , like the Correlation Ventures and Venture Science funds.

Data-driven can be translated as a management approach, where the main decision criteria are the results of a measurable experiment.

He does not just use his calculations to make his own bets in the market. Growth Science helps large corporations invest, conquer markets and strategies. 3M , for example, uses the services of Growth Science to predict the degree of success of a new product and service. The basic idea is to help these companies make informed decisions and avoid the practice of mass layoffs. Tom believes that over time, he can also help small businesses and start-ups.

Exorcist

The idea of ​​simulation business came to the author in 2006, while working at Intel Capital, the investment division of a highly respected chip manufacturer. One day, he decided to analyze Intel’s investment history to see any emerging patterns.

His approach is based on the transformation of qualitative information, such as whether a company is an “initiator” or a “fast follower” in the market, into quantitative data that are tabulated. It requires a certain degree of human evaluation, a level of rigor or consistency.

“You cannot trust the model until you have removed all the intuitive variables from it ,” says Thomas.

Surprise, surprise ...

Using this process, he discovered some amazing things. The most amazing of them is that the team provides only about 12% of the success of the company. “You need a good team that will not have a destructive effect on the company, but hiring rock stars from the industry doesn’t bring such great benefits,” he explains.

His work at Intel eventually led him to research at Harvard University, thanks to Clayton Christensen, author of the “disruptive innovation” model. After that, to fund further research, he began working in Growth Science.

To the masses ...

Thomas Thurston wants to advise entrepreneurs - and help people with good ideas find the best business models. Although until now his work was mainly used by large companies and investors, according to him, the results are also leaking to small entrepreneurs.

Last year, the Ironstone Group invested in Arcimoto's electric car , but they were almost on the verge. Examining the model, he eventually decided that the company should go beyond the US and enter emerging markets. For Arcimoto founder Mark Fronmayer (Mark Frohnmayer), this was key advice.

Problem!?

For companies that Tom has rejected as unsuitable for investment, this will also be beneficial. “People will come back to us in a few months and will say:“ We thought about what you told us, and now we are doing something else. ”

He would love to help all businesses, not just those that the Ironstone Group considers suitable for investment. The problem is that Growth Science charges a few thousand dollars for consulting a company. It is laborious to transform traditional business plans into a form suitable for the work of the algorithm. For most companies at an early stage of development, this is still too much.

You can increase the availability of the method by automating most of the process, offering it as a web service - for a small monthly fee or even for free. In fact, Growth Science has already developed a beta service, but there is a snag.

According to Tom's model, Growth Science's own chance of survival, following the current business model, is about 69%. Adding an automated service will improve the chances, but there is a risk of disrupting the already successful consulting business. In short, the real “innovator dilemma” . This situation clearly shows that there is always a fear of change, no matter how reliable your data model is.