KingsCrowd Startup Rating Methodology - KingsCrowd

August 26, 2020

KingsCrowd Startup Rating Methodology

Background

KingsCrowd started in 2018 with a mission. We want to enable everyone to make informed decisions in startup investing. We aggregate, research, analyze, and rate all companies raising capital on more than 20 online private equity funding platforms, from pre-seed to pre-IPO.

We have two types of ratings — qualitative and quantitative. 

Qualitative ratings — represented by Analyst Reports — are based on our in-house investment research. We conduct our own in-depth research and analysis on a company to develop an “opinion.” The end result is one of the following tags: Top Deal, Deal To Watch, Neutral, or Underweight

Quantitative ratings — Merlin ratings — are a numerical evaluation of investment opportunities based on the hundreds of data points we collect. With our numerical ratings, we try to be as objective as possible. We collect data on the company’s team, target market, financials, traction, and competitors. Then we compare all companies that are actively raising to each other, rank them based on collected data, and then convert the rank into a score. The end result is a number between 1 (lowest score) and 5 (highest score). 

For late stage companies, ratings depend mainly on the company’s financial performance. But for early and growth stage companies, there might not be any revenue yet. Rating startups was and still is a challenge. That’s why angel investing and venture capital is both a science and an art. 

Disclaimer: KingsCrowd’s quantitative and qualitative ratings should not be considered as investment recommendations. KingsCrowd is not a financial advisor. We provide information to aid investors who are making their own investment decisions. 

Ratings Philosophy 

We understand that it’s very hard to judge innovative startups in their early stages. Many top investors have passed on companies that turned out to be industry leaders. Many have also funded companies that failed quickly. What we’re trying to do is give investors some tools to make more informed decisions.  

To rate companies we considered two approaches: comparing startups to an ideal startup (a benchmark) or comparing existing startups to each other. 

The first approach raises important questions. What defines an ideal startup? Is it the valuation or the valuation growth? Is it the revenue or the revenue growth? Or is it the user growth rate? Is it the team? We can also ask what is considered “good” for any of the above metrics for different kinds of companies and for different industries. 

How often do we see ideal startups? Did all successful companies show signs of success from day one, or did they learn and innovate over time to build their competitive advantages? Moreover, what’s considered ideal now might become average as market dynamics change and as companies keep innovating to grow faster and break records. 

Instead of trying to define a benchmark in every industry, we decided to go with the second approach. We compare all available companies to each other. We think this is a more fair comparison in an ever-evolving world of innovation. With this approach, top performers can now rise up and be noticed by investors. 

We understand that this approach raises its own set of questions. A major point we have considered is that if all available companies are bad, then some of those will still receive high scores because they are marginally better than their peers. That can be true. However, we think it is very rare for all raising companies to be low-quality. We believe that the advantages of this approach outweigh the disadvantages. 

Another result of this approach is that the ratings of one company can vary from week to week. Every week, we add new companies and remove those who closed their funding rounds. This changes the ratings for those still active. 

When we started our ratings product, we had 300 active raises to evaluate at any given week. Because of that small sample size, we had to include all types of companies in the comparison, regardless of stage or industry. 

Now, the number of active companies at any given week has almost doubled. As a result, we are now differentiating between early stage and growth stage companies. Growth stage companies are compared to other growth stage companies (apples to apples). Early stage companies are compared to other early stage companies (oranges to oranges).

The overall KingsCrowd methodology will remain the same. But this simple change will vastly improve the accuracy of our ratings.

It’s worth noting that our qualitative rating scheme is separate from our numerical ratings. Some companies might look good on paper in comparison to others. But there could be some aspect of the startup that didn’t seem strong or viable to us. When that happens, we won’t consider them as Top Deals or Deals To Watch

The Five Main Metrics

For every company we rate, we collect more than 350 unstructured data points. We draw from a startup’s listing page on the crowdfunding platform, their pitch decks, financials, and performance metrics. 

We also pull information from companies’ websites and blogs, news and reviews written about the companies or their products/services, and other public data sources. In addition, we conduct our own standardized market sizing to get a better understanding of their potential. 

For every startup, we examine many metrics that we organize into the following five main dimensions. Every dimension has its own rating and multiple sub-ratings:     

  • Price: We compare the valuation of a company at the current round to the valuations of all other companies raising at the same time and at the same company stage. If the round is raised on a convertible note or a simple agreement for future equity (SAFE) we compare the valuation caps and discount rates. Companies with higher valuations get lower scores.

We also take into consideration industry-specific valuation revenue multiples and valuation growth over time. Overpriced companies receive lower scores in this metric. 

  • Market: We conduct our own standard market sizing research to estimate the addressable markets as well as the market growth rates and the market potential. Companies with bigger market sizes or faster growing markets get higher scores for this metric.
  • Differentiation: To come up with the differentiation score, we consider all of the following: number of direct competitors, whether the company’s product/service comes with a higher quality and lower price compared to its competitors, patents, barriers to entry, social impact, and business partnerships.
  • Performance: For performance, we consider the company’s current phase. Is it pre-launch, pre-revenue, pre-profit, or profitable? We also consider total annual revenue, revenue growth rates, funding raised in prior rounds, monthly burn rates relative to total capital, total assets relative to total liabilities, and other financial metrics.
  • Team: For the team, we take a deep look at the founders and other key team members. We consider years of relevant industry experience for the founders and the size of their network. We check to see if they have previous successful exits. The founders’ level of education, where that education was attained, and level of managerial experience are also taken into account. To get an idea of team cohesion, we look at whether the founders have worked together previously and whether they have complementary skill sets. Beyond the founders, we consider the number of relevant advisors and notable investors. Lastly, we examine the diversity of the team as a whole and the quality of key executives in the team.

For every data point in the above dimensions and their sub-dimensions, we use our proprietary algorithm in which we standardize, normalize, and scale values to come up with a score between 1 and 5. 

We’re always improving our algorithms. Our industry-leading team of data analysts is constantly testing and iterating to make the algorithm better at forecasting a startup’s potential trajectory.

More Information

For more information (and to provide feedback) on our ratings methodology, please contact KingsCrowd customer services at support@kingscrowd.com.


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