The Risk and Return of Venture Capital

Posted: 9 Nov 2009

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER); University of Chicago - Booth School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: 2005


This paper measures the expected return, mean, standard deviation, alpha, and beta of venture capital investments. The focus of the paper is correcting for the selection bias that is the central obstacle in evaluating such investments. Therefore, valuations are observed only when a firm goes public, receives new financing, or is acquired. A maximum-likelihood estimate is used, which measures the increasing probability of observing a return as value increases, the parameters of the underlying return distribution, and the point at which firms go out of business. The data source is the VentureOne database covering 1987 to June 2000, consisting of 16,613 financing rounds for 7,765 companies. The bias-corrected estimation neatly accounts for log returns. It reduces the estimate of the mean log return from 108% to 15%, and of the log market model intercept from 92% to minus 7%. The selection bias correction also lessens high arithmetic average returns: it reduces the mean arithmetic return from 698% to 59%, and it reduces the arithmetic alpha from 462% to 32%. A central question addressed is whether venture capital investments behave the same as publicly traded securities and how their yields compare. The evidence shows the smallest Nasdaq stocks have similar large means, volatilities, and arithmetic alphas in the same time period. That the similar phenomena are found in public and private markets suggests there is little special about venture capital per se.(TNM)

Keywords: Experimental/primary research, NASDAQ stock exchange, VentureOne dataset, Investment performance, Investment criteria, Venture capital, Initial public offerings (IPO), Return on investment, Stocks, Rates of return

Suggested Citation

Cochrane, John H., The Risk and Return of Venture Capital (2005). Journal of Financial Economics, Vol. 75, Issue 1, p. 3-52 2005. Available at SSRN:

John H. Cochrane (Contact Author)

Hoover Institution ( email )

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National Bureau of Economic Research (NBER)

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University of Chicago - Booth School of Business ( email )

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