John Sharp in Singapore is a Partner at Hatcher+, a next-generation, data-driven venture firm that uses AI and machine learning-based technologies to identify early-stage opportunities in partnership with leading accelerators and investors, worldwide. Hatcher+ has teamed up with the First Degree Global Asset Management fund platform in Singapore for its H2 Fund.
The worlds of hedge funds, private equity and venture capital have become blurred. Public and private markets and various investment styles are being mixed. Can you describe where and how Hatcher+ fits into the alternative investment space?
We designed the Hatcher+ venture investment strategy to fit the space between non-venture alternative strategies, including private equity, and traditional, higher-risk venture investment funds. In designing our strategy, we wanted to avoid swinging for the fences, in either direction, within the confines of a small portfolio, and instead favour a data-driven, very large portfolio strategy, based on substantive analysis. Our research, which took three years and included an analysis of over 600,000 venture events spanning 20 years, shows conclusively that our strategy is capable of delivering consistently good returns from venture with reduced risk.
What drove you to found Hatcher+?
We came up with the Hatcher+ strategy in response to our earlier experience investing in early-stage start-ups, both as angels, and institutionally, via our first investment vehicle (Hatcher H1), which we founded in 2013. During the time we spent investing that first US$20 million we raised, we were constantly reminded of the qualitative and subjective nature of our work and became more and more aware that venture capital was lagging other asset classes in terms of technology adoption. This, combined with some early research data that showed an overwhelming preference by LPs to invest in larger, more diversified portfolios, let us adopt a data-driven approach for Hatcher+ and the H2 Fund. Hatcher+ research shows that 67% of venture AUM is invested in managers that have greater than 500 investee companies in their portfolio.
Hatcher+ is using artificial intelligence and machine learning technologies to identify early-stage investment opportunities. I understand that you have built a lot of proprietary tech to run the investments and your firm. How important is cutting-edge tech to an asset manager like Hatcher+?
The bulk of our deep learning efforts have actually gone into understanding how we can modify portfolio construction theories to do a better job of capturing positive returns on a more consistent basis. To date, we’ve created almost four billion virtual portfolios, ranging in size from 10 to thousands of portfolio companies, across virtually all sectors, investment stages, and geographies. We’ve also spent a lot of time looking at how we can do a better job of project selection and performance analytics, and in January we will be rolling out the next version of our VAAST (Venture as a Service Technology) platform, which will enable investors to utilize our AI-powered analytics and process automation as part of their operations. We’ll including, for the first time, an Impact Readiness score, which will enable VCs looking to build portfolios based on impact investments to get an early read on opportunities we identify. In terms of how important technology is to venture fund managers, typically, it hasn’t been important at all. It’s, unfortunately, a truism that most venture investors spend less on data and technology than the average start-up – whereas large investment banks and brokerage firms spend millions, or even billions, on data analysis and automation. We have adopted a similar approach to the large banks and brokerage firms – and in the past three years at Hatcher+, we have spent over US3m a year building data models and automating our business processes, in support of the massive scale that our research data shows is required to win in the venture space.
What is Hatcher+ doing to make your style of venture capital more in line with what alternative investment allocators want and need? Are you facing pressure from investors and startup founders to evolve more in certain areas of your business?
Alternative investors I’ve spoken with have long eyed venture as a potential place to increase allocations – but picking winners among the wide range of different fund managers and strategies is hard. Most people that run venture funds are of high intelligence, and with a strong history of personal success, prior to entering the venture industry. However, 75% of the time, those qualities do not translate into consistent returns, or even returns capable of beating the Nasdaq. Our strategy, which some have termed “The Moneyball of Venture”, relies less on personality and subjective decision-making and more on quantitative analysis and the underlying probabilities that a given basket of investments will yield a power curve effect – or a dozen power curve effects. Where we see venture going is more of a hybrid model, where firms like ours will source and diligence deals and create large pools of high-quality startups, which our investors can use of feeder-funds for their own direct investment. We know from our discussions with family offices, corporate venture groups, and institutions, that many have plans to start their own direct investment firms within the next five years. Those firms will need deal flow, data analytics, fund structures, reporting capabilities, and a host of other services. We see it as our mission to create the deal flow and services necessary to help them succeed with these efforts.
Where do you stand on investor liquidity? Historically, the illiquid nature of PE and VC funds have caused some investors to prefer hedge funds and other more liquid strategies.
The historically illiquid nature of venture is one of the areas I have personally focused the most on. A ten-year lock-up is great if you’re an insurance company, and just want to invest capital and come back in ten years and find more waiting for you, but it’s less appealing to many other investors – especially those that are active in the direct markets. However, as we’ve seen historically in the bond market, for example, lockups only exist to the extent that derivatives (and secondaries) don’t. We’ve taken the first steps towards creating a liquid market for venture-based securities be creating an exchange-traded note, which is currently traded on the Wiener Bourse, and secured by units in our H2 Fund. We expect the market for derivatives will grow significantly in the coming years, with token-based offerings leading the way, especially as larger portfolios, such as ours, begin transparently reporting index-style returns.
Hatcher+ has been actively investing in the fintech space. A lot of the action in the fintech space has been focused on consumer and retail solutions such as payments. Have you also invested in or considered any fintech solutions for hedge funds and other asset managers?
We have successfully invested in payments (Telr) and trade finance platforms (ASYX) – because we like the growth available in the emerging markets these players operate in. The one caveat about investing in fintech in emerging markets is the time needed to get regulatory approvals – but both these companies seem to have navigated those steps very well. The Hatcher+ VAAST (Venture as a Service Technology) Platform remains by far our largest investment in the fintech space. It provides a complete suite of white-label-ready venture capital functions and analytics, and any family office, CVC, or institution can be onboarded within minutes.
What kind of people are you recruiting to your firm? Are you focusing more on quants and techies than people with finance backgrounds?
When it comes to hiring, we hire more data geeks and programmers than finance people – I think that old canard of the brokerage that had 10 developers in 1990 and 1000 sales guys that then flipped to having 1,000 developers and 10 sales guys is pretty accurate for what is happening in the venture capital industry. This is an industry that has lagged pretty much every other asset manager for decades, in terms of investing in technology and scale, and is only now waking up to the fact that risks can be much better managed, and returns made much more consistent, by using data to drive portfolio design, and business process automation to manage the fund. We may be one of the first, but I don’t think we will be the last firm to go from spending US$30,000 a year to spending over US$3m a year on data and tech. This is going to become an arms race, with data and deep learning models – and global access to deal flow – as key determining factors as to who wins.
You have opted to run the business from Singapore. What made you base the business there?
Singapore has emerged as the best place to set up a venture investment firm for a whole host of reasons, not just limited to the ready availability of capital. The legal and financial infrastructure is superb, the regulator is forward-thinking, the venture structures, such as the VCC structure, are well-thought-out and the whole place just works really well. Add to that the fact that it is one of the best-connected and respected countries, with one of the highest educated workforces and highest standards of living in the world (with among the lowest rates of taxation!) – and that combination is pretty hard to beat!