Can algorithms become start-ups’ crystal ball? The use of AI to predict start-up survival

Abstract

Professional ventures capitalists (VCs) have for years lived in a world in which, on average, eight out of ten investments in series A-B do not deliver a substantial return on investment. The remaining two investments should, in this context, pay for the other eight (of which five are likely to fail completely) and generate the return asked by the limited partners, the investors in the VC funds. The situation is even bitter for investments in early-stage start-ups (seed capital) for which very limited data are available, and in which investors are oftentimes less “professionalized” than venture capitalists and other corporate investors. When it is obvious than an average increase from two to three profitable cases (meaningful returns) in series A-B would greatly increase the profitability of funds, this is easier said than done.