This is why I thought YouNoodle’s Startup Predictor was a great idea pretty much the first second I heard about it. There was a lot of derision early on about the idea that a company could create an algorithm to predict how much a startup could be worth. (Ahem, not by me of course. YouNoodle predicted my book writing, blogging, column writing and TV show hosting mini-empire would be worth $21 million in three years. We’re still working on that.) But the algorithm takes the same variables that VCs weigh, like how long a team has worked together, what the goals for success are and metrics like Web traffic and buzz.

On Thursday, the company is releasing a new product called YouNoodle Scores that quantifies the buzz further. Unlike a vanity Twitter app that ranks the value of Tweets based on surface details like how many people follow you, there’s some serious methodology here, thanks to a partnership with Sean Gourley. Gourley is a Rhodes Scholar who’s studied how collective intelligence works, specifically how different cultural patterns, news reports and buzz lead up to break outs of terror attacks and wars. He found that you could predict the nature, size and timing of outbreaks by looking at all these factors. YouNoodle hired him to apply the same thing in the startup world: Analyzing traditional media, blog posts, Twitters, Alexa traffic patterns and other metrics over time to predict when and how a startup would, well, break out.

Conceptually, figuring out what all these patterns and metrics really mean will be even more important as we trudge deeper into this muck of a recession. Web 2.0 has become way too reliant on surface metrics with all of us thinking page views, unique visitors, Facebook friends and Twitter followers implies value in an age when we all know how to goose these metrics. If the algorithm works right, my guess is you see sites with fewer gaudy statistics actually scoring higher in meaningful buzz.

YouNoodle CEO Bob Goodson cites a company called Viikii.com, that jumped onto YouNoodle’s radar out of nowhere in October thanks to the algorithm. It was started by two Stanford kids, but I’d certainly never heard of it. Viikii makes subtitling software for Korean videos and despite its MIA status in the Valley echo chamber, the site has been taking off—it’s just been taking off in Korea. I can’t help but wonder what the scoring engine might have made of a site like Pownce that launched to wide hype and fanfare, but quickly tailed off in user activity and adoption.

It’s possible the new scoring engine may help YouNoodle inch towards a business model—the biggest area where I’ve had my doubts about the company. I don’t think VCs are a great market to buy any premium YouNoodle analytics, because there’s going to be natural skepticism that an algorithm can be any kind of substitute for their experience and judgment. But governments charged with investing in startups are a natural fit. After all, they are trying to act like VCs without the training or experience. Even if YouNoodle’s algorithm is right 30% of the time, it’d be a huge upgrade over funding companies in the dark. One of the company’s launch partners is the UK’s Department of Trade and Investment, which is currently charged with disbursing some one billion pounds into the London scene. (Full disclosure: CrunchBase is another launch partner.)

Of course for any of this to happen, the site has to work and, to be clear, I haven’t gotten a chance to play with it yet. (Yes, we all remember Cuil.) But as someone who’s covered this industry for ten years, I’m hoping that YouNoodle’s start up engine works well enough to give the venture capital industry just the kind of healthy kick in the pants it sorely needs. It’s only fair. Venture capitalists have certainly profited off of the Internet disrupting every one else’s businesses.

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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.

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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.

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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.

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“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.

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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?

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