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With A Focus On Big Data Startups, Data Collective Redefines Thematic Investing And Debuts Its Third Fund

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With A Focus On Big Data Startups, Data Collective Redefines Thematic Investing And Debuts Its Third Fund

The music was bumping and the drinks were flowing at a dimly lit San Francisco nightclub on a spring evening in 2009. But two voices rose above the sound of the music.

You wouldn’t think that big data would be the topic of conversation on this evening, but that’s the subject that brought Data Collective founders Matt Ocko and Zack Bogue together for the first time. Both were at the club for a friend’s birthday party and, upon meeting each other, immediately began geeking out over the possibilities of data dominating the world. This conversation became the foundation for the duo’s now three-year-old VC fund Data Collective (DCVC). Today, DCVC is announcing the close of its third fund, at $125 million, TechCrunch has learned.

Ocko and Bogue began co-investing informally together in 2009. They would pull each other into deals, primarily focusing on the enterprise and data-mining space. Around 2010, Ocko and Bogue thought about formalizing what they had been doing. Skill-set-wise, they thought they both brought unique attributes to the table.

Ocko’s background was deeply technical. He started hacking when he was a child and founded his first company at the age of 15. He also invested around the Series C in Facebook (2008) and in the seed round in Zynga (2007), and has been referred to as Mark Pincus’s consigliere.

Bogue, formerly an attorney at Wilson Sonsini, has a background in environmental science where he was exposed to large data sets in the energy and clean tech spaces. Prior to meeting Ocko, he’d been backing data-focused startups and incubating ideas on his own. And he’s married to Yahoo CEO Marissa Mayer.

Each appreciated the way in which the other evaluated deals and were involved with founders. Ocko had thought about joining a fund, but hadn’t found a firm where the focus was more on building a company versus collecting management fees.

Bogue and Ocko also had very different networks, which they believe contributes to their success as investors. “If you think about some of the great investing partnerships like John Doerr and Vinod Khosla, and Doug Leone and Michael Moritz, these people had complementary networks,” says Ocko.

Theme-Focused Verticals

As Ocko and Bogue formalized Data Collective, they both wanted to set up a discipline around what they would invest in. While the opportunity to back data-focused startups was huge, this wasn’t a spray-and-play type of strategy. The three areas DCVC invests in are at the infrastructure level (the storage, security, and management systems), analytics and the top layer (vertical-focused apps in areas like lending, travel, customer service, medical research and more).

Ninety percent of the world’s current data didn’t exist the day of Facebook’s IPO in 2012. In two years, the amount of data flowing through systems has increased by a factor of 10.

Bogue tells us the methodology behind creating the thesis of the fund: “We saw that there was a crazy amount of value being generated in the big data area. But the area at the time was somewhat unloved. But these companies were already having a huge impact on the industry.”

Creating a theme-focused vertical fund isn’t new. Some of the traditional VC firms like Kleiner Perkins and Accel have been doing this, as well. But there aren’t many funds who back squarely in the seed and Series A, with a singular focus on data. In fact, the only real successful player besides Data Collective is New York-based fund IA Ventures. Recently, Data Elite launched as a venture lab to back data-focused startups.

Data Collective Fund I was deployed in 2011, and according to Bogue, was a lightweight, smaller vehicle with some capital contributed by he and Ocko, as well as some money from friends and family. This particular fund has generated an IRR over the past four years of 75 percent, we’re told. Companies that were invested in from this fund include Metamarkets, Contendo (acquired by Akamai), SocialCam and Kenshoo.

For the second fund, raised in 2012, Ocko and Bogue decided to institutionalize things and went to LPs. The duo already had a good track record with its Fund 1 investments, so raising was easy. While they declined to reveal how much each previous fund size has been, in total, Bogue and Ocko have invested around $100 million together in 100-plus companies (this also includes the co-investing they did together before Fund 1).

Between Fund I and Fund II, the term “big data” became more of a buzzword, thus making it something that LPs could actually understand. “Ninety percent of the world’s current data didn’t exist the day of Facebook’s IPO in 2012. In two years, the amount of data flowing through systems has increased by a factor of 10,” explains Bogue. “Big data will disrupt every vertical.”

Unsurprisingly, the third fund was oversubscribed, and LPs ranged from large universities, to national government organizations to strategic partners, we’re told.

“Under-The-Hood” Investing

The discipline aspect of Bogue and Ocko’s investment strategy is key. As mentioned, each investment has to fit into one of the three verticals. Another way DCVC will narrow down deals is that the firm will only invest where there is a real, defensible big data technology. If there’s nothing under the hood that separates the startup from the next guy, then Ocko and Bogue will pass.

And they mean it when they say “under the hood.” Ocko conducts code reviews with potential startups to see the quality of a server architecture, or the code, and whether there is any risk associated with backing the technology. For a VC to actually sit down and get his or her hands dirty with examining code is extremely rare. From what I’ve heard, there are only a handful of VCs in Silicon Valley who have the skill set necessary to do this, and who actually do it themselves versus having someone else do the diligence.

People like to talk about the secret sauce of being a great investor. I think of the moment of wonder when I used a computer for the first time. Every new deal I see, I want to bring that same sense of wonder.

Eric Frenkiel, the CEO and co-founder of MemSQL, remembers when Ocko was doing due diligence on possibly investing in his database technology company and was surprised when Ocko asked to look at the code. “It’s so rare, and he has the tremendous ability to go deep,” says Frenkiel. “It was clear in that moment that he knew data systems and infrastructure better than most other investors.”

Because of DCVC’s technical expertise, other Sand Hill VCs see their involvement as a signal, and also pull DCVC into deals where they know their network and experience can be helpful. A general partner of one of the top VC firms in Silicon Valley, who declined to be named, told me that usually when a VC firm invests in a company in the A or B, early investors see their work is done. “We are expected to do the heavy lifting and be the parent, while these investors become the friendly uncle.” DCVC is the opposite, he says.

Data_Collective_Venture_Capital_-_DCVC“They are willing to stay involved longer than any other early investor, and actually do things that materially help the company across all stages,” he added. “That is atypical…. There’s a difference between investors being proactive and being accountable. Matt and Zack are accountable.”

Most VC firms tout their network of corporations, tech executives and more as differentiators in helping entrepreneurs. Data Collective is no different, but the firm has a slightly different take on this. DCVC has 35 equity partners who have worked in engineering and big data in companies like Akamai, Zynga, LinkedIn, Apple, Facebook, Salesforce, Twitter, IBM, Citrix, Airbnb and VMware. These partners all have an equity stake in the fund, so they benefit in some way from the its startups’ success.

Not only do these partners help with deal flow and the vetting process, but they also aid in due diligence and evaluating startups, and they provide ongoing assistance to the portfolio when it comes to large data problems and challenges. Ocko explains that this model is the evolution of the idea of the “venture partner.” DCVC’s equity partners include Jawbone’s VP of Data Monica Rogati, Facebook’s head of analytics Ken Rudin, Splunk’s CTO Todd Papaioannou and Factual founder Gil Elbaz.

Big-Data Advisors To The Industry

For Ocko and Bogue, creating a network of technologists that entrepreneurs can lean on is crucial to the success of the firm. But outside relationships with the large enterprises, telcos, and banks that may be using many of their portfolio’s software and services is also important. But as DCVC has made a name for itself in Silicon Valley as being the go-to data investors, consulting firms, investment banks and large corporations are coming to the firm for advice.

Sasha Orloff, CEO and co-founder of portfolio company and disruptive payday lending startup LendUp, has seen value from working with some of the equity partners, as well as tapping into DCVC’s network. For example, Mike Driscoll, the CEO of Metamarkets, shared some of his academic research with Orloff that found correlations in data sets of mobile carriers and consumers, and this became part of LendUp’s own data model.

Bogue introduced Orloff to the CTO of credit scoring giant FICO. And Orloff has also been introduced to the largest specialty private-equity fund focused on investing in financial services. Orloff adds that he didn’t ask for any of the introductions; Bogue and Ocko did this on their own.

“Having Matt and Zack as investors is like having a brain trust,” says Orloff.

Joris Poort, CEO and co-founder of stealthy cloud simulation company Rescale, echoes Orloff’s thoughts. “DCVC is one of our most helpful and thoughtful investors.” One of the challenges Poort had early on was actually pitching his company in a way that investors would understand — the product is deeply technical, and some investors couldn’t quite grasp what Rescale was tackling. But Bogue and Ocko understood the value immediately because they have technical experience.

Startups are like a game of high-speed chess. We see ourselves as more of a guardian angel. We want to be the first call when there’s something wrong at 3 a.m.

You don’t often hear about VC firms’ LPs getting involved with the portfolio but in the case of DCVC, the firm has taken money from private-equity firms that own companies in the automotive, aerospace, manufacturing and gas industries. These companies are often prime candidates to use the complex enterprise and data technologies that are being developed by the portfolio, says Poort. The question, with all different models for the VC world, is whether the vertical-focused fund works.

As mentioned above, DCVC says that it is creating significant returns that are well above average for its LPs. Both funds have had a number of exists, including Moleculo, which was acquired by Illumina; Parse, acquired by Facebook and Morta Security, acquired by FireEye. The duo’s pre-Fund I co-investment, Cotendo was acquired by Akamai. Ocko says that more than 90 percent of the portfolio is still going strong, with around a third of the portfolio creating revenues in the seven and eight figures.

The Data Sweet Spot

Can these vertical-focused funds become the next Sequoia? It’s probably still too early to know. The focus of the fund instills strong deal discipline, but one could argue that some of the big wins in the VC world are outliers. On the other hand, there’s never been more data created in the world, and we need better technologies to manage this.

It’s clear, however, that Ocko and Bogue don’t measure success in just returns for LPs or big exits. “People like to talk about the secret sauce of being a great investor,” Ocko says. “I think of the moment of wonder when I used a computer for the first time. Every new deal I see, I want to bring that same sense of wonder.”

Bogue adds, “Startups are like a game of high-speed chess. We see ourselves as more of a guardian angel. We want to be the first call when there’s something wrong at 3 a.m.”