Page last updated at 11:36 GMT, Friday, 20 February 2009

Investing in the next 'big thing'

By Maggie Shiels
Technology reporter, BBC News, Silicon Valley

slot machines.
YouNoodle wants to make backing start-ups less of a gamble

A San Francisco company has launched a tool to help investors decide where to put their money.

YouNoodle uses a scoring system that plans to turn the business of investment into more of a science.

The software measures the "buzz" surrounding a company via blogs and media reports along with a variety of factors including website traffic.

The scoring tool covers nearly 30,000 start-ups, ranging from biotechnology to gaming software.

"By watching the way the world responds to a start-up, we can give advance notice of what's hot and what's not," said co-founder Bob Goodson.

Researchers adjust the algorithm (the mathematical rating), based on more than 150,000 start-up related stories, every day. Those reports are then analysed in much the same way that Google ranks content on a web page.

Screenshot of Twitter home page, Twitter
Assessing the chatter on Twitter is one of the sources the score is based on

"While dollars are regarded as the best indicator of success, there are other good indicators out there before there is revenue," Mr Goodson told the BBC.

"Take something like Facebook, which is an example from Web 2.0. For two years there was rapid growth, rapid expansion, hiring, media coverage and so on without the revenue.

"So if you are in the business of needing to understand what's hot, then you need to know what is moving before the revenue numbers come through. For investors, getting in early is where the real money is made," explained Mr Goodson.

Early warning system

The algorithm behind the new scoring system was devised by New Zealander Dr Sean Gourley.

He has also worked on modelling the likelihood of terrorist attacks for the Pentagon and describes the start-up tool as "an early warning system" that highlights to people the potential of a company.

YouNoodle scores
The public can check the health of a start up for free

"Maybe 20 years ago if you were a venture capitalist in Silicon Valley, you knew everyone through your network and everyone came to you," said Dr Gourley, who is director of data tools.

"Today the world is a lot bigger and there is a lot of information out there. We wade through the noise and create value by making sense of it all and putting a spotlight on companies that could easily slip under the radar, because they don't come through the old boys' network."

While Dr Gourley talked of hoping to "create a meritocracy" for the start-up world, the reality is that venture capitalists have always relied on their trusted networks, personal referrals and their own gut instinct.

Ron Conway is a business "angel", who invests at an early stage of a company's life. Of the more than 500 start-ups he has put his money into, his successes include Google, PayPal, Digg and Ask Jeeves.

He is affectionately known as the Godfather of Silicon Valley for having placed more bets on internet start-ups than anyone else in the Valley.

He told the BBC he thought the scoring system "sounded like a useful tool that I think would be helpful to investors".

However he also said that for him, the personal connection was what counted.

"Most of my deal flow comes from the people in the more than 500 companies I have invested in. If the company is recommended to me by someone I have done business with in the past, then that will move it way up my list.

"For me, word of mouth and trust is even more important to me than a scoring system. But it might help as an add-on," said Mr Conway.

Best return

Investing in start-ups can seem like a risky way to make money given that there is no guarantee of a return and the belief is that most companies flame out within the first couple of years.

Mr Goodson said he believes this scoring system will take some of the gambling element out of the equation, as well as eventually boosting the $100bn (71bn) being invested globally in the sector.

Bob Goodson YouNoodle
Bob Goodson believes the company will change the way start-ups are judged

"Everyone wants to see money go into places where it's going to yield the best return. That's good for entrepreneurs and its good for the economy and for investors and we believe our algorithms will make a difference.

"It's a disgrace that only $100bn is being invested in the most valuable companies on the planet - businesses tackling the big social and environmental problems, businesses that could one day be the next Google or Apple," said Mr Goodson.

Getting in on the ground floor of the next Google or Apple is what every investor dreams of doing.

Government agencies are no different. The United Kingdom's trade and investment arm spends hundreds of millions helping UK start-ups through its enterprise capital fund.

In England, that adds up to $315m (225m) annually, which is matched by the private sector. Scotland, Northern Ireland and Wales operate their own separate funds.

For the past few weeks, the British Consulate in San Francisco has been using the YouNoodle score to help determine which businesses it should take a closer look at.

"With start-ups, you want to find companies that are going to be competitive, have longevity and something else that no-one else is offering," said David Slater, regional director for UK Trade & Investment in California.

"The perennial problem is how to spot those companies and what YouNoodle is providing is a potential tool to help people like us make those value judgements."

While some may be sceptical, Mr Goodson believes his firm could be something of a game changer down the road.

"What gets us up in the morning and working late at night is the idea we can make this industry more efficient, bring more resources into the industry and be part of finding the next big thing."

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