Are 'Better' Ideas More Likely to Succeed? An Empirical Analysis of Startup Evaluation

This paper studies the uncertainty associated with screening early stage ventures. Using data on 652 ventures in high-growth industries, we examine whether experienced entrepreneurs, executives, and investors can predict the outcomes of early stage ventures by reading succinct summaries of their business ideas without meeting the founding teams. We find that the predictability of venture outcomes varies with the intensity of research and development (R&D) in the sector. In R&D-intensive sectors, such as life sciences, the ideas that elicit more positive evaluations are significantly more likely to reach commercialization and/or to raise substantial funding; this pattern does not hold for ventures in non-R&D–intensive sectors such as enterprise software. Our results suggest that, despite the many uncertainties associated with innovating at the technological frontier, early stage ventures in R&D-intensive sectors can be screened effectively using information on their non-human capital assets. In contrast, such information is not sufficient to screen ventures in non-R&D-intensive sectors.