Moneyball Investing

Dave McClure wrote this post on Moneyball investment and it sparked some thoughts for me.

Moneyball was all about looking for new metrics in an old game. Instead of looking for strong traditional results in potential recruits – like pace, arm or home runs hit – the Oakland A’s General Manager, Billy Beane, looked for subtle stats that indicated greater chances of team success, such as: ave balls faced/at plate, on base % and the number of walks a batter averaged. They would then model those stats and find the statistical probability that their team would score more runs than their opponents over a season. They did this, because instead of ‘investing’ in talented youths with potential they recruited proven players from the minor leagues, with history and data that pointed to strong performance accross their metrics. Previous performance pointed to strong continued performance, even in the Majors.

You can see this scenario already playing out in very simple ways in the investment arena. The rise of methodologies such as #leanstartup and the success of the Rework book by the guys at 37signals (and their blog, Signal vs. Noise) demonstrates a growing appreciation for the ‘minor leagues’ where businesses are built for revenue and the priviledge of their founders. If you look through the upcoming AngelList, you’ll see many of the people involved there are investing in many projects NOT for the returns alone but because they are happy to win at different metrics. Matt Mullenweg would like to invest in seed/early stage companies that Automattic may be able to buy later. What better way to prove a good buy, than see it play in the minor leagues first?

Dave’s artcle is great, and his contention that investment companies should invest earlier and in smaller tranches is good. People are keener to invest in smaller lots because they’re happy not to be playing in tbe Major leagues. The game is changing towards one of survival (in an existential sense) and sustainable cash flow. Investment will change towards not backing companies until they have proven business models, or in need of funds to continue customer development finding it. Perhaps investors will possibly even move to recieving something more like ‘dividends’ from companies they strategically admire than being in the game of exits