this industry has
had an outsized
impact on the
sign with the fund managers drives the
economics and returns of those funds. The
second audience is academics who are trying
to understand this world of innovation
and venture capital. The third audience is
practitioners — those who are already VCs,
already limited partners, already investors
in VC funds, already corporate executives.
There’s a lot of value in showing them best
practices and how to improve.
And then the fourth audience is
policymakers. There’s a lot of misconception
among policymakers, both here and around
the world, about what VCs do and what
innovation really is. People in Washington
need to understand the difference bet ween
an entrepreneur who opens a laundry
shop in Missouri and an entrepreneur who
launches a tech startup in Silicon Valley.
They face very different kinds of risks and
have very different potential impacts.
I don’t mean in any way to demean the
entrepreneurs opening laundry shops.
Entrepreneurship in general is really
important. But companies that are funded
by VCs have much more potential to impact
the entire economy and millions of lives,
and I think it’s important for policymakers
to understand that and also to appreciate
that these startups and the entire innovation
ecosystem require a different approach.
Is there any data out there that you wish
you had access to that you haven’t been
able to get? [Laughs] Yes. A lot. If any
of your readers have access and are ready
to share data, we will be very happy to
receive it. We already have access to a lot
of confidential information that we get
under NDAs, so we’re very well positioned
to work with anonymized data. It shouldn’t
be a problem. The good thing about being
an academic is that people understand
that we’re doing this for the benefit of the
community and that, at the end of the day,
science is about finding the truth.
Where are the specific data gaps? For one,
we don’t have good data on the employment
contracts of people who work for firms funded
by venture capital. What are the vesting
agreements and how are they structured for
various stages and various firms? How are the
employment agreements structured and what
is their economics? We don’t really have a good
grasp on that yet. That would be number one.
Second, we would love to work more with
limited partners — the funders of these funds,
essentially — to understand better how they
choose which VC funds to invest in.
So you want information from people at the
opposite sides of the spectrum. Exactly.
We actually are starting to have a good grasp
of what goes on in bet ween, but less so of those
t wo ends.
It seems that the measurements used to
determine success in the venture capital
world all have to do with generating wealth.
Are there other metrics that you think
might be more important? This is just
another economic industry, so the measures
of success are really the same as in any
human endeavor. From the finance point of
view, it’s about generating value and wealth,
but it’s also about fostering innovation and
generating employment. Do VCs care that
much about employment per se? Probably not,
because above all they have fiduciary duties
to their investors. But as a byproduct, they are
generating innovation and employment. And
at the end of the day, their products can make
life easier and better for consumers — or at
Most people don’t realize that without
venture capital, we would have never had
i Phones, because Apple was backed by VCs.
We would have never had computers, because
the semiconductor industry was backed by
VCs. We would have never had search engines,
and so on and so forth. At the very least, one
can reasonably claim that it would not
have happened in such a short period of time.
Some of us might not like all of the
innovations, but there’s no question that
this industry has had an outsized and
underappreciated impact on the economy
and on humanity. That’s why I’m so excited
to study it. Δ
example is that we were able to use it to
determine values of existing companies that
had been backed by venture capital.
This is the unicorn study. Yes. It consisted
of t wo parts. The first was the framework
that we developed to value these private
companies. But the second part was getting
dirty in the data, reading every single
contract very carefully and understanding
the implications for cash-flow rights and
preferences of various shareholders —
basically, who is going to get what in any
eventual outcome, whether it’s liquidation or
a sale or an IPO. And that took a lot of effort.
A lot of effort.
I imagine some people weren’t happy with
your conclusions. Absolutely. If I say that
Company X is overvalued by 100%, people at
that company are not pleased. I heard from
some of their general counsels.
Was that worrisome? No. I’m very confident
in the framework we developed, and I’m
confident that what we did was right. I replied
to every communication and welcomed them
to give us all the data about their company,
because there could be some private
documents that we haven’t seen that might
affect our estimate of value.
If we’re inaccurate, help us become
Did that work? One company provided some
further information that elucidated their
contract. In all the other cases, we haven’t
received any follow-up information, which
suggests that they agreed with the way we
read and interpreted their contracts.
What audience do you have in mind when
you’re deciding what kind research
to perform on the data? We have four
audiences in mind. The first one, obviously,
is students — our students here at Stanford
GSB and students around the world — who
are just learning how to become VCs, how to
become entrepreneurs, and how to become
investors in innovation more generally.
The contracts that founders and VCs sign
with each other are very important, and it
is truly critical for everybody to understand
the economics of what is going on there.
Similarly, the contracts that investors