TY - JOUR
AU - Cochrane,John H.
TI - The Risk and Return of Venture Capital
JF - National Bureau of Economic Research Working Paper Series
VL - No. 8066
PY - 2001
Y2 - January 2001
DO - 10.3386/w8066
UR - http://www.nber.org/papers/w8066
L1 - http://www.nber.org/papers/w8066.pdf
N1 - Author contact info:
John H. Cochrane
Hoover Institution
434 Galvez Mall
Stanford University
Stanford, CA 94305-6010
Tel: 650 723 6708
E-Mail: john.cochrane@stanford.edu
M2 - featured in NBER digest on 2001-05-01
AB - 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.
ER -