Building an index of venture capital involves more than does building an index of company shares that are publicly traded. The following obstacles must be overcome:
- Company shares are not traded in any regular market.
- Value is revealed only when companies raise money or exit, events that are usually a year or two apart.
- When companies raise money, only sometimes do they share the company value implied by the terms of their deal.
- While their best outcomes, a public offering (IPO), and profitable acquisitions, are nearly always news, acquisitions at low values are often reported without a value, and shutdowns are seldom news. Thus, research for acquisitions and shutdowns must be continuously diligent and some values must be estimated.
The Sand Hill Approach
To generate our index, we take the following steps:
- For every company from the date of its first round of funding to its exit (IPO, acquisition, or shutdown), we have a value for every company every month.
- If a company does a round of funding and reports a value, we use that value.
- If a company does a round of funding and does not report a value, we estimate the value.
- Between rounds we interpolate, using market indications of changes in value.
- When a company exits, we know the value for IPOs (values are public) and shutdowns (value is zero), and for some acquisitions.
- For acquisitions, if value is revealed, we use it. If value is not revealed, we again estimate it.
- For companies not exited, we estimate values after the most recent round of funding, applying a decay function that recognizes that the longer a company goes without a round of funding, especially if it is not shipping a product, the more likely that it will expire worthless.
Want to Know More?
Please take a look at our Sand Hill Papers--in particular, our Academic White Paper, which goes into detail on how we go about estimating values and correcting for the bias in values that are revealed (vs. concealed.)