🦾 AI tool analyzes startups 537 times faster than human analysts

• A new study shows that AI agents can screen early-stage startups 537 times faster than human venture capital analysts without sacrificing quality.
• The AI tool cost an average of 6.9 cents per search compared to 70 dollars for human analysis.
• Startups selected by the AI agent had a higher probability of surviving and receiving funding.

Study of over 60,000 startups

Researchers from several European universities have examined how large language models (LLMs) can help venture capital firms screen potential investments. The study was conducted in collaboration with the German venture capital firm Freigeist Capital and was based on their database of 61,814 early-stage startups from the period 2018 to 2023.

Venture capital firms typically finance less than 1 percent of all applications they receive. This means investment decisions are often drawn from a pool of over two million potential companies in the United States alone. Identifying the most promising companies is a time-consuming process.

AI performed as well or better

The study compared the AI agent's performance with four human analysts from Freigeist Capital. The analyst group consisted of two early-career individuals and two experienced investment professionals.

When it came to grouping companies into distinct categories, the AI agent performed nearly as well as humans. The AI received a Silhouette score of 0.35 compared to 0.37 for the human analysts. But the AI agent outperformed humans when it came to creating clear and compact categories. The Calinski-Harabasz Index, which measures how well separated and defined the categories are, was 70 percent higher for the AI agent.

Dramatic difference in time and cost

The most striking difference was speed. A human analyst needs an estimated two hours to review and rank startups according to a given investment hypothesis. The AI agent needed an average of 13.4 seconds for the same task. This means the AI is 537 times faster.

The cost difference was equally large. A venture capital analyst in Germany has an hourly cost of approximately 35 dollars, resulting in a total cost of 70 dollars for a two-hour analysis. The AI agent cost an average of 6.9 cents per search. This represents a cost improvement by a factor of 1,000.

Validation shows accuracy

The researchers also conducted a validation to examine whether the AI agent's selections led to good results. They analyzed 9,911 startups that were screened by Freigeist Capital during October and November 2023.

The results showed that startups selected by the AI agent had a significantly higher probability of surviving. They also had a higher probability of receiving funding after the screening. Startups selected by both human analysts and the AI agent had the highest survival rate.

Practical applications

The venture capital firm Freigeist Capital continues to use the AI tool in its operations. A senior analyst from the firm explained that they previously used interns to filter startups at an early stage. This meant that critical decisions were made by people with less experience.

With the AI tool, they now conduct the screening themselves and have eliminated the need for interns for this task. The firm reports that they filter out 70 percent of startups that do not match their investment theme.

Opportunities for smaller players

The study suggests that AI tools can lower the costs of screening startups. This in turn can reduce barriers for smaller venture capital firms and new players to enter the market. Historically, venture capital investments have favored certain geographic regions and established networks. By reducing the importance of personal connections, AI agents can potentially benefit startups from areas outside traditional ecosystems.

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