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Determinants of required return in venture capital investments: A five country study

Using two complementary theoretical perspectives, this CMBOR Occasional Paper develops hypotheses regarding the determinants of the return required by venture capitalists and tests them on a sample of over 200 venture capital companies (VCCs) located in five countries.

Consistent with resource based theory, the authors find that early-stage specialists require a significantly higher return than other VCCs when investing in later-stage ventures. Consistent with financial theory, it also finds that acquisition /buyout specialists require a significantly lower return than other VCCs when investing in expansion companies. Furthermore, in comparison to specialists, highly stage-diversified VCCs require a significantly higher return for early stage investments.  Independent VCCs require a higher rate of return than captive or public VCCs. In general, higher required returns are associated with VCCs providing more intensity of involvement, having shorter expected holding period of the investment, and being located in the US or UK (in comparison to those in France, Belgium, and the Netherlands).

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