Risk and Reward in Venture Capital
Posted: 25 Jan 2012
Date Written: December 3, 2010
Abstract
This note describes the payoff structure of investment in individual venture capital-backed companies and in venture capital portfolios. Venture Capital investments are characterized by high failure rate (over 50%) and a small number of given successes (greater than 10% returns). As an asset, class, venture capital has produced high cyclical returns that mirror trends in capital markets and in markets for new technology. There is a large disparity in median and upper quantize performance. A small number of funds do well on a constant basis. Overall returns on venture capital have been low for the decade ending in 2009.
Learning Objective: The purpose of this note is to expose students to real data in payoffs for individual venture capital investment sand the portfolios across the past 30 years.
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