The risk and return of venture capital
AbstractThis paper measures the mean, standard deviation, alpha and beta of venture capital investments, using a maximum likelihood estimate that corrects for selection bias. Since firms go public when they have achieved a good return, estimates that do not correct for selection bias are optimistic. The selection bias correction neatly accounts for log returns. Without a selection bias correction, I find a mean log return of about 100% and a log CAPM intercept of about 90%. With the selection bias correction, I find a mean log return of about 7% with a -2% intercept. However, returns are very volatile, with standard deviation near 100%. Therefore, arithmetic average returns and intercepts are much higher than geometric averages. The selection bias correction attenuates but does not eliminate high arithmetic average returns. Without a selection bias correction, I find an arithmetic average return of around 700% and a CAPM alpha of nearly 500%. With the selection bias correction, I find arithmetic average returns of about 53% and CAPM alpha of about 45%. Second, third, and fourth rounds of financing are less risky. They have progressively lower volatility, and therefore lower arithmetic average returns. The betas of successive rounds also decline dramatically from near 1 for the first round to near zero for fourth rounds. The maximum likelihood estimate matches many features of the data, in particular the pattern of IPO and exit as a function of project age, and the fact that return distributions are stable across horizons.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 75 (2005)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/505576
Other versions of this item:
- Cochrane, John, 2000. "The Risk and Return of Venture Capital," University of California at Los Angeles, Anderson Graduate School of Management qt7qm9h594, Anderson Graduate School of Management, UCLA.
- John H. Cochrane, 2001. "The Risk and Return of Venture Capital," NBER Working Papers 8066, National Bureau of Economic Research, Inc.
- G0 - Financial Economics - - General
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- Liang Peng, 2001. "Building A Venture Capital Index," Yale School of Management Working Papers ysm221, Yale School of Management, revised 01 Oct 2001.
- Kaplan, Steven & Strömberg, Per Johan, 2000.
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CEPR Discussion Papers
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