Boardroom Governance with Evan Epstein

Ilya Strebulaev: Focusing on the Finance and Governance of Venture-Backed Companies.

Episode Summary

In this episode, I talk with Ilya Strebulaev, the David S. Lobel Professor of Private Equity and Professor of Finance at the Stanford Graduate School of Business, where he also serves as the Faculty Director of the Venture Capital Initiative. Professor Strebulaev is one of the top experts in valuation and corporate finance of venture-backed companies. His work has been widely published in leading academic journals and he teaches at the Stanford MBA, MsX, PhD, and executive education programs. In this podcast we discuss his interest and research in venture capital, including core aspects of decision-making by VCs and valuation of venture-backed companies. We also dive into some of the nuances and complexities of corporate governance in these companies, as opposed to public company governance. If you like this show, please consider subscribing, leaving a review or sharing this podcast on social media. You can find all the show notes on the website boardroom-governance.com and please feel free to subscribe to the Boardroom Governance Newsletter at evanepstein.substack.com

Episode Notes

  1. Start of interview [1:19]
  2. Ilya's "origin story" [1:50]
    1. Lomonosov Moscow State University ('97)
    2. New Economic School (NES) ('99)
    3. London Business School, PhD Finance ('04)
  3. His start as a Professor at the Stanford Graduate School of Business (2004-Present) [7:08]
  4. His initial interest in the field of venture capital  [7:56] "These days my major problem is that there are so many research projects, and I have to juggle 10 different (amazing) research projects at the same time."
  5. Why governance of venture-backed companies has been historically under researched by finance scholars (it has to do with the "quantification revolution" from the 70s-80s). [12:08]
  6. His article "The Economic Impact of Venture Capital: Evidence from Public Companies" co-authored with Will Gornall (2015) [14:29]
    1. "This is important to mention: venture capital is an American phenomenon, since 2016 every single day the top 5 U.S. public companies by market cap were venture-backed, and from the top 100 there is a significant proportion. But most importantly they are young companies that grow very fast."
  7. His article "How Do Venture Capitalists Make Decisions?" co-authored with: Paul A. Gompers, Will Gornall, Steven N. Kaplan (2016) [20:40]
    1. Differences between VCs focused in IT and healthcare
    2. Differences in terms of geography (i.e., west coast v. east coast, U.S. v. international)
    3. Differences in early stage vs late stage.
    4. Deal flow, deal selection, and post-investment value-added as contributors to value creation
    5. Investment selection (jockey v. horse framework)
  8. His article "Squaring Venture Capital Valuations with Reality" co-authored with Will Gornall (2017) [32:37]. They wrote this paper because:
    1. It is difficult to apply traditional financial methodology (such as DCF or CAPM) to early stage startups.
    2. Whenever the valuation of venture-backed companies was reported in the press or in commercial datasets,  it did not make sense to him (not the price, but the way it was reported).
    3. They used the example of Square's post money valuation pre-IPO.
    4. They created a new valuation model for startups (they found that the average unicorn in their sample had 8 classes of shares).
  9. His current research on governance of venture-backed companies [41:12]
    1. In venture-backed companies boards are very "unstable" due to staged financing.
    2. Board control, voting rights and protective provisions.
    3. Stanford Venture Capital Initiative: one of its goals is to improve the quality of the data in venture-capital. Some projects:
      1. Study of evolution of corporate governance in venture-backed companies.
      2. The anatomy of down-round financings.
  10. His take on the "stay private vs go public debate" and SPACs [49:12]
    1. Significant increase of investors in private markets.
    2. Liquidity options beyond IPOs and M&A, such as secondary markets.
  11. His favorite books: [54:42]
    1. The Structure of Scientific Revolutions, by Thomas Kun (1962)
    2. The Autobiography of Bertrand Russell, by Bertrand Russell (1951)
  12. His professional mentor: [54:42]
    1. His father: "maybe the most important lesson that I learned from him is that you have to be calm, even when life throws at you a ball that that you don't necessarily want." "He taught me how to live and behave in life."
    2. Stephen Schaefer. His former academic advisor at LBS.
  13. His favorite quotes: [57:43]
    1. On the difference between theory and practice. "It is very difficult to tell people: learn how to swim, but only when you learn how to swim we're going to fill the water in the swimming pool"
  14. His unusual habit [58:48]
    1. These days, the fact that he reads (his goal in life is to devote one hour per day some physical book, usually on topics unrelated to finance).
  15. His experience as a corporate director of Yandex  [01:00:57]

Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License