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The risk and return of venture capital

Venture capital investments carry more risk than most investments in the broad public market and their returns are much more modest than commonly thought, according to this paper by John Cochrane, of the University of Chicago. He concludes that VC investments are not dramatically different from publicly listed small growth stocks.

Estimates of the returns on VC investments can be highly misleading because they typically reflect only those firms that have initial public offerings or are acquired by another company. Private companies are more likely to go public when they have achieved a good return. Those that do not are more likely to stay private or go bankrupt. Ignoring those companies that stay private only counts the winners; it induces an upward bias in the measure of expected returns for potential investors. Cochranes analysis includes companies that stay private, the losers as well as the winners - so as to estimate the returns on VC investments more accurately.

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John H. Cochrane, Professor of Finance, Graduate School of Business, University of Chicago, 1101 E. 58th St., Chicago IL 60637, 773 702 3059, john.cochrane@gsb.uchicago.edu, or visit this URL

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