How can an investor with limited experience investing in early stage companies realistically gauge the risk of different investments? This RABBIT Report looks at a team of Babson College entrepreneurship experts who have distilled their research, knowledge and experience into an algorithm that looks at 180+ data points to analyze risk and benchmark companies.
Company: Catapult Intelligence (www.catapultintel.com)
Sector: Data & Analytics Tools
Catapult was formed, by Babson College trained experts, to support issuers, financial intermediaries and investors via the Catapult algorithm, as they evaluate the risks inherent in startup fundraising campaigns. Their algorithms assess an individual issuer’s potential for success in a securities crowdfunding effort by benchmarking what can be known of early stage companies. Regardless of a firm’s industry, size or stage of development, Catapult states that their score can be used to assess a) relative likelihood of fundraising success, b) ability to show progress over time, or c) as part of terms and conditions of a lender to monitor their obligors. This algorithm was tested on companies exiting the Babson College Butler Venture Accelerator and the entrepreneurs that used it said that they found it very valuable in their process. In addition, Catapult states that its algorithm and 180 attribute process is IRS Business Valuation compliant.
1. What problem is Catapult solving?
Startup companies defy traditional valuation techniques, which require (among other things) cash flows, a track record, hard assets, and/or a recently closed round as inputs. In addition, information asymmetry in private company investing is believed to exist to the benefit of traditional accredited investors but is not useful or usable for the average retail investor. Catapult’s model is to assimilate information and create a scores that can help a broader population of investors to understand the underlying well-being of an early-stage private company’s ability to do what is their next major step: raise money from investors. A large challenge indeed.
2. Why is this product necessary?
An online investor in the private capital markets needs the ability to look across portals and compare issuers. However the nascent low-touch, high-volume, securities crowdfunding industry is built upon information asymmetry which is a hurdle for retail investors. Investor education is also lacking in content, depth and relevance on how to properly analyze deals. This makes it a challenge to understand the details. Catapult believes widely available, transparent benchmarking of startups can solve these problems by analyzing 180+ attributes of a business that are fundamental to its ability to achieve the next milestone.
CEO Dustan Bonnin says, “Our research of six equity crowdfunding portals shows a strong correlation (R2=0.8319) between the amount and type of information about an issuer that is available to a retail investor (measured as a % of our survey) and that intermediary’s ability to successfully attract funding for the issuer. The more information, the better are the success rates.”
3. How does Catapult work?
Catapult states that it uses what can be known about an individual startup, without trying to predict what isn’t. Using data collected directly from the firms and the funding platforms, they look at offering details, and how the company and its product interact with its community. Catapult collects data through a simple (copyrighted) survey. “The survey is an attribute rich, standardized, automated, culturally and chronologically tunable, hybrid scorecard that learns over time,” says Bonnin. It is calibrated to classify market acceptance measured by crowdfunding success.
The survey seeks to understand why a company is in business. “We want to know what the founders are like, and what the company story tells us. These things matter to any business. Catapult has also discovered patterns in the data that give us the ability to classify differences in the level of preparedness of a company to seek investment through the crowd,” says Bonnin.
Catapult believes that its process also has anti-fraud / anti-gaming provisions built in. On the survey side “we ask specific triggering questions, and have intentionally designed answers with no ‘right’ or ‘wrong’, or better/worse answer,” says Bonnin. “We tightly control access to the survey and the trade-secret protected control scoring system, which is separate from the crowd-based benchmarking regression. This expert-derived algorithm is never revealed to the firms nor the platforms. We compare against the crowd-based scoring system, and look for trends that warp the current alignment between the two methodologies.”
Much of Catapult’s methodology is derived from work started in 2013. At that time, a team from Oxford, Cornell, Babson and Boston University put together the underpinnings of the methodology for venture funded entrepreneurs and the first versions of the surveys but failed to secure funding due to the delays in implementing the JOBS Act regulations. Since then, they have used the last 3 years to further validate the methodology and continue to collect data.
4. Who are the founders?
Dustan Bonnin is Catapult’s CEO and Founder. Bonnin is a Babson MBA, Registered U.S. Patent Agent, and published author. He holds granted patents and certifications in software quality and product ownership. Bonnin is a consultant to entrepreneurs at Babson’s Butler Venture Accelerator. Catapult is the culmination of Bonnin’s 25 years of involvement in startups including venture funded companies like Telios, Praecis, Peptimmune, as well as a few failed startups.
Bonnin’s advisors include Swifton CFOs, ACOM, Lanes Management Services, and FinTech Market Strategy.
5. What can you tell us about early traction/user experience?
Catapult officially launched its services in May, 2016 and is working with its first equity crowdfunding platform, PlayBusiness out of Mexico City. PlayBusiness is helping to build a startup ecosystem in Latin America’s biggest city. “What we have found when benchmarking PlayBusiness’ issuers is a set of investor preferences for company attributes that are somewhat distinct from those of UK and Northern European investors,” says Bonnin. They are tuning their regression algorithm to fit the geography’s views. Bonnin says, “our relationship with PlayBusiness is a great example of how Catapult can provide a standardized and automated evaluation solution that is customized to a business culture and a regional set of investors.”
While waiting for the U.S. launch of Title III platforms, Catapult has evaluated a number of companies out of Babson’s Butler Venture Accelerator to continue to build out its U.S.-based benchmarking data set and collect user feedback. This includes companies like Rapidocc, Fastway Engineering, and Immi Financial Solutions. “The feedback from the entrepreneurs has been tremendous. Users report that the analysis delivered by Catapult helped them focus and prioritize actions to improve their businesses and the likelihood of success in their fundraising efforts,” says Bonnin.
6. What are the risks (regulatory, operational, other) to Catapult?
The primary risks at this early stage, is 1)the size of the data set – is it large enough at this point to deliver actionable insights, and 2) are the data points being collected the best data points to answer the questions being asked. Catapults sees risk in the level of quality in the issuers themselves though they have a strong belief in the entrepreneurial culture in the U.S. “We have attempted to mitigate product performance risk by adopting a methodology which itself is highly adaptable. We evaluate companies whatever the outcomes. The attributes of the companies that have succeeded take on a positive meaning. The methodology works, validated in multiple ex-US geographies. Catapult’s value grows with the growth of its data set, which organically improves the benchmarking results,” says Bonnin.
Since their current target customers are the platforms, they are subject to the same risk as all the other industry participants. There is some chance that crowdfunding platforms as a whole, will not be successful. While they believe there are other opportunities for their benchmarking methodologies to be used in other credit decisions, it would be a setback if their initial target segment was not successful enough to sustain their market entry.
Lastly, there is a trade-off between delivering anti-fraud capabilities and transparency of the Catapult algorithm. While they believe transparency is critical to building investor trust and the credibility as a whole, too much visibility into the Catapult methodologies would leave them vulnerable to issuers gaming the scores. The risk is that they do not find, or are regulated away from, an optimal balance between transparency and protection from the fraudulent use of the scoring tools.
7. What is CCA’s perspective?
For us, this is a very early example of a cross of two sectors: data & analytics + white space. As the data set grows, there will be greater proof points/validation of the algorithm. While one day there will be true Machine Learning created in the early stage, private capital market space, today the data sets are far too small for this to occur. What Catapult is working to deliver is an analytical algorithm that is pioneering an important shift in the private capital markets. In the past (and still today) private transactions were just that…private, opaque and bespoke, which make them difficult to draw learnings from. This is now shifting to an investor expectation of the ability to use data to drive improved decision making, transparency and collaboration. This is a service that grows in value as more data becomes available. By also integrating a survey, Catapult can access further data points that might not otherwise be uncovered online. In doing so, the industry (issuers, investors and intermediaries) will have a better understanding of what it takes to be successful at crowdfunding and these lessons may also shape better policies.