How to Spot the Next 10x Company for Your Equity Comp (Part 1)

A Fundamental Research Framework for Evaluating Companies

My Journey from Investing to Tech

When I decided to pivot from investing to becoming an operator in tech, I thought a lot about which companies to join. Choosing the right company felt like picking stocks, except the stakes were even higher. Your career and financial future are both on the line, as you can work for only one company at a time and in tech, your compensation is largely tied to the future value of equity.

In the worst cases, the equity stakes in high-flying startups that may have been worth 7 figures on paper eventually plummeted to zero (examples include WeWork, FTX, Convoy, LendUp, Beepi, Fast, Jawbone; each raised over $100M from renowned investors[1]). Besides, a lot of startups have seen significant valuation cut or down rounds. Klarna and Instacart’s valuation have both dropped by 85% since 2021.

On the flip side, when things pan out, these equity awards can surge 5x, 10x, or even 100x. However, true rocketships are exceedingly rare—only 2.5% of VC-backed seed-stage startups become unicorns[2]. And as we’ve seen since 2023, many of these unicorns, more built on hype than substance, are likely to shut down over the next two years, unless the growth-stage funding landscape significantly improves.

As I evaluated opportunities to try operational roles in tech 6 years ago, I focused on growth-stage/pre-IPO companies, where the risk-reward balance seemed most optimal at that time. Putting on my investor hat, I asked which companies might 10x their valuation over the next five years. I ruled out many that didn't clear the bar. In the end, I narrowed down to two companies—Stripe and Zoom—valued back then at $9 billion and $1 billion, respectively.

Fast forward three years, Stripe's valuation hit $95B, while Zoom’s soared above $100B during the Covid Boom, now stabilizing around $20B. Thankfully, my years of finance and investing experience guided me to a good career (and financial) decision.

The Pitfalls of Conventional Wisdom

I regularly meet people who don't know how to assess the future equity value of their current companies or prospective employers.

Traditionally, many rely on news headlines or the roster of VC firms to gauge a company's prospects. Yet, headlines often fail to paint the full picture. For instance, Sam Bankman-Fried and Elizabeth Holmes were once on Forbes covers. A prestigious list of VC backers, including the likes of Sequoia with FTX, or Andreessen Horowitz and Kleiner Perkins with Jawbone, does not guarantee success.

To be clear, these are savvy investors. Venture capital is inherently about risk-taking. And you can generate impressive returns if even one out of a hundred investments is a big hit. For instance, a16z's seed and Sequoia's Series A investment in Stripe likely have yielded returns of 2,000x and 500x, respectively [3][4].

However, as employees, we don't have the luxury of playing the VC portfolio game. We don't get a hundred shots at success—we get one, and we need to make it count.

Note there are many factors that affect whether a job is a good personal fit that is out of scope of this article. For example, am I excited about the company’s mission? Do I feel this is the right job responsibilities or title for me? Do I like the people on the team? This article solely focuses on an objective framework to assess the potential equity value of a company.

A Fundamental Research Framework for Evaluating Companies’ Prospects

For those willing to delve deeper and go the extra mile, here’s an objective framework to evaluate companies’ potential equity value. It comes down to five dimensions - market, business quality, financials, people, and valuation.

• Market:

  • Is the market large and growing? Is the specific segment gaining share and does it have significant growth potential left?

• Quality:

  • What is the business's quality?

  • Does it have recurring revenue?

  • Is the product mission critical to its customers?

  • What is the competitive advantage of this business - better product, GTM, network effect, or something else?

• Financials:

  • How strong are the financials?

  • How rapid is recent growth, and what’s the long-term growth outlook?

  • Is the business profitable or cash flow positive, or if not, does it have strong unit economics?

• People:

  • Does it have an excellent management team?

  • Is it founder-led, and how capable are the founders?

  • What is the company culture like? What caliber of talent does it attract? Do people stay long-term?

• Valuation:

  • Is the current valuation reasonable, or inflated with overly optimistic expectations?

Next Steps

In my next post (part 2), I'll delve into these dimensions in detail, illustrated by some examples. If you have thoughts to add, different views, or specific questions, please feel free to reach out!

A Personal Note

Reflecting on 2023, I realized that I missed writing more than I anticipated. Perhaps the four years at Stripe drafting hundreds of memos (for those unaware, Stripe has a strong memo culture as opposed to slides) and the years before that writing tons of investment memos have left a mark on me… So in 2024, I aim to write more consistently, sharing lessons and insights on finance, investing, business and tech that hopefully could be useful to others.

If you like this article or wish to follow along, you can subscribe here. Also reach out if you have suggestions on writing topics that you’d like to see!

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[1] https://www.cbinsights.com/research/biggest-startup-failures/

[2] https://www.angellist.com/blog/angellist-unicorn-rate

[3] https://techcrunch.com/2011/03/28/stealth-payment-startup-stripe-paypal/

[4] https://venturebeat.com/business/stripe-funding-valuation/