This 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8066.
Length: Date of creation: Jan 2001 Date of revision: Publication status: published as Cochrane, John H. "The Risk And Return Of Venture Capital," Journal of Financial Economics, 2005, v75(1,Jan), 3-52. Handle: RePEc:nbr:nberwo:8066
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2000.
"The Private Equity Premium Puzzle,"
CRSP working papers
524, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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