Volatility and Venture Capital

48 Pages Posted: 29 Sep 2017 Last revised: 25 Jan 2018

See all articles by Ryan H. Peters

Ryan H. Peters

Tulane University - Finance & Economics

Date Written: January 25, 2018


The performance of venture capital (VC) investments load positively on shocks to aggregate return volatility. I document this novel source of risk at the asset-class, fund, and portfolio-company levels. The positive relation between VC performance and volatility is driven by the option-like structure of VC investments, especially by VCs’ contractual option to invest in subsequent (follow-on) rounds. At the asset-class level, shocks to aggregate volatility explain a substantial fraction of VC returns. At the fund level, consistent with the follow-on investment channel, this exposure is concentrated in years two through four of fund life and in early-stage VC funds, which have more embedded follow-on investment options. For VC-backed portfolio companies, volatility shocks correlate with faster and more frequent follow-on investment. The level of volatility at the time of initial investment has no relation with future performance, consistent with competitive markets. Overall, my results imply that the option-like features of VC investments are first-order determinants of risk in VC.

Keywords: Venture Capital, Real Options, Idiosyncratic Volatility

JEL Classification: G11, G24

Suggested Citation

Peters, Ryan H., Volatility and Venture Capital (January 25, 2018). Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=3044000 or http://dx.doi.org/10.2139/ssrn.3044000

Ryan H. Peters (Contact Author)

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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