Scouting for Startups: Finding the needle in a haystack

Hundreds of thousands of startups are created each year, and the vast majority of these will fail. How can you distinguish the very best from the rest? A number of platforms have emerged in the last few years to try and assign value to a startup, even when they don’t have anything tangible in terms of revenue or customers.

Hundreds of thousands of startups are created in the United States alone each year, and the vast majority of these will fail. How can you distinguish the very best from the rest? A number of platforms have emerged in the last few years to try and assign value to a startup, even when they don’t have anything tangible in terms of revenue or customers.

One of the first was Test4Startup, which uses AI to determine whether a startup will thrive or not. French company Early Metrics, by contrast act as a kind of ratings agency for startups. They examine a range of factors before giving each startup a rating that signifies their potential.

Both of these platforms have humans working alongside technology when rating the startups, but researchers at the University of Texas at Arlington have taken men out of the process entirely. Their approach uses text-mining to analyze unstructured, publicly available information about the startup. The method, which has been commercialized via a company called Topic Technologies, aims to predict the success of any acquisition of a startup based upon a range of factors.

“This data-driven, analytics-based approach has proved effective in explaining mergers and acquisitions in the startup world and complements existing toolkits for measuring business proximity,” the team explain. “Our system is particularly appropriate when the firms under study are small and privately held so industry classification in largely unavailable, which is the case for startups.”

A similar approach was taken by a team from Oxford University, who worked with Huawei to evaluate tech startups in the UK between 2006 and 2015. They evaluated everything from the commercial success of the company to the number and quality of patents registered during the timeframe. This allowed them to assign a financial value to each startup, which when tested against historical data was able to account for around 85% of the variation in company valuation. Indeed, the project even accurately valued AI pioneer DeepMind prior to their acquisition by Google.

What makes a startup valuable?

Tools like these attempt to automate approaches that have traditionally been performed manually by VCs and their counterparts within companies. A previous post explored some of the factors that should be considered when assessing a startup, both in terms of what it offers in isolation, and how it might be integrated into your organization.

Some valuable insights might also be gleaned from a recent report from the British government into the various factors that help startups to scale. The report is interesting because it looks at things from the perspective of the buyer/investor. It highlights a significant mismatch between what investors think is important and what the startups think is important.

Foremost among the most important things for investors were softer aspects, such as the quality of the founding team, the chemistry between the investor and the entrepreneurs and the communication levels between the two entities. Investors also wanted the management team to exhibit passion, resilience, drive, adaptability and ambition, with cultural fit crucial.

The apparent disconnect between startup and corporate worlds however underlines the importance of viewing the world through the same lens. That is at least a good start point in ensuring that the partnership beteen startup and corporate is a successful one.

Your next steps

So, to summarize, there are a number of things you can do to get better at spotting the hottest startups:

Utilize smart technologies to help you identify the leaders in their field
Understand the factors that contribute to the success of a startup
Assess the short-list created in step 1 via these criteria

The DealMatrix platform is the digital innovation scouting platform helping you with intelligence, structure and insights while you search for the right startups.

Connect with startups and collect detailed profiles about them to evaluate them using our best practice business score cards and your specific industry criteria. Manage your innovation funnel efficiently in one system with all stakeholders and run multiple opportunities for startups such as challenges, batches, corporate innovation programs and many more.