The Reality of IPO Performance: An Empirical Study of Venture-Backed Public Companies

Abstract

The incredible profits of Initial Public Offerings have often been emphasized in the media as a popular investment for the public. This paper takes a few steps towards refuting such an assertion by investigating the performance of 2,895 venture capital backed IPOs between 1968 and September 1998. The paper finds that it is incorrect to assume that investors demand very high annualized and cumulative rates of return to compensate for the risks they are taking by financing ventures in different sectors of the economy. The mean rates of return are found to be, in practice, very moderate, and often, negative.

Keywords: Initial public offering, venture capital, annualized and cumulative rates of return, Information Technology, Medical, Health and Life Science, Non-High Technology, Biotechnology, Communications, Computer Industry, Semiconductor and Other Electronics Industries

JEL Classification: C12, D81, D92, E22, G12, G24, G3, M13, M21, O16, O