These are the Key Takeaways
- PitchBook created a tool which forecasts whether venture-backed startups will be successful in exiting.
- In the past year, exit activity has been in sharp decline.
- We used the PitchBook to analyse the top 50 startup companies in GeekWire 200.
PitchBook has unveiled a machine-learning tool that can predict the probability of a successful exit for a VC-backed startup.
The VC Exit Predictor uses PitchBook’s database — which includes more than 120,000 VC-backed companies; financing rounds; and investors — to train its algorithm.
The tool calculates a startup’s “opportunity score,” a percentile that reflects the greatest chance of a high return on investment. Additionally, it forecasts the company’s exit path — acquisition, going public, or remaining self-sufficient or shutting down.
We evaluated the GeekWire 200’s top 50 startup companies using the VC exit predictor. Below are the final results.
- The percentage of exit type indicates the most likely way to leave a startup.
- “N/A” is assigned to startups that received fewer than two rounds of financing.
- Some notable opportunities: Certn. Klue. Skilljar. Snap. Wyze Labs and Fabric.
PitchBook emphasizes that this new tool will not replace routine due diligence. The model does not consider factors such as comprehensive financials, business models, and founder intangibles — all metrics commonly used to evaluate startups.
Also, machine learning algorithms may not be able to quickly react to industry-specific sentiments or macroeconomic changes. TechCrunch reports that the VC Exit Predictor has a positive view on crypto-related businesses.
CB Insights provides a similar market intelligence tool, called Mosaic score. This feature, which was launched in 2021, came under fire after Tech Brew found bias. The Mosaic Score reportedly took into account a founder’s previous employers, educational background, academic achievements, and “network quality.”
PitchBook’s model does not use information related to the personal characteristics of founders, PitchBook Senior Quantitative Research Analyst Andrew Akers said during a webcast for reporters Thursday. However, he acknowledged there is “potential for bias in the output.”
Akers said PitchBook conducted a series of tests to minimize potential biases, and discovered no “statistically significant difference” in projected success rates between startups with male and female founders.
VC Exit Predictor’s release coincides with a significant decline in startup exit activity brought on by rising interest rates, geopolitical tensions and waning investor outlook on the tech industry.
PitchBook reports that the total exit value of the U.S. in 2022 was $71.4 billion, a decrease of over 90% from the year before. That’s the first time since 2016 that annual exit value didn’t surpassed $100 billion, per the report.
No companies from Washington state went public via IPO last year, while two — cannabis platform Leafly and photo giant Getty Images — went public via a special-purpose acquisition company (SPAC).
The VC sector could be further affected by the lackluster exit climate. PitchBook warned that an inefficient exit process could result in longer holding periods, reduced returns and lower distributions to restricted partners. This can also lead to slower fundraising.
“To mitigate these affects and achieve liquidity, VC investors need to understand the quality of their assets and evaluate their appetite for taking on more risk,” the company said. “Meanwhile, startups need to showcase their path to profitability and justify their valuations to maximize shareholder value.”
In order to get an exit prediction, companies must’ve received at least two rounds of venture financing. PitchBook’s model is based on 46,000 observations from startups with known exit outcomes. The tool was tested on more than 11,000 observations that were not included in the model’s training, and it demonstrated a 75% accuracy rate in its outcomes.