International Journal of Advanced Science and Technology

Vol. 29, No. 03, (2020), pp. 8073 - 8079

Prediction on Financing Risk in Venture Capital based on Machine

Learning

Ms. Shiela David1Ashish Pateria2 C.Nitish Mohan3 Vedant Vyas4

1
Assistant Professor, CSE Department, SRMIST, Ramapuram
2, 3, 4
UG SCHOLARS, CSE Department, SRMIST, Ramapuram
1
shielad@srmist.edu.in2ashishsrm31@gmail.com3mohan.nitish4@gmail.com4vyasvedant024
@gmail.com

Abstract
It can be observed that various organisations or establishments are particularly inclined to
be approached by a venture capital swiftly if they possess an innovative plan. An involvement
is dependent on various factors such as time, ability to be a prominent product in the
respective market. A venture capitalist is poised to be an integral part of the organisation as
compared to other sources of financing avenues. The positive or negative outcome of a
company is correlated to an increased or decreased round of investment decision for a
venture capitalist.

Keywords:,DecisionSupport,Random Forest, Machine learning, investment rounds

1. Introduction
A venture capitalist is arguably believed to provide a stronghold in the economy by
increasing the outreach of the development of these early-stage companies and increasing its
visibility to wider markets. It is considered that a venture capitalist plays a pivotal role in the
development of any organisation in its early stage. In the development of any organisation
especially in its early stage, investors portray as an integral part of this organisation. In
broader terms, these venture capitalist can be considered as the limbs of the organisation in
the initial stages. These venture capitalist not only act as a source of finance but also help in
establishing or overlook a governance model and standard operating procedures for the
production operations. Their involvement is definitely crucial for any organisation when they
are at an early blooming stage.

There are mainly five stages of a venture capitalist funding process, which are seed capital,
start-up capital, early stage, expansion stage and pre-public stage. Each phase has its own Key
point indicator. A seed capital stage indicates the phase of research and development of the
product which is at an initial stage. Start-up capital is where the organisation has a sample
product in place and requires management governance and conditional research. Early-stage
funding takes place when the product is established but requires more marketing and a wider
audience. Expansion stage is the phase where the new target audience is acquired and more
emphasis on market research takes place. The last funding phase, Pre-public stage is when the
organisation is already well-established and is open to an IPO and offer its shares.

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Copyright ⓒ 2019 SERSC
 International Journal of Advanced Science and Technology
Vol. 29, No. 03, (2020), pp. 8073 - 8079

One of the prominent skills which are required for a venture capitalist to acquire the
knowledge and predictability of understanding if the financing is into a risk-based portfolio or
a profitable one. One of the key areas which help these set of people is the aspect of machine
learning. It will help this venture capitalist to understand on which company they can invest
and gain clarity of the number of rounds of investment required and an understanding of the
amount of investment required for the same.

Introducing the Machine learning assessment for venture capitalist in making financial
decisions is a revelation and utilising the modern technologies for enhanced output and
driving the culture of data-driven decisions. For any organisation decisions and insights based
on data is a healthy setup. But this environment is possible if there is an appropriate structure
established with a protocol to ensure that these data-driven decisions are possible whilst
collecting the right kind of data to help the algorithms or the processing models to make the
best possible decision to the maximum extent. There definitely won't be an accurate output
but these kinds of assessment help in getting a close call in the decision-making process.
While many data assessment model predicts the possibility of an organisation to be acquired
or go through an IPO at a given phase but we are trying to understand the sustainability of the
company and the revenue required to be pumped in to expedite its growth. We are also trying
to improve on the accuracy by utilising an enhanced algorithm which can take multiple
features into consideration while helping the venture capitalist predict the outcome.

2.Literature Survey
We can find a literature survey of various approached based on to improve the assessment of
the model to predict the outcome for a venture capitalist for financing an organisation at the
early stage.[1] Has implemented an approach where they have used a mechanism known as
string metric which functions to measure the difference between two different sequences. It
converts the various phases into a sequence of XML files and its solutions in the text format.
As the algorithm proceeds in parsing the required XML file, it identifies the symmetry and
matches the solution of the text. Through this approach, high accuracy is observed amongst
its results but it reduces the evaluation overhead. The goal of the proposed model is to find
the correctness of an obtained response by the user. [2]

Utilizes multiple algorithms such as an artificial neural network, stochastic gradient descent,
k-nearest neighbour’s algorithm, support vector machine, decision tree and random forest. A
comparative approach was taken into consideration for each model and the accuracy it
provided for the output. Stochastic gradient descent is the most accurate amongst the given
models but is not the ideal option if based on running time. The RGB value of the image in
consideration was taken and the models were run on python platform. The SGD model being
most accurate also improved the quality assessment system despite having high runtime and
sensitive to feature scaling. [3] This method features an unconventional method which is
deploying a fusion of deep learning and a crafted feature.

In the aspect of deep learning, an emphasis on transfer learning approach has been
introduced. Surprisingly the hybrid method has produced better results than the traditional
deep learning methods. In the crafted features, they utilized various dynamics of the tool

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Copyright ⓒ 2019 SERSC
 International Journal of Advanced Science and Technology
Vol. 29, No. 03, (2020), pp. 8073 - 8079

which is used and combined it with the deep learning method. The entire data were classified
into three different stages, this enhanced approach has provided more accuracy and has
provided a more cost-effective assessment for the product quality. The accuracy does not
exceed 90% and can only provide the results based on the crafted features but not of any other
modification if wanted. [4] It involves the implementation of machine learning approach and
an established methodology for a system architecture to detect a pattern of learning,
relationship, interaction and effective assessment for a complex system which involved
massive data that could be attained from a collaborative learning environment. The
architecture consisted of involving and integrating computational psychometrics and
convolutional neural networks which extracting particular features, skill identification and
pattern recognition. Through this, it can establish a model for behaviour within a group. This
enhanced approach has had high accuracy and involved some advanced techniques despite
displaying high latency.[5] It has implemented a hill-climbing approach and utilises the local
knowledge for the maxima. It utilises the anti-learning model where it tries to perform worse
than the actual random guessing and then apply the inverse of the obtained predicted data to
the unexplored dataset. This has provided a more heterogeneous structure to the model and
has increased the accuracy despite accuracy not going over 50% and an increase in the
number of folds.

3. Existing System
In the existing, there is three focus approach. Focus on early-stage companies, which are of a
specific age and fall under the active company status. The second approach is a time-aware
analysis where there is a specific period and the rounds of investment required. Multi-class
prediction where the future events for companies are forecasted. These predictions will enable
a VC to predict various rounds of investments. These various rounds of investments give an
idea about the scope of the company. There are two windows of simulation in the window,
the first one includes there creation timeline if it is acquired and the round of investments it
requires. In the second simulation, the window is based on the event of the first round, such
as IPO, if acquired or not, funding acquired and any other event. The existing system has five
parameters such as Acquired round, Closed, No event, IPO and Funding Round.

3.1Existing system Drawback

The existing system has an increased version of evaluation overhead for the desired predicted
result.

The existing systems run on decision tree algorithms which increases the run time for the
evaluation. It also extracts and considers limited feature for it’s evaluation. Another
prominent drawback is it’s high latency. It is an aspect of delay in evaluation results when
multiple input counts are produced. When the number of folds increase the accuracy is
shortened. This may be because of the high latency aspect in the model.

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Copyright ⓒ 2019 SERSC
 International Journal of Advanced Science and Technology
Vol. 29, No. 03, (2020), pp. 8073 - 8079

4.Proposed System
Proposed system works on the new algorithm which is Random forest. It has the feature of
extracting multiple feature and giving out the accurate result amongst the N number of
subsets it has considered. The predictive performance competes with supervised learning
algorithm. The existing algorithm gives out a 81.8% accuracy for analysis. Thealgorithm
works as a collection of decorrelated decision tress.

Figure 1. Random Forest Formula

It offers efficient estimates of the test error without incurring the cost of repeated model
training associated with cross-validation. The given system can accommodate more features
and can enhance the predictive outcome for a venture capitalist.

5. Working
The dataset of the set of companies which have been invested in the similar domain and had a
similar growth environment are considered.
The Algorithm takes into a set of features. It has a training class. From the dataset it creates
random subsets with different elements to create a decision tree. And similarly it creates a
collection of decision tress from a N sample.

Figure 2. Random Forest Classification

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Copyright ⓒ 2019 SERSC
 International Journal of Advanced Science and Technology
Vol. 29, No. 03, (2020), pp. 8073 - 8079

The ranking of classifiers is produced after the evaluation of random subsets. And through
these rankings the prediction is produced with a certain accuracy.

The dataset of various companies are taken in with different features. Through them we are
able to understand if the venture capitalist can invest and how much of investment will be
required.

Figure 3. Module of the system

6.Conclusion
This work shows and helps us understand how Machine learning assessment can help us
understand how it can affect the investment cycles of venture capitalists. Our assessment
helps in understanding and increase the ability to predict more accurately. The work has
included the parameters which may not require a defined model for data collection and hence
make it a better option to reduce the invalid fields in the model.

It is one of the many yet relevant tools which a Venture capitalist can utilize to maximise
their efficiency of investment strategy. But as mentioned it should not be the only tool to
asses and made as a sole criterion for investing in an organisation. Many decisions such as
pushing a company for IPO or if it should be acquired can be based on our assessment as it
contains vertical and sub-vertical along with the investing amount. It is very essential to
understand how assessment like these help in better functioning for organisations. A
constructive approach to improvise the assessment will be to include a data model to which
can accommodate parameters required to determine the improvement and assessment of any
operating procedure for the organisation.

7. References

7.1 Journal Article

1. Sadhu Prasad Kar 1, Jyotsna Kumar Mandal 2, Rajeev Chatterjee “A Comprehension Based
Intelligent Assessment Architecture”,May’17.
2. Lea Monica B. Alonzo, Francheska B. Chioson, Homer S. Co, Nilo T. Bugtai and Renann “A
Machine Learning Approach for Coconut Sugar Quality Assessment and Prediction”, July’18.

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 International Journal of Advanced Science and Technology
Vol. 29, No. 03, (2020), pp. 8073 - 8079

3. Jaroslaw Kurek “Hybrid approach towards the assessment of a drill condition using deep learning
and the Support Vector Machine”,March’18.
4. Pravin Chopade, Saad M Khan, David Edwards, and Alina von Davier “Machine Learning for
Efficient Assessment and Prediction of Human Performance in Collaborative Learning
Environments”,september’18.
5. Chris Roadknight, PrapaRattadilok, Uwe Aickelin,” Teaching Key Machine Learning Principles
Using Anti-learningDatasets”,January’18.
6. C. E. Halabí and R. N. Lussier, ``A model for predicting small firm performance,'' J. Small Bus.
Enterprise Develop., vol. 21, no. 1, pp. 425, Feb. 2014.
7. B.Yankov, P. Ruskov, and K. Haralampiev, ``Models and tools for technology start-up companies
success analysis,'' Econ. Alternatives, no. 3,pp.1524,2014.
8. F. R. da Silva Ribeiro Bento, ``Predicting start-up success with machine learning,'' M.S. thesis,
Dept. Inf. Manage., Universidade Nova do Lisboa, Lisbon, Portugal, 2018.
9. Tahiri, J. S., Bennani, S., and Idrissi, M. K.: An Assessment System adapted to Differentiated
Learning within Massive Open Online Courses Using Psychometric Testing, 15th International
Conference on Information Technology Based Higher Education and Training (ITHET), Istanbul,
Turkey, Sep 08-10, 2016.
10. J. Fletcher and R. Sottilare, “Shared mental models in support of adaptive, instruction for teams
using the GIFT tutoring architecture,” International Journal of Artificial Intelligence in Education,
pp. 1-21, 2017.
11. M. Kruk, B. Świderski, S. Osowski, J. Kurek, M. Słowińska and I. Walecka, “Melanoma
recognition using extended set of descriptors and classifiers”, Eurasip Journal on Image and Video
Processing 43, 1-10, (2015).

7.2 Conference Procedings

1. Chatterjee R, Mandal J.K, “Two Dimensional Assessment Technique for CBL”, International
Conference on Teaching Assessment and Learning in Engineering (TALE) 2016, Bangkok,
Thailand, Dec 7-9, 2016.
2. Kar S. P., Chatterjee R, Mandal J.K, “A novel automated assessment technique in e-Learning
using short answer type questions”,1st International Conference on Computational
Intelligence, Communications and Business Analytics (CICBA) 2017, Kolkata, India, Mar 24-
25, 2017, in press.
3. Y. Huang and S. Khan, “DyadGAN: Generating facial expressions in dyadic interactions,” in
2017 IEEE Conference on Computer Vision and Pattern Recognition Workshops (CVPRW),
Honolulu, HI, 2017.
4. Y. Yan-yan Song, “Decision tree methods: applications for classification and prediction”,
PubMed Central (PMC), 2018.

7.3 Chapter in a book

1. M. Hardt, B. Recht, and Y. Singer, “Train faster, generalize better: stability of stochastic
gradient descent,” arXiv preprint arXiv:1509.01240, 2015.
2. T. Stewart, D. Zeng and M. Wu, “Constructing support vector machines with missing data”,
Wiley Interdisciplinary Reviews: Computational Statistics, vol. 10, no. 4, p. e1430, 2018.
3. G. Goodwin, J. Johnston, and R. Sottilare, “Individual learner and team modeling for adaptive
training and education in support of the US Army learning model: Research Outline,” US
Army Research Laboratory, September 2015.

ISSN: 2005-4238 IJAST 8078

Copyright ⓒ 2019 SERSC
 International Journal of Advanced Science and Technology
Vol. 29, No. 03, (2020), pp. 8073 - 8079

Authors

SHIELA DAVID currently working as Assistant Professor in the Department of Computer Science
and Engineering at SRM Institute of Science and technology. She has completed her B.E from
SACS MAVMM Engineering College, Madurai and her M.E., from Sethu Institute of Science and
Technology and she is currently pursuing her Ph.D from Sathyabama Institute of Science and
Technology. She has published many papers in Scopus Indexed Journals. Organized TechTalk
event for CSI(Computer Society of India) conducted on 21st March 2018 at SRMIST Ramapuram,
Chennai.

C.Nitish Mohan is currently pursuing B. Tech in Computer Science. Other than

Academics he has joined a technical club in college where they have organised and
conducted various events.. He is good at orating and current affairs. He aims to achieve
laurels both for his institutions and his country.

Ashish Pateria is currently pursuing B. Tech in Computer Science. Other than Academics
he has joined a technical club in college where they have organised and conducted
various events.. He is good at singing and acting. He aims to achieve laurels both for his
institutions and his country.

Vedant Vyas is currently pursuing B. Tech in Computer Science. Other than Academics
he has joined a technical club in college where they have organised and conducted
various events.. He is good at painting and drawing. He aims to achieve laurels both for
his institutions and his country.

ISSN: 2005-4238 IJAST 8079

Copyright ⓒ 2019 SERSC