The importance of venture capital
Venture capital is a perspective from which to observe this phenomenon. Although venture capital accounts for a small proportion of the total social investment in the United States, it has a very strong role in promoting the industrial development and economy of the United States.
Of the more than 1,400 companies listed since 1974, as many as 43% originated from venture capital investment. The output of enterprises receiving venture capital accounts for up to 11% of the gross national product.
How to value a startup?
Generally speaking, venture capital companies have the following methods to value a startup:
- Last round of financing
- Comparable company method: that is, referring to the valuation of similar companies or competing companies
- Option pricing model
Note: For relevant details, please refer to the section “Learning Wall Street to Use 3 Indicators to Give Reasonable Valuations to New Ventures” starting from 4-3 in my book “The Rules of Super Growth Stocks Investing“, starting on page 282.
Things to note when starting a new startup
- Type of company: partnership or limited company.
- Rights and obligations of founders: including shares, resignation, restrictions.on share transfer, and division of rights and obligations of co-founders.
- Stock options: including stock option vesting periods, restrictions, transfers, etc.
- Intellectual property
- Employee stock options: This is important and discussed below.
Employee’s stock options
The employee stock option pool is generally 15% of the company’s total shares, and the period for active employees to exercise options is generally four years.
The period for employees to exercise options after leaving the company has been extended from the usual three months to a maximum of 7 to 10 years.
For this topic, please see my post of “Pros and cons of employee stock options as compensation“
Companies go public
The only way
IPO is the only goal of most startup companies. The time set is usually to go public within ten years. Those who can go public within four to six years are considered to be fast progressing new companies.
Pros and cons of going public
For more in-depth information on this topic, please see my post of “Why a company go public?“
Factors that hinder companies from going public
With the development of the capital market in recent years, companies do not necessarily need to be listed, and there are many factors that can hinder companies from going public. These factors include:
- The cost of listing a company: This is a considerable financial burden for new companies.
- Wealth and asset managers, whose funds are getting larger, favor large-cap stocks because they can have a clear impact on the performance of their funds. The result is that stocks of smaller companies are less popular.
- Indexes, or various ways of calculating performance in capital markets, work against small caps companies.
- The methods of raising funds are becoming more and more diversified, and listing companies is no longer the only way to raise funds.
- Listed companies are under too much pressure and must withstand various tests from shareholders, market and the public.
Related articles
- “Startup issues that most people care about“
- “a16z’s “Secrets of sand hill road” to investors and entrepreneurs“
- “How is Y Combinator different from other venture capital firms?“
- ““Blitzscaling” expansion speed decide if startup success eventually“
- “Why a company go public?“
- “Insights on company governance“
- “Pros and cons of employee stock options as compensation“
- “Average lifespan of companies“
- “Don Valentine, founder of Sequoia Capital, father of Silicon Valley Venture Capital“
- “Angel is an excellent venture capital book for ordinary people“
- “Two famous essays by Marc Anderson on software and artificial intelligence“
- “Zero to One“
- “Venture capital and unicorns introduction“
- “Global Venture Capital and Unicorn Report“
- “Traitorous Eight, the origin of the semiconductor and venture capital industries“
- “The Power Law“
- “Venture capital and unicorns introduction“
- “Global Venture Capital and Unicorn Report“
- “The Power Law“
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