Differential Ventures: This Firm Specializes In Being Advisors For AI Companies

By Amit Chowdhry ● May 11, 2023

Differential Ventures is a seed-stage venture capital fund that was founded by data scientists and entrepreneurs for data-focused entrepreneurs. To learn more about the firm, Pulse 2.0 interviewed Differential Ventures’ managing partner and co-founder Nick Adams.

Nick Adams’ Background

Nick Adams

Adams’ road to launching a VC fund is a culmination of many varied experiences that began with a false start of a legal career.

“I did my undergrad at Brandeis thinking I’d be a lawyer. After graduation, I started working full-time in a law firm planning to go to law school but very quickly I realized that a lifetime in law wasn’t for me. Mercifully, I was hired into a sales role at a startup in Boston called 170 Systems, which had just raised a Series A. This kicked off a nearly fifteen-year career as a tech operator where I was always on the front line of launching something new in the enterprise tech industry,” said Adams. “At Basware, I was one of the first employees in North America and had to navigate the shift to cloud deployments from on-premise. At Opower, I was part of the team prior to their IPO selling behavioral energy efficiency products for the utility industry, which was a novel concept at the time. And at RAGE Frameworks, I was building and selling a natural language processing solution for risk management. Somewhere along the line,  I also got my MBA and then a Masters in Global Finance so by the time I joined Supernode Ventures in New York as a venture partner, I had a really broad set of experiences across sales, marketing, product management, finance, and legal. At the same time, I felt strongly that the next generation of enterprise technology would be dominated by enabling companies to become data-driven. So, in 2017, I branched out to start Differential Ventures with a focus on AI, machine learning, and data science.”

Adams noted that there are many different backgrounds and experiences that could help make someone good at venture investing but the only way he can imagine being well-rounded enough to invest in and sit on boards of startups is to have had significant operator/founder experience coupled with a solid base of financial understanding. And even with all of the harder skills Adams learned through the years, the asset he uses most in venture capital is EQ and psychology because coupled with the hard skills, he has the comfort level to know when to do four essential things:

1.) Surround myself with people much smarter than me in their areas of expertise

2.) Know when to weigh in on a particular topic

3.) Know when to say nothing, and

4.) Be comfortable saying when he does not know something

Evolution Of Differential Ventures’ Thesis

How has Differential Ventures’ thesis evolved over time?

“We have broadly held the same thesis that the world is going to become largely data-driven through an evolutionary process that will play out over the next couple of decades, and we adjust within that view as macro trends evolve. When I first started the fund, we were largely focused on applied-AI solutions and fortunately, our first investment was in a FinTech company called Ocrolus which has performed extremely well and has now grown to Series C,” Adams explained. “However, I am only technical to a product manager level, and through talking to hundreds of founders it was clear to me that we needed to be more fluent in machine learning processes and deeper technology to really capture the value of the AI evolution. Fortunately, I met my now co-founder, David Magerman, and we have expanded our thesis to include additional themes such as Advancing the Machine Learning Tech StackEvolution of Engineering and Infrastructure, and Responsible Data Management and Information Analysis. Many of our top-performing companies are deeper into the tech stack in categories like data privacy, cybersecurity, and high-performance computing.”

Significant Milestones

What have been some of Differential Ventures’ most significant milestones? There have been quite a few.

“Each new fund, and the related portfolio companies, go through phases of growth not that dissimilar to how humans develop. The first couple of years were mostly deploying new capital and going from infancy to a wobbly toddler learning to stand on its own. For a seed fund with a deeper tech focus, it’s usually not until year three or four that you start to see the companies with the highest potential. I can definitely point to a couple of milestones where I felt like we were really on the right track,” Adams highlighted. “The first one was getting to our first close on Fund I. Despite having had successful previous careers, David and I were both first-time fund managers and it was our first time working together which inherently makes it harder to fundraise. Getting to that first close was significant because we had earned the trust of many people who knew each of us personally and professionally to manage their money in this really complex asset class. It also enabled us to move forward with investing knowing we had enough capital to write meaningful checks into seed-stage companies.”

The second one was getting the firm’s first exits under its belt. Concertio was acquired by Synopsys in November 2021 and Databand was acquired by IBM in June of 2022. Both of those outcomes validated the investment strategy and returned a substantial portion of Fund I to investors. And through the first few years of the firm’s partnership, they built a track record of investing in great companies and knowing when to look for early exits or double down on investments and go for the really outsized outcomes.

“These understandings of the market built our credibility enough to secure larger LPs and shortened the path to getting to a close on Fund II,” Adams added.

Success Stories

When I asked Adams about specific investment success stories, he mentioned Databand and Concertio which were both meaningful outcomes for the fund and the founders.

“Seeing founders’ lives changed for the better after going through the insane process of launching a startup really is the best part of the job. I am also really proud of the work done by the team at Ocrolus. We were barely set up as a fund and made a relatively small investment into the seed round back in 2018, and I joined the board at that time,” Adams replied. “Over the four years that I was on the board, the company really accelerated and the team was able to bring on other great investors like QED, Oak HC/FT, Bullpen Capital, Laconia, Fin VC, Fintech Collective, etc. to build the business to what it is today. I learned so much from that group and think Ocrolus will have a great outcome when the time is right.”

Assets Under Management

As of right now, Differential Ventures is at $65 million in assets under management (AUM). Fund I was $20 million and it has been fully deployed so they have set up some special purpose vehicles (SPVs) to continue investing in portfolio companies that have raised later rounds of funding.

“We are currently investing out of our $42 million Fund II. I expect we will go out for Fund III towards the end of 2023 or early 2024,” Adams pointed out.

Industry Focus

What are some of the industries that Differential Ventures is focused on? “Our focus is on advanced engineering solutions that unlock the full value of the world’s data. All of our investments are enterprise-focused at various tiers of the tech stack which means our portfolio companies build solutions for essentially every industry,” Adams shared. “They are doing important work in industries like financial services and manufacturing but also enabling business functions like HR, learning and development, sales, customer success, data science, cybersecurity, machine learning, and electrical engineering, among others. We are constantly looking for founders building innovative new ways to collect, manage, analyze, and secure data.”

Differentiation From Other Firms

What differentiates Differential Ventures from other firms? Adams emphasized that their investors and partners often say that they “are their go-to advisors for everyone saying ‘they are an AI company,’ which is really a great description.”

And given Differential Ventures’ combined experience as technologists and operators in cutting-edge enterprise technology, the firm is well-positioned to source, evaluate, and support startups in this important part of the market.

Future Goals

What are some of Differential Ventures’ future goals? “The value created by AI adoption is akin to the advent of the internet and mobile technologies. It is fundamentally changing the way the world operates, and we are building a venture capital firm that is at the forefront of that evolution,” Adams concluded. “We want Differential to be the financial partners to the founders who will be leading that transformation and the strategic partners to all of the stakeholders tasked with figuring out how to navigate the fine line of fostering the innovation of this powerful technology without jeopardizing the safety of our civilization.”