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 online across more than 60 platforms.
Quantitative ratings are a numerical evaluation of investment opportunities based on the hundreds of data points we collect for each startup. With our numerical ratings, we try to be as objective as possible. We collect data on the company’s team, target market, financials, traction, competitors, and more. 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).
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
Evaluating innovative startups in their early stages is challenging, as even top investors sometimes miss out on future industry leaders or back ventures that fail. Our goal is to provide investors with tools to make more informed decisions.
We compare all startups actively raising capital against one another, enabling top performers to stand out. While this method may mean that even marginally better companies receive high scores if the overall pool is weak, we believe such scenarios are rare and that this approach’s benefits outweigh its drawbacks.
Ratings can shift weekly (ratings changes are typically small, no more than a few tenths) as we add new companies and remove those with closed funding rounds, ensuring our evaluations remain current. Initially, with just 300 active raises, all companies were compared regardless of stage or industry. Now, with nearly double that number, we categorize companies into early-stage and growth-stage groups, comparing them within their peer sets for greater accuracy.
Overall Rating and the Five Main Metrics
The overall rating captures a raise’s upside potential. For every company we rate, we collect more than 350 unstructured data points. We draw from a startup’s raise page, 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 a startup’s potential.
For every startup, we examine many data points that we organize into the following five main metrics. Every metric has its own rating and multiple sub-ratings:
Price
We compare the valuation of a company at its 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. Companies with higher valuations get lower scores, since valuation is inversely correlated to potential investor returns upon an exit.
We also take into consideration industry-specific revenue-to-valuation multiples and valuation growth over time. The multiples are compared within the same industry as well as against all active companies. 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 and managerial experience for the founders and the size of their network. We check to see if they have previous successful exits.
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.
Risk Rating
When investing in startups, it’s also important to estimate the likelihood that an investment will be unsuccessful. Kingscrowd’s risk rating captures each raise’s downside potential, on a scale of 1 to 5. Note: a rating of 1 reflects a low amount of risk (good) while a rating of 5 reflects a high amount of risk (bad).
Like overall rating, risk ratings are calculated by comparing all active raises in the online private market. Our risk rating consists of eight sub-categories — product, funding, team, market, legal, investment terms, time, and financial risks.
Product Risk
Product risk is mostly measured based on the company’s product type and its development progress. Companies with less developed products will have a higher product risk rating.
Funding Risk
Funding risk assesses the company’s ability to raise future rounds. This risk is mostly measured based on the raise amount from prior rounds and the capital intensity required for a startup’s day-to-day operations.
Team Risk
Having too many or too few founders contributes to team risk. In addition, founders’ dedication (whether they are full-time or not) and past exit experiences are also factors that could add to the team risk.
Market Risk
Not all markets are created equal. Some markets require approval from authorities and licenses (such as medical devices). Some new markets still require mass adoption from consumers to be accepted. Some markets need to have the support from both the supply side and demand side (marketplaces). These factors contribute to the market risk for a startup.
Legal Risk
Some companies may have faced lawsuits or have a stronger likelihood of facing legal issues in the future. These companies could receive a higher legal risk rating.
Investment Term Risk
Investment terms are measured based on security type, early bird discounts, and valuation. If the investment terms are more favorable for investors, the raise will receive a lower investment term risk rating.
Time Risk
Some companies raising in the online private markets are still at an early stage. They may require a long time to build products, scale production, and/or develop sales and distribution channels. The time required to show these results may increase the raise’s time risk rating.
Financial Risk
The company’s financial risk is measured based on its debt structure and margin level. Heavy debt and low margins pose a higher financial risk for equity investors.
Risk-Adjusted Rating
The risk-adjusted rating captures both the upside potential and loss potential of a raise by combining the overall rating and the risk rating together. This score provides the total picture of an investment’s potential.
This rating again works on a scale of 1 (Iow potential) to 5 (high potential). Raises with a high risk-adjusted rating will have a relatively high overall rating (upside) and low risk rating (downside). A raise with a high overall rating could have a lower risk-adjusted overall rating, if its risk rating is relatively high.
More Information
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.
For more information (and to provide feedback) on our ratings methodology, please contact Kingscrowd customer services at [email protected].
