The local ABC affiliate dropped by YouNoodle’s offices in San Francisco to get an idea of how useful their new startups valuation predictor is. ABC’s Sue Thompson interviewed CEO Bob Goodson on how the service works, and I dropped in for a cameo and a dose of healthy skepticism.

We first covered YouNoodle in February way before it launched. It entered public beta last week, and now anyone can enter their startup information and see how the service scores it from 1-1,000 along with a dollar valuation prediction a few years out.

See our review of the YouNoodle startup valuation predictor from a couple of days ago (as well as our skeptical post from earlier this year). The product just came out of private beta. Look for a tab in the top right corner of the site called “startup predictor”, or just click on younoodle.com/predictor and fill in the questionnaire.

The company, which is funded by The Founders Fund, Max Levchin and Peter Thiel, uses detailed data about startups and a proprietary algorithm to make a guess on the likelihood of success of a startup. They even go so far as to estimate the value of the company three years out.

The key factors in determining likelihood of success are the team, financial factors, the concept and advisors. The tool wants to know everything. For the founders, their age, education, previous startups (and how they did), and their long term relationship to the other founders. For the concept, YouNoodle gathers information on the business idea (probably extracting keywords for analysis), where it’s located, and lots of other data.

See our previous post for valuation predictions for a few high profile startups like Slide, RockYou, Twitter, FriendFeed, Cuill and Mahalo. Then cast your aspersions appropriately. The most interesting and insightful (or just plain funny) commenters get a TechCrunch tshirt in the size of their choice.

In February a well backed startup called YouNoodle said that they were developing a product that would accurately predict the future success of startups based on an analysis of the business and the founding team. Much like a credit rating tells creditors how likely an entity is to pay off debt, YouNoodle aimed to tell investors how likely they would be to see a return on their investment, and would even go so far as to estimate the exact valuation of a startup a few years into the future.

We were skeptical, to say the least. Particularly because the product was being announced while still in development.

Now YouNoodle is preparing to launch the predictor tool (sign up to be notified here). CEO Bob Goodson let me test the service out last week and shared some of the early results with me.

I’m still skeptical, but I love the valuation prediction for TechCrunch ($87.4 million), and I have to admit that some of the predictions are within a stones throw of accurate. And if people can be convinced that this is a useful way of understanding if a startup team has a chance of succeeding, it could become part of Silicon Valley culture.

The Prediction Tool

YouNoodle collects a lot of data on startups to make the prediction – the questionnaire takes a good half hour to properly complete. YouNoodle aims to make the prediction right before the first round of funding for a company. So one way to test it is to enter information about a more mature startup that was true prior to funding, and see how well it predicts the actual results.

The key factors in determining likelihood of success, says Goodson, are the team, financial factors, the concept and advisors. Details on the education, entrepreneurial experience and other information founder and key employee. The tool wants to know everything. For the founders, their age, education, previous startups (and how they did), and their long term relationship to the other founders. For the concept, YouNoodle gathers information on the business idea (probably extracting keywords for analysis), where it’s located, and lots of other data.

YouNoodle then churns all that data and assigns the company an index score from 1-1000 as well as a valuation estimate three years down the road. YouNoodle has tested and fine tuned their algorithm with 3,000 startups, Goodson says, and the results are “highly statistically accurate.”

As I said, TechCrunch’s valuation prediction based on 2005 information is just over $87 million. I won’t comment on that (woohoo!), but here are some other predictions, all made with data on the startups that was true prior to any funding:

Slide: $124 million (actual: $550m)
RockYou: $71 million (actual: $250m)
Mahalo: $118 million
Powerset: $104 million (actual: $100m)
Cuil: $95 million
Twitter: $110 million
Friendfeed: $86 million

Given that the information used to make the predictions was limited to that available prior to any funding of these companies, the data is both interesting and accurate enough to be useful. Slide and RockYou, for example, aren’t accurate, but the algorithm did predict success and it also got the relative valuations almost perfectly correct. Powerset was accurately predicted, and we’ll have to wait and see how Cuil and Mahalo do. Twitter’s valuation is probably close to accurate.

More examples: YouNoodle predicted that Google would be worth just $88 million three years after it was founded, which is lower than their private valuation at the time but now way off. Facebook’s valuation was predicted at $111 million, which is way off of its actual valuation. But the key is that YouNoodle would have predicted huge successes for all of these companies based on the exceptional teams put in place at the very early stages.

The average three year predicted valuation for student startups from top ten universities is about $360,000.

So the big question is, how does YouNoodle predict it will do based on its own algorithm? Goodson says it thinks YouNoodle will be worth $96 million in 2010.

How YouNoodle May Be Used

Goodson says he will provide the prediction algorithm for free to startups, even giving them a “certificate” showing their index score and predicted valuation (the one for TechCrunch is the top image above). If third parties want official access to the certificate they’ll be asked to pay (just as creditors are asked to pay for official credit reports). For now the service is being provided completely for free.

While the algorithm seems to do a good job of identifying teams with a high likelihood of success, it’s not clear to me that it does a better job than an experienced VC would be able to do on their own. YouNoodle is also basing predictions on historical data, and in a rapidly changing world that is consistently disrupted by new technologies, those predictions are very hard to make. Humans who are on top of recent developments can make subjective decisions that are far more likely to be accurate than an algorithm.

But YouNoodle is also dispassionate, and can therefore make decisions outside of the emotional world of startup investing. Venture capitalists are, despite their appearance, fairly risk averse people. If YouNoodle backs up their instinctive reaction to a startup they may be more likely to invest. And they may also walk away from an investment they like if YouNoodle says it’s destined to fail.

At the very least YouNoodle is going to add a fascinating layer to the conversation. The company has raised one round of financing (they aren’t disclosing the amount raised) from Max Levchin, Peter Thiel and The Founders Fund. In addition to Goodson, key employees include Kirill Makharinsky and Rebeca Hwang.

New startup YouNoodle debuted to some first class press coverage this morning – a headline in the NYTimes that reads “A Start-Up Says It Can Predict Others’ Fate.” The really choice quote from the article from CEO/co-founder Bob Goodson is this:

“Give us some information, and we’ll give you some idea of what the company will be worth in five years.”

The best part about the article is that the prediction feature hasn’t launched, so no one can see if it’s for real. For now, the site is a database of startups with very light information. Hardly what I would consider NYTimes material. If not for the investors, which include Founders Fund, Peter Thiel and Max Levchin, there’s no way we would have covered this.

The NYT did cover themselves somewhat by bringing in some venture capitalist quotes calling bullshit on the whole thing. “If their tool did such a good job, they’d raise a fund themselves and beat the tar out of us,” said Paul Kedrosky, who didn’t bother to write about the company on his blog.

And he’s exactly right. Just like the people who say they can sell you a book and a seminar to help you get rich quick off of distressed real estate – if these guys found some sort of magic formula that actually predicted the value of a startup down the road, they’d keep the information to themselves and make, well, unlimited amounts of money.

It’s hype and nonsense, and it won’t work. The NYTimes bit on it hard, but our readers are smarter. In a poll that Duncan ran earlier the vast majority say there’s no way YouNoodle can pick winners based on some algorithm.

I propose this as a test – If and when YouNoodle launches this magic predictor thingy, they should run their own founding team through it. If it predicts failure, then it’s spot on and we know it will work.

So far, Goodson says, they haven’t run themselves through the model. Smart move.

We cover a lot of startups here at TechCrunch, but I don’t recall ever having covered a startup that thinks it can use artificial intelligence to predict whether other startups will be successful. YouNoodle promises to do just that.

The site opens to the public today, and they chose the NY Times to pitch their product:

Kirill Makharinsky, 21, and Bob Goodson, 27, call their software a “start-up predictor,” and they say their company, YouNoodle.com, might give an edge to venture capitalists and other investors trying to decide whether to sink money into an early-stage company.

“We don’t want to replace investors,” Mr. Goodson said. “We simply believe that industries of comparable size have utilized artificial intelligence to inform decision-making.”

“Give us some information, and we’ll give you some idea of what the company will be worth in five years,” he said.

Call me a little skeptical, but I’ve been pitched AI that will predict the results of horse races for years, and ASIC warns against them.

Having said that, this quote is not inaccurate:

Paul S. Kedrosky, a venture capitalist and the author of the Infectious Greed blog, said that his industry was indeed inefficient at picking winners; typically, 90 percent of venture investments are not home runs.

It sounds interesting, but what do you think?