Disintermediating the VCs? Fat chance.
In this age of disintermediation, when middle men of all kinds are rendered increasingly irrelevant by online technology, it seems only fair that the same force takes aim at the people who helped finance the Internet’s spread: venture capitalists.
YouNoodle, the San Francisco startup that last year launched an online crystal ball of sorts that uses algorithms of such factors as the education and professional networks of a startups’ founders to come up with a valuation for it in three years, has added another tool to its arsenal: a ranking of over 25,000 startup businesses by “how much buzz they are generating”, according to a report by Kristina Grifantini in MIT’s Technology Review Thursday.
Leading the list are well-known social networking sites Facebook and LinkedIn. Companies that have jumped up the rankings over the past month include Care.com, a source for local caregivers; Reply.com, a place to buy or sell online clicks; and Quantcast.com, a site that generates statistics of websites’ traffic. One of the biggest movers is the PowerPoint-presentation-sharing site SlideShare.
The notion that a software program could do the same job as an experienced venture capitalist was met with skepticism from some observers, reports Grifantini, who spoke with Josh Lerner, a professor at Harvard Business School. The professor, who has published research showing that an entrepreneur’s second startup has slightly better odds of succeeding than her first, suggests “there are definitely patterns out there that work.”
Lerner is cautious, though, about relying on prediction tools, saying “it’s hard for me to believe there isn’t an important element of randomness that constitutes a successful entrepreneurial venture.”
5 comments
Jonathan @ ChubbyBrain
Wanted to share an excerpt from a review of YouNoodle that a reviewer on our platform recently did. The reviewer, Amy Z, gave YouNoodle 1-star and her full review entitled “I Predict YouNoodle is Worth Nothing” is here along with an excerpt for those interested:
http://www.chubbybrain.com/companies/younoodle/reviews/amyz
Review excerpt below:
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First and foremost, the business model is fatally flawed because the product, The Startup Predictor, is interesting but hopelessly inane.
* Valuation is an art – Financial models, no matter, how sophisticated and dressed up they may be are always wrong. We just need to look at our current financial/economic predicament to see where our financial models got us. They’re very good at predicting things when companies are growing or declining at steady/predictable rates and if you have some understanding of key business indicators, but no matter what, they are wrong. The valuation models are consistently wrong, often significantly, even when there are reams and reams of historical data as there is with public companies. Private companies where the data is much more spotty and where financials are non-existent are therefore even more difficult to model. While the goals of disintermediating the “old boys network” sounds interesting, evaluating startups is a mix of skill and luck and so diligence is required but so is a good gut instinct.
* Intangibles cannot be modeled – The idea that “the concept itself, the advisors and the team” can be considered, evaluated and modeled is appealing because it sounds tidy, but there is no way to credibly do this no matter how fancy the diagrams or logic YouNoodle shows look. Startups are inventing markets in many instances so how does the concept get evaluated in such instances? Using comparable companies and their data? What if there isn’t a real comp? Perhaps it’ll be a hybrid of existing companies? There is way too much room for error – very significant error. You can look at the connections & relationships between the founders, but beyond anecdotal evidence that this matters, there is little real proof. When we talk about advisors, I assume this means folks like the VCs and advisory board of the company. Problem #1 is that if the startup has any legitimate VCs, they’ll never have a need for this. And modeling advisors will be rudimentary at best in my view. Oooh, Kleiner Perkins is an investor so we’ll give your valuation a factor of 2x since they’re an A-list VC. Same with modeling the team. You’ve done well in a prior business so we’ll give your valuation a bump. Doesn’t sound too complex or fancy.
So beyond the fundamentally flawed product, what is wrong with the business model:
* Let’s be the Moody’s of startups – As the recent news makes clear, the rating agencies which Moody’s is one of are not very good at their jobs. And they get lots and lots of information from companies they rate. And they still aren’t very good at it. With startups, you’re inherently data-constrained making the idea that a quiz with user-submitted inputs is useful even more laughable.
* It makes sense to be biased to the upside – Even if the Startup Predictor generated credible valuations, the company is incentivized to ‘grade inflate’ if they want startups using it. As an entrepreneur, I’d only use the Startup Predictor if it told me an answer I like which is a high #. So the target for this product is for entrepreneurs too inexperienced to develop their own credible valuations. If I’m an investor seeing a YouNoodle valuation, I would be suspect of the upside bias and an entrepreneur bringing a YouNoodle valuation.
* Investors will pay for this? – If the price was insignificant, then yes, this might even be an interesting data point to a time-strapped investor. But, given that as an investor, you may be making a large bet with money given to you by your investors, are you really going to rely on a report vs your own expectations and model for an investment? I doubt it or at least I don’t think smart investors would do this. If it’s a $100 per report, sure why not? But if all investors seriously look at 500,000 companies per year and 10% of those evaluations get a YouNoodle report (this is a high market penetration rate), that is 50,000 reports per year in total (I’m not talking about the pitches they see but those they seriously evaluate). That is a $5 million opportunity. I’m not sure how much they raised, but that doesn’t seem like a big # given some of the brand name investors they have and the very organic, grassroots effort probably required to get these investors on board. According to the company’s CEO, he thinks “YouNoodle will be worth $96 million in 2010″ based on their own algorithm. Wow. (source: http://www.techcrunch.com/2008…..is-coming/)
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Feb 23, 2009
Ricky
You made some good points there.
Apr 2, 2009
Joke
my God, i thought you were going to chip in with some decisive insght at the end there, not leave it with
Jun 22, 2009
Heloise
Thanks for sharing the link, unfortunately it seems to be down? Does anybody have a mirror or another source?
Jan 24, 2010
Mark Demicoli
Jonathan @ ChubbyBrain, with due respect to your introduction, that excerpt is not a review, it is at best an opinion piece and none of the points have a scientific basis.
Which I think misses the point. YouNoodle is a theory, an experiment like any other startup on the bleeding edge. Therefore, you can only measure it’s performance in hindsight.
YouNoodle claim to have scientific theories behind their algorythms, which I don’t doubt myself, and ofcourse they’re not going to release them for scientific peer review, for commercial reasons.
A serious review would check out the work of Kirill Makharinsky (co-founder and lead analyst), to see what heps published, and how his peers reacted. That is a starting point for a review.
Personally, I would say that these guys are taking the movement started by Alexa (and now Complete, Quantcast etc), and experimenting by extending into more subjective measurement. Again, time will tell if the extension is useful. Definitely huge potential here.
Feb 8, 2010