How getting rid of ‘gut feel’ helps find better startups

Diversity isn’t just about doing good, it also produces great returns. And Sharon Vosmek, CEO of VC firm Astia, has the data to prove it now.

The firm has been developing a mechanism for screening investment opportunities in a way that filters out biases — what it calls the Expert Sift — and Vosmek says this has produced an internal rate of return of around 19% over the decade – roughly commensurate with top-quartile performance, with DPI exceeding the average in the same time period.

Astia began developing the Expert Sift more than a decade ago, when the company was an accelerator, trying to pick startups to join the programme. The team began to notice patterns of how some founders and startups would tend to be overlooked by investors, despite strong fundamentals.

Although VC investors are in the business of looking for outliers, they still revert to the human nature of favouring the familiar. Human decision-making, after all, is not a rational enterprise.

So, first thing that the Sift does is flip on its head the way investor-founder relationships begin. Rather than start with introductions, which are hard for underrepresented founders without a network to get, it leaves the face-to-face meeting until after the initial business assessment.  

“Really what the Sift is trying to do is put the business assessment before the relationship build. This is counterintuitive to all things in venture,” says Vosmek tells the CVC Unplugged podcast.

It’s an intentional way to cut off the gut feeling – the investor’s hunch – before it can overwhelm the more tangible indicators of potential.

“In venture, we believe in the relationship build. We believe in the verifiable ‘who you know that I know’, we look for pedigrees. I’m not saying that these things are bad, I’m just saying that when you put them at the top of the funnel, you will miss business opportunities that you should be considering,” she says.

Vosmek argues that this opens the way to more clearly assess the core KPIs, and doesn’t up necessarily taking a longer time from a founder’s first contact with the firm to the first face-to-face meeting anyways.

Counterproductive hunches

A white paper Astia recently published on its screening process details the firm’s experience with how bias has manifested itself in the past. Back in the early stages, when it would assign four mentors to each company, they noted how differently the power dynamics between the male entrepreneurs and their mentors would be relative to the female entrepreneurs.

In one vignette, a female founder with millions in recurring revenue at seed stage – an attractive measure to any investor – gave an impressive pitch with a firm grasp on her numbers. The female VC saw the vision right away, but the male VC was put off by the founder’s seeming introversion and lack of confidence – her presentation of the conservative case for her company was read as risk aversion despite being solid.

The wisdom of crowds

Try as one may, it’s impossible to eliminate bias altogether, but it can be spread out. Integral to Astia’s screening process is drawing from an over 5,000-strong pool of expert advisors, who volunteer to assess each company, around 30 or so apiece. Spreading the evaluation among such a wide group dilutes the effect that a single assessor’s bias might have.

Apart from just assessing the startups, the advisors also form relationships as they go through the process, giving the founders a network they didn’t previously have.

Inclusion pays

Now that it can look back on its time as an incubator, accelerator and then equity investor, Astia has data it can point to. Out of just under 200 startups that have made it through the Sift over the years, 89% of them are still going, have been acquired, or have gone public. It boasts a 16% exit rate compared to an 11% failure rate.  

Crucially, the group of companies that make it through the Sift, are are highly diverse. Under-represented founders are just as likely to make it through the selection process if their businesses are strong and competitive.

Perception problems?

The system presents a huge opportunity to invest in undiscovered gems, says Vosmek, but the firm hasn’t been able to raise sufficient capital to take advantage of it all.  In an environment where the term “DEI”, which just a couple of years ago was all the rage, is now being demonised, she notices a correlation not commensurate with performance.

“I think, looking at our track record as put alongside some of our peers in the market, it’s shocking that it’s not easier for us to raise capital,” she says

“I’m not complaining about it. I’m simply saying there seems to be a correlation that because we dare to demand inclusion at the top of our funnel, that we do get put into the bucket of diversity.”

Developing a process that filters out bias is not an overnight exercise, and in Astia’s case it required putting together a huge network of volunteer professionals to assess each startup. Not all units will be able to do that, but the most important thing they can do immediately, says Vosmek, is spread the net wider.  

“I’d say widen your lens in all elements of your business. Widen your lens in who you surround yourself with. Widen your lens for how you evaluate businesses. Widen your lens for how you then reach the investment decision,” she says.