Will Gornall
Assistant Professor of Finance, UBC

Papers Code and Data Teaching Slides RA Opportunities

William Gornall
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Sauder School of Business
University of British Columbia
2053 Main Mall, Vancouver
BC V6T 1Z2, Canada
(604) 827-4372

will.gornall@sauder.ubc.ca

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Published Work

"How Venture Capitalists Make Decisions," 2021, Harvard Business Review (with Paul A. Gompers, Steven N. Kaplan, and Ilya A. Strebulaev)
For decades now, venture capitalists have played a crucial role in the economy by financing high-growth start-ups. While the companies they’ve backed—Amazon, Apple, Facebook, Google, and more—are constantly in the headlines, very little is known about what VCs actually do and how they create value. To pull the curtain back, Paul Gompers of Harvard Business School, Will Gornall of the Sauder School of Business, Steven N. Kaplan of the Chicago Booth School of Business, and Ilya A. Strebulaev of Stanford Business School conducted what is perhaps the most comprehensive survey of VC firms to date. In this article, they share their findings, offering details on how VCs hunt for deals, assess and winnow down opportunities, add value to portfolio companies, structure agreements with founders, and operate their own firms. These insights into VC practices can be helpful to entrepreneurs trying to raise capital, corporate investment arms that want to emulate VCs’ success, and policy makers who seek to build entrepreneurial ecosystems in their communities. Based on the paper "How Do Venture Capitalists Make Decisions?" 2020, Journal of Financial Economics 135(1), 169–190 (with Paul A. Gompers, Steven N. Kaplan, and Ilya A. Strebulaev)

Teaching slides discussing the venture capital investment selection process. (You may freely use and modify the slides but please let me know if you use them.)

"Squaring Venture Capital Valuations with Reality," 2020, Journal of Financial Economics 135(1), 120–143 (with Ilya A. Strebulaev)
We develop a valuation model for venture capital--backed companies and apply it to 135 US unicorns, that is, private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post--money valuations average 48% above fair value, with 14 being more than 100% above. Reported valuations assume that 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 initial public offering (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.

Appendix.

Code. (Can be freely used for non-comercial purposes as long as original paper is cited.)

Tool to value employee stock options. (This is a beta version, comments welcome.)

Teaching slides about the different between post-money valuation and value. (You may freely use and modify the slides but please let me know if you use them.)

Mentioned in Barrons 1, 2, BC Business, BIV, BJ, Bloomberg, Bloomberg, TV, Business Insider 1, 2, CNBC, Economist 1, 2, El Economista, Entreprenuer 1, 2, Financial Post, Forbes, Fortune 1, 2, G&M, Inc., Institutional Investor, JDSupra, 36kr 1, 2, Les Echos, MSN, NBER, NY Mag, NYT, Pitchbook 1, 2, 3, Reuters, Stanford, Tech Crunch, TechVibes, The Real Deal, Wired, WSJ 1, 2, 3

"How Do Venture Capitalists Make Decisions?" 2020, Journal of Financial Economics 135(1), 169–190 (with Paul A. Gompers, Steven N. Kaplan, and Ilya A. Strebulaev)
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. We compare our results to those for CFOs (Graham and Harvey 2001) and private equity investors (Gompers, Kaplan and Mukharlyamov forthcoming).

Appendix included at above link.

Teaching slides discussing the venture capital investment selection process. (You may freely use and modify the slides but please let me know if you use them.)

Mentioned in Bizztor, Chicago, Havard Law School Forum, Stanford, VentureBeat

"Financing as a Supply Chain: The Capital Structure of Banks and Borrowers," 2018, Journal of Financial Economics 129(3), 510-530 (with Ilya A. Strebulaev)
We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset volatility by an order of magnitude relative to that of their borrowers. Second, previously unstudied supply chain effects mean that highly levered financial intermediaries can offer the lowest interest rates. Low asset volatility enables banks to take on high leverage safely; supply chain effects compel them to do so. Firms with low leverage also arise naturally, as borrowers internalize the systematic risk costs they impose on their lenders. Because risk assessment techniques from the Basel framework underlie our model, we can quantify the impact capital regulation and other government interventions have on leverage and fragility. Deposit insurance and the expectation of government bailouts increase not only bank risk taking, but also borrower risk taking. Capital regulation lowers bank leverage but can lead to compensating increases in the leverage of borrowers, which can paradoxically lead to riskier banks. Doubling current capital requirements would reduce the default risk of banks exposed to moral hazard by up to 90%, with only a small increase in bank interest rates.

Appendix included at above link.

Code. (Can be freely used for non-comercial purposes as long as original paper is cited.)

Mentioned in Fortune

"Locally-Capped Investment Products and the Retail Investor," 2011, Journal of Derivatives 18.4, 72-88 (with Carole Bernard and Phelim Boyle)
Locally-capped products are a popular but poorly understood type of structured financial product. These contracts combine a guaranteed payoff with a bonus based on the capped periodic returns of a reference portfolio. We show that in the USA these products often contain unreasonably optimistic hypothetical scenarios in their prospectuses,and conjecture that these unrealistic scenarios may contribute to their popularity with uninformed investors. We also explain why locally-capped products perform badly in turbulent markets and confirm this with evidence from the 2008 financial crisis.


Working Papers

"Venture Capitalists and COVID-19," 2021, conditionally accepted at Journal of Financial and Quantitative Analysis (with Paul Gompers, Steven Kaplan, Ilya Strebulaev)
We survey over 1,000 institutional and corporate venture capitalists (VCs) at more than 900 different firms to learn how their decisions and investments have been affected by the COVID-19 pandemic. We compare their survey answers to those provided by a large sample of VCs in early 2016 and analyzed in Gompers, Gornall, Kaplan, and Strebulaev (2020). VCs have slowed their investment pace (71% of normal) and expect to invest at 81% of their normal pace over the coming year. Not surprisingly, they have devoted more time to guiding the portfolio companies through the pandemic. VCs report that 52% of their portfolio companies are positively affected or unaffected by the pandemic; 38% are negatively affected; and 10% are severely negatively affected. Overall, they expect the pandemic to have a small negative effect on their fund IRRs (-1.6%) and MOICs (-0.07). Surprisingly, we find little change in the allocation of their time to helping portfolio companies relative to looking for new investments. In general, we find only modest differences between institutional and corporate VCs.

Mentioned in Institutional Investor, Harvard Law School Forum on Corporate Governance

"A Valuation Model of Venture Capital-Backed Companies with Multiple Financing Rounds," 2021 (with Ilya A. Strebulaev)
This paper develops 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.

Tool to value employee stock options. (This is a beta version, comments welcome.)

"Gender, Race, and Entrepreneurship: A Randomized Field Experiment on Venture Capitalists and Angels," 2020 (with Ilya Strebulaev)
We study gender and race in high-impact entrepreneurship within a tightly controlled random field experiment. We sent out 80,000 pitch emails introducing promising but fictitious start-ups to 28,000 venture capitalists and business angels. Each email was sent by a fictitious entrepreneur with a randomly selected gender (male or female) and race (Asian or White). Female entrepreneurs received an 8% higher rate of interested replies than male entrepreneurs pitching identical projects. Asian entrepreneurs received a 6% higher rate than White entrepreneurs. Our results are not consistent with discrimination against females or Asians at the initial contact stage of the investment process.

Mentioned in BJ, Economist, Guardian, MarketWatch

"Safe Assets and Dangerous Liabilities: How Bank-Level Frictions Explain Bank Seniority," 2017
This paper uses bank fragility to explain why bank loans are senior in firm capital structure. High leverage makes banks more vulnerable to financial distress than the typical bond investor, and thus makes banks willing to pay for seniority. Bank seniority emerges even when banks need skin in the game, as bank effort has more impact on a large senior loan than on a smaller junior claim with the same systematic risk. Adding deposit insurance or bailouts adds a subsidy to tail risk, which makes large senior claims even more attractive to banks. Empirically, this model explains why procyclical firms avoid bank loans and provides a host of debt structure predictions.

"The Economic Impact of Venture Capital," 2021 (with Ilya A. Strebulaev)
Over the past 30 years, venture capital has become a dominant force in the financing of innovative American companies. From Google to Intel to FedEx, companies supported by venture capital have profoundly changed the U.S. economy. Despite the young age of the venture capital industry, public companies with venture capital backing employ four million people and account for one-fifth of the market capitalization and 44% of the research and development spending of U.S. public companies. From research and development to employment to simple revenue, the companies funded by venture capital are a major part of the U.S. economy.

Spreadsheet classifying Compustat companies as VC-backed or not. (Used in The Economic Impact of Venture Capital, updated 2017. Can be freely used for non-comercial purposes as long as original paper is cited. You may also be interested in Jay Ritter's data.)

Mentioned in National Review, Tech Republic


Code and Data

Tool to value employee stock options. (This is a beta version, comments welcome. You may also be interested in Andrew Metrick and Ayako Yasuda's tool.)

Code to value a venture capital-backed unicorn. (Matlab code, as used in Squaring Venture Capital Valuations with Reality. Can be freely used for non-comercial purposes as long as original paper is cited.)

Code to replicate Financing As a Supply Chain. (Matlab code, as used in Financing As a Supply Chain. Can be freely used for non-comercial purposes as long as original paper is cited.)

Spreadsheet classifying Compustat companies as VC-backed or not. (Used in The Economic Impact of Venture Capital, updated 2017. Can be freely used for non-comercial purposes as long as original paper is cited. You may also be interested in Jay Ritter's data.)


Teaching Material

Undergraduate Course Outline COMM 470 Venture Capital.

Teaching slides based on Squaring Venture Capital Valuations with Reality about the different between post-money valuation and value. (You may freely use and modify the slides but please let me know if you use them.)

Teaching slides based on How Do Venture Capitalists Make Decisions? discussing the venture capital investment selection process. (You may freely use and modify the slides but please let me know if you use them.)


RA Opportunities

Email me if you are a Canadian university student interested in volunteering as a research assistant. I am presently working with the Stanford Graduate School of Business Venture Capital Initiative. There are several possible opportunities:

1) Read venture capital financing contracts and enter the data from them into spreadsheets. This is likely of particular interest to students interested in law school.

2) Write Python code to understand the meaning of financial contracts. This would involve NLP and other cool programing stuff.

3) Update the option pricing calculators at valuation.vc.

If you are interested and based in Canada, email me your CV and a description of which project you are interested in and why. I am not presently interested in RAs not based in Canada.