![]() This is much greater than the roughly 10 percent standard deviation for the S&P-500 in the same period, but similar to the volatility of small publicly traded NASDAQ stocks. VC investments are still extremely volatile, with an annual standard deviation of about 100 percent. The most probable return is only about 25 percent.Ĭochrane then estimates how the probability of going public or being acquired increases as the value of the firm increases and the point at which companies go bankrupt, in order to estimate the overall underlying average return, volatility, and sensitivity to movements in the stock market (beta) of VC investments.Īdjusting in this way for the selection bias of firms that go bankrupt, the mean return on VC investments is 57 percent per year, still very large but less dramatic that the 700 percent mean before correcting for selection bias. About 15 percent of companies that go public/are acquired achieve returns greater than 1,000 percent yet 35 percent of the companies achieve returns below 35 percent and 15 percent of the companies deliver negative returns. Underlying these averages, however, there are a few companies with astounding returns, and a much larger fraction with modest returns. Returns in this sample are also very volatile, with a standard deviation of 3,300 percent. The average return is almost 700 percent. His analysis is based on 17,000 financing rounds in 8,000 companies, representing $114 billion of VC dollars, between 19.īefore controlling for the selection problem, Cochrane finds very large average returns among companies that go public or are acquired. 8066), Cochrane includes those companies that stay private - the losers as well as the winners- so as to more accurately estimate the returns on VC investments. In The Risk and Return of Venture Capital (NBER Working Paper No. Therefore, ignoring those companies that stay private only counts the winners it induces an upward bias in the measure of expected returns for potential investors. Those that do not achieve a good return are more likely to stay private or go bankrupt. Private companies are more likely to go public when they have achieved a good return. He concludes that VC investments are not dramatically different from publicly listed small growth stocks.Įstimates of the returns to VC investments can be highly misleading because they typically reflect only those firms that have initial public offerings or are acquired by another company. Venture capital (VC) investments carry more risk than most investments in the broad public market and their returns are much more modest than commonly thought, according to a new paper by NBER Research Associate John Cochrane. Transportation Economics in the 21st CenturyĪdjusting in this way for the selection bias of firms that go bankrupt, the mean return on VC investments is 57 percent per year, still very large but less dramatic that the 700 percent mean before correcting for selection bias. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |