Are ‘Better’ Ideas More Likely to Succeed? An Empirical Analysis of Startup Evaluation
August 17, 2015 Editor 0
by Erin L. Scott, Pian Shu, and Roman M. Lubynsky
Executive Summary —
Can early-stage assessment of a startup idea by experienced entrepreneurs and executives predict its future commercial viability? The authors used data on 652 venture ideas across a wide range of industry sectors at Massachusetts Institute of Technology Venture Mentoring Service between 2005 and 2012 and presented three key findings. Overall the researchers suggest that for ventures in R&D-intensive sectors, seeking feedback from a diverse set of experts may be an effective mechanism to reduce some of the uncertainty associated with commercializing new ventures.
Entrepreneurs face high uncertainty and often make costly investments in new business ideas without knowing the expected payoff. This paper empirically examines whether ex-ante assessment of early-stage startup ideas can predict their subsequent commercialization. We leverage an entrepreneurship program at the Massachusetts Institute of Technology in which early-stage venture ideas, presented in the form of succinct standardized summaries, elicit subjective evaluations from a large set of experienced entrepreneurs and executives. Using data on 652 ventures in multiple industry sectors, evaluated over an 8-year period, we find that ideas that elicit more positive evaluations are significantly more likely to ultimately reach commercialization. We further show that these results are driven by venture ideas with documented intellectual capital in research-and-development-intensive sectors, such as life sciences and medical devices. We find no evidence, by contrast, that experts can effectively assess the commercial potential of venture ideas in non-R&D-intensive sectors such as consumer web and enterprise software. Finally, we find that industry-specific and scientific expertise is not critical to experts’ collective ability to predict ventures’ commercial viability.
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