Backtesting results: Early Metrics is able to predict startup journeys early on
By Katerina Mansour - 21 December 2022
Since its creation in 2014, Early Metrics has rated more than 4,000 startups all over Europe. In collaboration with a scientific committee backed by the CNAM, we created a startup rating methodology based on three main pillars: management, project and market. After conducting an interview with the entrepreneurs and receiving key documentation, our analysts assess a startup based on a set of defined criteria in these three pillars. This assessment results in a final rating out of 100. By leveraging our robust methodology, we are therefore able to identify a startup’s strengths and weaknesses, its growth potential and its capacity for resilience. However, it’s also important to note that a key factor behind the strength and accuracy of our rating methodology is our continuous backtesting efforts.
Our backtesting process and methodology
In order to ensure that our rating methodology evolves with the times and remains as relevant and accurate as possible, our data and modelling team conducts regular backtesting analyses. These backtesting efforts involve collecting data on rated startups at 4 different points in time: 12, 24, 36 and 60 months after its rating. The data collected comes from both the entrepreneurs and public sources and helps us conduct a statistical analysis on 4 key criteria: business growth, team growth, financials and funding. Based on the results of these analyses, our teams can fine-tune our rating model so that we can weight our rating criteria based on real-life results.
How our backtesting model performs
So far, we have conducted our backtesting analyses on 2,940 of our rated startups. This sample has already helped illustrate just how relevant Early Metrics’ rating methodology is. Indeed, 36 months after their rating:
- 77% of startups ranked in the top 10% of all startups rated by Early Metrics experienced a positive growth trajectory*
- 80% of startups ranked in the bottom 10% of all startups rated by Early Metrics went bankrupt or experienced difficulties with their growth
These results illustrate the correlation between Early Metrics’ rating and how well the startups we rate do in the months after their rating.
*Companies that experienced an average growth (turnover or team size) per year of at least 40%
How our rated startups perform
One may wonder what exactly a positive growth trajectory is and just how positive this trajectory may be for our top-rated startups. Indeed, it’s also very insightful to look at more in-depth growth criteria captured during our backtesting analysis to see what trends emerge and how accurate our rating methodology proves to be. 36 months after their rating, startups ranked in the top 20% of all startups rated by Early Metrics:
- Increased their revenue by 161%
- Grew their team by 138%
- Raised 120% of their initial funding goal
Ultimately, these results also highlight that our methodology can provide predictions on a startup’s ability to successfully raise funds, grow its team and grow its revenue. Indeed, another piece of data that helps illustrate this is that startups ranked in the bottom 20% of all startups rated by Early Metrics were only able to secure 23% of their initial fundraising goal, 36 months after the rating.
Early Metrics is proud of these recent backtesting results and looks forward to further strengthening and improving our rating methodology over the years to come, as our pool of rated startups continues to grow.