It's not obvious that the venture capital community would have lessons to learn from the statistical analysis of baseball, but my WBD colleague Mark Newberg, made a great case recently for creating a metric for venture capital firms based on baseball slugging percentage as a way of tracking a venture firm's performance over time.
Mark is the firm's Director of Impact Strategies. In a recent Forbes article, he notes that 2017 was a record year for home runs in baseball, but along with the homers came a lot of strikeouts. He explains that, "This is not at all dissimilar from the all-or-nothing, home-run-or-bust approach taken by many venture capital firms. The "swing-for-the-fences" philosophy works for some fund managers and for some entrepreneurs as well."
He goes on to say, "But in venture capital, as well as in baseball, consistency matters. A skilled hitter who regularly produces base hits can be more valuable than a home run slugger who strikes out frequently. It's why baseball analysts and administrators developed the slugging percentage metric, as it measures overall production over the course of a season and even a career."
So never one to shy away from metrics, Mark has developed a "Venture Slugging Percentage" formula that could work along the lines of the one developed for baseball, giving more weight (like baseball does) to high-producing returns, but also taking into account more modest, but consistent results.
He starts by defining opportunities, "This is pretty simple. An at-bat is a portfolio company investment. If you have 10 companies in your portfolio, you have 10 at-bats," he said. Then he sets a value for different levels of venture return: "For the sake of argument let's use a multiple. Let's also agree that a home run is an exit that equates to a multiple of 5x or more—meaning the investors get a return of at least five times their investment. A triple is a 4x exit, a double is 3x, and a single is 2x. Anything less than that is an out."
In this formulation, a VC firm that hits a home run (like an early investment in Facebook) will get plenty of credit for it, but will also be dinged if the next nine at bats are strikeouts. A firm that focuses on more modest returns – hitting singles and doubles as it were – may prove to be noteworthy for their consistency – a result that will be attractive to many investors who are not counting on hitting a home run.
The venture marketplace is always looking for new metrics and it would be interesting to see Mark's formula applied to the marketplace to supplement the usual analysis we see in financial returns. Bragging rights could be extended to singles hitters as well as to the big sluggers who sometimes close their eyes and hit it out of the park! 2017 has been a year where there has been plenty of success in the financial markets to go around.
Wishing you and yours happy holidays and a safe and prosperous new year.
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