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

Abstract

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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
554
Abstract Views
3,147
Rank
86,548
PlumX Metrics