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The performance of venture capital investments: Do investors overreact?

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  • Achleitner, Ann-Kristin
  • Engel, Nico
  • Reiner, Uwe

Abstract

Using a unique proprietary data set of over 5400 realized and unrealized venture capital investments between 1980 and 2005, we examine the impact of demand-related factors, e.g. entrepreneurial activity, as well as supply-related factors, i.e. money provided by VC investors, on the return of individual VC investments. This way, we are able to shed more light on the question whether volatile VC investment returns are rather driven by fundamental changes with regard to the number of attractive investment opportunities or by the overreaction by investors. We find that rising demand for VC, i.e. an increase in entrepreneurial activity, results initially in higher returns. However, our results also indicate that overreaction on the supply side can be observed, destroying deal-level results. Overfunding, specifically overinvesting seems to be a recurring characteristic of the VC industry. In fact, contra-cyclical investment strategies yield highest deal-level returns.

Suggested Citation

  • Achleitner, Ann-Kristin & Engel, Nico & Reiner, Uwe, 2013. "The performance of venture capital investments: Do investors overreact?," Review of Financial Economics, Elsevier, vol. 22(1), pages 20-35.
  • Handle: RePEc:eee:revfin:v:22:y:2013:i:1:p:20-35
    DOI: 10.1016/j.rfe.2012.10.001
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    References listed on IDEAS

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    Cited by:

    1. Buchner, Axel, 2016. "How much can lack of marketability affect private equity fund values?," Review of Financial Economics, Elsevier, vol. 28(C), pages 35-45.
    2. repec:kap:jtecht:v:42:y:2017:i:5:d:10.1007_s10961-016-9476-5 is not listed on IDEAS
    3. Bock, Carolin & Schmidt, Maximilian, 2015. "Should I stay, or should I go? – How fund dynamics influence venture capital exit decisions," Review of Financial Economics, Elsevier, vol. 27(C), pages 68-82.

    More about this item

    Keywords

    Venture capital; Performance; Overreaction; Market volatility; IRR;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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