vc_holy_grail

Predicting the likelihood of success for startups and their founders

The Holy Grail of Venture Capital

Authors

Alex Nakagawa ([GitHub](https://github.com/alexnakagawa/))
Ani You ([GitHub](https://github.com/Annyou/))
Dimitrios Hytiroglou ([GitHub](https://github.com/DimitriosHytiroglou))
Lorenzo Ong ([GitHub](https://github.com/Lorenzowy))
Mert Gurkan ([GitHub](https://github.com/mgurkan/))
Surya Sendyl ([GitHub](https://github.com/ssendyl/))

Introduction

In 2016, there were $57.4 million in capital flows of Venture Capital financing, going towards 3,718 companies. However, based on previous data, the mean period for a start up’s Initial Public Offering (IPO) is 7 years, but there were only 39 companies that went public last year. With VCs faced with this 1% chance that an investment will actually be successful, choosing the right founder and startup to bet on can be quite a random process, and is usually done based on quantitative metrics. Our team approaches this by combining both quantitative and qualitative aspects - from personality surveys to personal information and company data - to ultimately predict a founder’s likelihood of success. In this case, we will define success as the startup being able to raise a Series B.

Problem

Applying machine learning into Venture Capital is a hot topic, but few people takes action due to its uncertainty. During this project, we faced quite a few problems.
First of all, we were met with a dilemma to choose between predicting success of a potential future-founder OR a current founder+startup. Then, we seeked our mentors’ Patrick Chung (a VC) and Kevin Liu (angel investor) to give us some business requirement in their industry. They advised that the latter is more of a problem for a VC/angel.
The second problem: how can we get the data? To begin, we reached out to ScrapingHub, and received a JSON dump of 1.5k Crunchbase profiles. The only problem was that the dataset was too small to perform a classification on. Next, we tried scraping/downloading AngelList, LinkedIn, Pitchbook, Mattermark data, but we decided that we were wasting lots of time to go through the rows person-by-person. Finally, we settled on Crunchbase as our dataset, and professor Ikhlaq Sidhu gave us Pro access to all the features Crunchbase has to offer us. From there, we manually exported 100k rows of founder/company data. Thanks to a little manual labor done by each team member, we finally had our data to begin our modeling.
Thirdly, although Crunchbase provided many useful data points, we wanted to avoid deferring to solely to the Crunchbase data and explore non-objective, non-third-party data sources. We decided to send out a short survey to roughly 2000+ founders in the Bay Area to capture first-person psychological traits of successful founders, and mapping this data to our initial dataset. We only received 50 responses, and on top of that, only 15 people who responded were in our training data.
Finally, Crunchbase data was a mess to wrangle with in a CSV format (different data types, strings in int columns, ints/floats in string columns, missing/unicode values, duplicates), so it’s common in data preparation to do data cleaning using a combination of pandas, numpy and excel to join and clean data. Our group had to go back and repeat this step continuously to account for the many compatibility issues popped up.

System Solution

Our system, as with most machine learning systems, starts with the data. After pursuing various avenues to get data for our problem, including speaking with companies and VCs as well as attempting scraping, we settled on manually exporting data from Crunchbase. This data comprises of 100K rows of people data and 100K rows of company data, both sorted by Crunchbase rank. We then joined these two datasets on the ‘Primary Organization’ column, which lead to about 60K rows of data. This dataset had to be filtered further for only founders, both successful and not, so we filtered the ‘Job Title’ column for those that contained only ‘founder’ or ‘ceo’. We then dropped NaN values for the columns left over, of which there were many, which lead us to have 25K rows of data remaining. Once this process is completed, we selected various features that we wanted and recoded them to categorical or numerical. We also create an independent output variable, which is binary for whether the startup and founder raised at least a Series B.
To augment our Crunchbase data, we also have the survey data (survey found [here](https://docs.google.com/forms/u/2/d/1DcAkYxIK-FKCca9QU1IUp80HT_FGaa321XhHeN6Zoq8/edit?usp=drive_web)) which, due to the small number of respondents (n=50), we use in isolation from the Crunchbase features. To our features we apply a train-test-split (80/20) and then test out various models, including XGBoost, logistic regression, kNN, SVM and random forest. Random forest results in the highest accuracy of classification on the test set, at 77.45%.
The remainder of our system deals with evaluation and presentation of the models, where we plot out ROC and Evaluation curves and tabulate the accuracy scores for each model. We then append predictions to our original dataset and order them to make the data usable by the VC customer. In our intended UI, we also show the top contributing features for each founder, most similar founders, and also links to Crunchbase and LinkedIn profiles. In the intended system, a VC would log into our website and link to a particular founder's Crunchbase profile. Our system would then scrape that profile for the needed features, and apply those to our best model. The output would be a rank for that particular founder, along with top contributing features and a list of similar founders. If the founder fills out our survey, we would also provide a correlation table of which psychological features, if any, are likely to be the top contributors to success for that founder.

Future Plan

Distinguish Industry Categories
After talking with our mentor, Patrick Chung was really focused on one area: technology. As a VC in the Silicon Valley, this is to be expected. Our future goal is to make this program accessible to VC firms that are interested in funding companies that are in more traditional fields. Our next step would be to allow for subcategorization in different areas of interest, and have a more personalized categorization system based on different features that may seem more important.
Improve Success Representation
As a VC, defining success is not that easy: many companies might declare bankruptcy past a Series B round, losing firms money. Therefore, want to build a new model to better clarify what success means for a company based on what stage of funding they are in. That way, VC’s can rely more heavily on our algorithm to display higher projection accuracies for companies that they fund/prospectively will fund until the company hits IPO.
Get More Non-Objective Data
Currently, we found little to no highly correlated characteristic features to a founder’s success. It might have been the small size of our survey data, or asking the wrong questions in our survey. From the limited survey results we possess, we found that many people highly evaluate themselves for success, making the survey results null from an issue in self-confidence. To make more meaningful characteristic data, we plan to redesign our survey questions or extend the size of our data.