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Articles by Ilya
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What Do We Know About Unicorns? Defining and Finding Unicorns
What Do We Know About Unicorns? Defining and Finding Unicorns
By Ilya Strebulaev
Activity
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'The Art and Science of Venture Capital Investing' ...🤏 an inch closer to figuring it all out! 🤔 Thank you Ali Tamaseb and Ilya Strebulaev for the…
'The Art and Science of Venture Capital Investing' ...🤏 an inch closer to figuring it all out! 🤔 Thank you Ali Tamaseb and Ilya Strebulaev for the…
Liked by Ilya Strebulaev
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I read a lot for work, but haven’t been able to find a good book to keep me occupied outside of work for some time. The Venture Mindset by Ilya…
I read a lot for work, but haven’t been able to find a good book to keep me occupied outside of work for some time. The Venture Mindset by Ilya…
Liked by Ilya Strebulaev
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Giving Ilya Strebulaev and Alex Dang’s book - “The Venture Mindset” to Timur Ishmetov, he is actively researching and supporting our startup…
Giving Ilya Strebulaev and Alex Dang’s book - “The Venture Mindset” to Timur Ishmetov, he is actively researching and supporting our startup…
Liked by Ilya Strebulaev
Experience & Education
Publications
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The Contracting and Valuation of Venture Capital-Backed Companies
Handbook of the Economics of Corporate Finance, Vol 1: Private Equity and Entrepreneurial Finance
Fast-growing innovative companies - startups - operate unlike other businesses and raise money in similarly distinctive ways. Eschewing traditional banks and equity markets, they turn to a startup financing ecosystem that includes corporate and institutional VC funds, crowdfunding, angel investors, growth equity, and private equity. We start by discussing key relevant stylized facts and how they lead to contracting frictions. We then discuss the various investment contracts used by startups and…
Fast-growing innovative companies - startups - operate unlike other businesses and raise money in similarly distinctive ways. Eschewing traditional banks and equity markets, they turn to a startup financing ecosystem that includes corporate and institutional VC funds, crowdfunding, angel investors, growth equity, and private equity. We start by discussing key relevant stylized facts and how they lead to contracting frictions. We then discuss the various investment contracts used by startups and their associated cash flow and control rights. Given that startups almost invariably raise multiple rounds of funding, we then discuss contracting issues associated with the evolution of cash flow and control rights. We finally discuss approaches to valuing startups, their financial securities, and the impact of contractual terms on valuation.
Other authorsSee publication -
A Valuation Model of Venture Capital-Backed Companies with Multiple Financing Rounds
Stanford University, Graduate School of Business Working Paper
We develop the first option pricing model of venture capital-backed companies and
their security values that incorporates the dilutive future financing rounds prevalent in the industry. Applying our model to 19,000 companies raising 37,000 rounds shows post-money valuations exceed fair values by 39%. Ignoring future rounds overstates the valuation impact of liquidation preferences by more than 100%. Counterintuitively, future “investor-friendly” rounds transfer value from current investors…We develop the first option pricing model of venture capital-backed companies and
their security values that incorporates the dilutive future financing rounds prevalent in the industry. Applying our model to 19,000 companies raising 37,000 rounds shows post-money valuations exceed fair values by 39%. Ignoring future rounds overstates the valuation impact of liquidation preferences by more than 100%. Counterintuitively, future “investor-friendly” rounds transfer value from current investors to founders and other common shareholders. Future terms closely resemble current terms, which makes current “investor-friendly” terms much less valuable to investors. Our valuations predict outcomes and the prices reported by specialized venture capital investors but are lower than values reported by mutual funds and dramatically higher than the values companies report for tax purposes. -
Venture Capitalists and COVID-19
Stanford University, Graduate School of Business Working Paper
We survey over one thousand venture capitalists (VCs) on how the COVID-19 pandemic has affected their decisions and investments. Although individual funds and portfolio companies have been dramatically impacted, VCs expect aggregate returns to be largely unchanged because winners have offset losers. This suggests the primary impact of COVID-19 has been an increase in volatility and uncertainty. Consistent with that, VCs report initially delaying investment due to a difficulty evaluating deals…
We survey over one thousand venture capitalists (VCs) on how the COVID-19 pandemic has affected their decisions and investments. Although individual funds and portfolio companies have been dramatically impacted, VCs expect aggregate returns to be largely unchanged because winners have offset losers. This suggests the primary impact of COVID-19 has been an increase in volatility and uncertainty. Consistent with that, VCs report initially delaying investment due to a difficulty evaluating deals and an expectation that future financings will offer investors more downside protections. We find only moderate evidence of disruption to VC capital flows, with investment expected to be down less than one-fifth, and only one-sixth of VCs reporting any pressure from limited partners to conserve capital. Despite the historical importance of in-person meetings, VCs do not report difficulty finding quality entrepreneurs. We also find little change in how VC allocate their time in the pandemic compared to before the pandemic.
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Gender, Race, and Entrepreneurship: A Randomized Field Experiment on Venture Capitalists and Angels
Stanford University, Graduate School of Business Working Paper
We study gender and race in high-impact entrepreneurship using a tightly controlled randomized field experiment. We sent out 80,000 pitch emails introducing promising but fictitious start-ups to 28,000 venture capitalists and angels. Each email was sent by a fictitious entrepreneur with randomly assigned gender and race. Female entrepreneurs received 9% more interested replies than males pitching identical projects and Asians received 6% more than Whites. Our results suggest that investors do…
We study gender and race in high-impact entrepreneurship using a tightly controlled randomized field experiment. We sent out 80,000 pitch emails introducing promising but fictitious start-ups to 28,000 venture capitalists and angels. Each email was sent by a fictitious entrepreneur with randomly assigned gender and race. Female entrepreneurs received 9% more interested replies than males pitching identical projects and Asians received 6% more than Whites. Our results suggest that investors do not discriminate against female or Asian entrepreneurs when evaluating unsolicited pitch emails and that future research on investor biases should focus on networks and in-person interactions.
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How Do Venture Capitalists Make Decisions?
Journal of Financial Economics
We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment decisions; valuation; deal structure; post-investment value-added; exits; internal organization of firms; and relationships with limited partners. In selecting investments, VCs see the management team as more important than business related characteristics such as product or technology. They also attribute more of the likelihood of ultimate investment…
We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment decisions; valuation; deal structure; post-investment value-added; exits; internal organization of firms; and relationships with limited partners. In selecting investments, VCs see the management team as more important than business related characteristics such as product or technology. They also attribute more of the likelihood of ultimate investment success or failure to the team than to the business. While deal sourcing, deal selection, and post-investment value-added all contribute to value creation, the VCs rate deal selection as the most important of the three. We also explore (and find) differences in practices across industry, stage, geography and past success.
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Squaring Venture Capital Valuations with Reality
Journal of Financial Economics
We develop a valuation model for venture capital-backed companies and apply it to 135 U.S. unicorns -- private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find reported unicorn post-money valuations average 48% above fair value, with 13 being more than 100% above. Reported valuations assume all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower…
We develop a valuation model for venture capital-backed companies and apply it to 135 U.S. unicorns -- private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find reported unicorn post-money valuations average 48% above fair value, with 13 being more than 100% above. Reported valuations assume all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as IPO return guarantees (15%), vetoes over down-IPOs (24%), or seniority to all other investors (30%). Common shares lack all such protections and are 56% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.
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The Economic Impact of Venture Capital: Evidence from Public Companies
Stanford University Graduate School of Business Research Paper
Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies’ R&D spending. Among public companies founded within the last fifty years, VC-backed companies account for half in number, three quarters by value, and more than 92% of R&D spending and patent value. The US did not spawn top public companies at a higher rate than other large, developed countries prior to 1970s ERISA reforms, but produced twice as many after it. Using those reforms…
Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies’ R&D spending. Among public companies founded within the last fifty years, VC-backed companies account for half in number, three quarters by value, and more than 92% of R&D spending and patent value. The US did not spawn top public companies at a higher rate than other large, developed countries prior to 1970s ERISA reforms, but produced twice as many after it. Using those reforms as a natural experiment suggests that the US VC industry is causally responsible for the rise of one-fifth of the current largest 300 US public companies and that three-quarters of the largest US VC-backed companies would not have existed or achieved their current scale without an active VC industry.
Honors & Awards
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First Place, Jensen prize
Journal of Financial Economics
For the paper: How Do Venture Capitalists Make Decisions?
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The Inaugural Doriot Award for the Best Private Equity Research Paper
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For the paper: How Do Venture Capitalists Make Decisions?
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Professor of the week, Poets & Quants
Poets & Quants
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The Sloan Teaching Excellence Award
Stanford Graduate School of Business
Awarded annually to one faculty member by Stanford MsX (Sloan) fellows
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First Place, Fama-DFA Prize
Journal of Financial Economics
Awarded annually to the best paper published in the Journal of Financial Economies in asset pricing
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The Inaugural Masters in Management Inaugural Best Teacher Award
London Business School
Awarded annually to one faculty member by LBS MiM students
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The MBA Distinguished Teacher Award
Stanford Graduate School of Business
Awarded annually to one faculty member by Stanford MBA students
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Distinguished Alumni Award
New Economic School
Awarded annually to one graduate of New Economic School
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First Paper Prize, Brattle Award
Journal of Finance
Awarded annually to the best paper published in the Journal of Finance in corporate finance
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The Trefftzs Award
Western Finance Association
Awarded annually to the best student paper by the Western Finance Association
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