Note: this article was updated on Oct. 17, 2022 in reflection of changes to the KingsCrowd startup rating algorithm.
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.
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 assessment of it. The end result is one of the following tags: Top Deal, Deal To Watch, Neutral Deal, or Underweight Deal.
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
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.
We compare all startups that are actively raising capital to each other. We think this is the most 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 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. These updates can change the ratings of those startups that are 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.
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.
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 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.
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 while a rating of 5 reflects a high amount of risk.
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 downside 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 low risk-adjusted overall rating, if its risk rating is too 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 support@kingscrowd.com.
