After news broke that Chipotle had a norovirus outbreak, financial experts expected sales to drop as stores closed in the aftermath. Yet no one knew how bad the financial damages would be until four months later when Chipotle delivered its results.
Except for investors using a tool called Second Measure. They already knew its sales hadn’t recovered — and they knew which restaurants Chipotle’s customers had turned to instead.
Many analysts could have guessed Chipotle’s sales hadn’t recovered, but wouldn’t have recognised that the surprise winner were meal kits, like Blue Apron, and Chilli’s.
Hedge funds and venture capitalists alike are turning to this new Silicon Valley startup for their next information edge. Second Measure takes billions of anonymized credit card transactions and analyses them so investors can see where consumers are voting with their dollars before a company’s quarterly earnings come out.
To venture capitalists looking at private companies, it was immediately addicting, said Rodolfo Gonzalez of Foundation Capital, which invested in Second Measure.
“It’s like catnip to investors,” he said. “You rarely have access to ths kind of data and in such a digestible way as well.”
Shining the light
Mike Babineau was working at a video game company when a friend of a friend who worked at a hedge fund called him for help. The investor had 2 terabytes of data sitting on a hard drive that he wanted to analyse and he wanted to know how to upload it to Excel.
If he’d had the technical knowledge or an engineering team available to help, he would have known Excel was not the answer. To Babineau, though, it was a wake up call on how much better informed investors could be if they had the tools to read the data.
“That really caught our attention because it was the first time that we saw how the hedge fund space is operating,” Babineau said. “Most funds are investing billions of dollars without any sort of technical expertise.”
Babineau and cofounder Lillian Chou started digging into all of the alternative data sources hedge fund managers use, from LinkedIn scrapes to forecast layoffs or watching Google trends.
“They’re looking for non-traditional data sources, and theses sources have this common characteristic for many of them that they’re really hard to use,” Babineau said.
Babineau and Chou first worked on a tool where they would take care of the back-end work of cleaning up the data and making it usable, and then investors could use a tool like Tableau to chart it. But even with data easily available, investors found it hard to analyse because they were used to reading quarterly reports, not determining cohort retention for private companies.
So the company decided to become both a source of consumer spending data and the ones to analyse it.
Due to strict confidentiality agreements, Second Measure can’t say exactly where it receives its data from, but says it works with a massive quantity of anonymized consumer spending data, and that this data makes up a representative selection of 2-3% of all credit card transactions. The data is not coming from retailers or other companies Second Measure tracks, and not from individual tracking, which suggests the company has a deal with one or more banks, credit card companies, or credit agencies, but Second Measure would not confirm this.
Regardless, it’s got detailed data about billions of credit card transactions, and it’s only increasing as the company crunches through data every day.
Second Measure employs a part-human, part-machine approach to extract the data from each transaction down to the store location before displaying it in a dashboard that investors can play around with.
“If you look at your credit card statement, it may say Macy’s store 512. That may not mean anything to you, but it does for us from our perspective,” Chou said.
Beyond the numbers
Investors using Second Measure all get access to the same data, but they gain a personal edge by deciding how to use it. The company built a simple dashboard that’s so secret you can only see it through a company demo.
The “catnip” Gonzalez described is when investors start digging through the dashboard and into the retention rates of customers, average customer order spend, and wallet share — and then break it down by geography. Has Hilton taken a hit because of Airbnb? Did GrubHub sales tank when Maple launched in New York? Is Dollar Shave Club really selling millions in razors?
It’s a rabbit hole of data that can be mixed and compared in different ways — and something Gonzalez had never had with companies public or private.
“It’s fascinating. Every time that you mention that you have access to this kind of data everybody gets extremely intrigued and they all want to have a look,” Gonzalez said.
His firm, Foundation Capital, decided to invest in Second Measure after seeing its pitch at Y Combinator’s Demo Day earlier in summer 2015.
The startup is announcing Tuesday that it’s closed $2 million in seed funding form a laundry list of Silicon Valley investors including Y Combinator, Bessemer Venture Partners, Norwest Venture Partners, and Shasta Ventures — all of whom have also become clients looking for a competitive edge.
For instance, Foundation is using the platform to track companies against peers and find new investment leads. There’s also the advantage of being able to use qualitative data when negotiating a funding round.
In a recent deal, Gonzalez said, the firm was able to talk down a startup’s valuation by looking at their position in the market compared to their competitors and objectively talk it down. The nature of the discussions changed dramatically, and it made it far less of an emotional negotiation that he’s dealt with before, he said.
“For us, it has always been quite challenging to find information about private companies,” Gonzalez said. “This is a little glimpse of hope and a huge strategic advantage to identify companies that might be doing really well.”