In this research, we present a Bayesian model to aid the investment decision in early stage start-ups and ventures. This model addresses both the venture and the angel investing markets. The model is informed both by previous academic literature on entrepreneurship and by venture capital investment practices. The model is validated through an anonymized experiment where reviewers with previous experience in entrepreneurship or investment or both scored a list of 20 anonymous real companies for which we knew the outcome a priori. The experiment revealed that the model and online scoring platform that we built provide an accuracy of 83% in identifying companies that would later on fail and where the investments would be lost. The model also performs fairly well in identifying companies where the investors would not lose their money but they would either have to wait for a very long time on their returns or they would not receive large return on investment (ROI), and we also show that the model performs modestly in identifying “big exit” companies or companies where the investors would receive high ROI and in a fairly short amount of time.
Part of the book: Bayesian Inference