An Analysis of the Performance of Publicly Traded Venture Capital Companies

Martin, John D.; Petty, J. William

doi:10.2307/2330729

Cited by 46 publications

(11 citation statements)

References 9 publications

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“…In a preliminary analysis using data from one venture group, Gompers and Lerner (1997) find that the correlation between venture capital and public market prices increases substantially when the underlying venture portfolio is "marked-to-market." An alternative approach is to examine the relatively modest number of publicly traded venture capital funds, as is done by Martin and Petty (1983). These authors showed that eleven publicly traded funds had superior returns relative to the market during the years 1974 through 1979 (a period of strong returns to the venture capital industry as a whole, as Figure 2 notes).…”

Section: Understanding Risk and Returnmentioning

confidence: 99%

The Venture Capital Revolution

Gompers

Lerner

2001

Journal of Economic Perspectives

1,436

823

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Venture capital has emerged as an important intermediary in financial markets, providing capital to young high-technology firms that might have otherwise gone unfunded. Venture capitalists have developed a variety of mechanisms to overcome the problems that emerge at each stage of the investment process. At the same time, the venture capital process is also subject to various pathologies from time to time, which can create problems for investors or entrepreneurs. This article reviews the recent empirical literature on these organizations and points out area where further research is needed.

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Section: Understanding Risk and Returnmentioning

confidence: 99%

The Venture Capital Revolution

Gompers

Lerner

2001

Journal of Economic Perspectives

1,436

823

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“…Returns of venture capital firms are studied by Murphy (1956), Poindexter (1976), Hoban (1976) Martin and Petty (1983), Ibbotson and Brinson (1987), Roberts and Stevenson (1992), Rich and Gumpert (1992), Bygrave and Timmons (1992), Timmons (1999) and Venture Economics (1997). The issues related to the questions of what motivate entrepreneurial activities have been studied by, among others, Constant and Shachmurove 2006;Constant, Shachmurove and Zimmermann 2007;andKellman, Roxo andShachmurove 2003.…”

Section: Review Of the Literaturementioning

confidence: 99%

Economic Geography, Venture Capital and Focal Points of Entrepreneurial Activity

Shachmurove

2009

SSRN Journal

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Economic geography receives limited consideration in the venture capital literature. This study utilizes thirty years of data concerning companies that initially were backed by venture capital. These firms are located in Entrepreneurial Focal Points in the United States, namely: California, Massachusetts, New York, Pennsylvania and Texas. How well do these companies operate once they go public? Do the scrutiny measures, expertise and financial backing that firms gain from the venture capitalists increase their annual and cumulative returns? The results show that returns on investment are adequate given their substantial risk.

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“…In a later study, Martin and Petty provided a partially satisfactory answer to this risk/ reward question. They compared the performance of 11 publicly traded venture capital funds, 20 "maximum capital gain" mutual funds, and the Standard and Poors 500 Index (S&P 500), over the 1974-1979 time period (Martin and Petty 1983). Martin and Petty argued that since the mutual funds are "bundles" of marketable equity securities which are eligible investments for institutional investors, they offer a useful basis of comparison for the publicly traded venture capital funds.…”

Section: Previous Researchmentioning

confidence: 99%

Publicly traded venture capital funds: implications for institutional “fund of funds” investors

Brophy

Guthner

1988

Journal of Business Venturing

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EXECUTIVE SUMMARY Institutional investors supply the bulk of thefunds which are used by venture capital investment firms in financing emerging growth companies. These investors typically place their funds in a number of venture capital firms, thus achieving diverstfication across a range of investment philosophy, geography, management, industry, investment life cycle stage, and type of security. Essentially, each institutional investor manages a 'find of funds, " attempting through the principles of portfolio theory to reduce the risk of participating in the venture capital business while retaining the up-side potential which was the original source of attraction to the business. Because most venture capital investment firms are privately held limited partnerships, it is very difficult to measure risk adjusted rates of return on these funds on a continuous basis. In this paper, we use the set of twelve publicly traded venture capital firms as a proxy to develop insight regarding the risk reduction effect of investment in a portfolio of venture capital funds, i.e., a fund of funds. Measurements of weekly total returns for the shares of these funds are compared with similar returns on a set of comparably sized "maximum capital gain" mutual funds and the daily return of the S&P 500 Index. A comparison of returns on an individual fund basis, as well as a correlation of daily returns of these individual funds, were made. In order to adjust for any systematic bias resulting from the "thin market" characteristic of the securities of the firms being observed, the Scholes-Williams beta estimation technique was used to reduce the effects of nonsynchronous trading.The results indicate that superior returns are realized on such portfolios when compared with portfolios of growth-oriented mutual funds and with the S&P 500 Index. This is the case whether the port&olios are equally weighted (i.e., "naive") or constructed to be mean-variant efJicient, ex ante, according to the capital asset pricing model. When compared individually, more of the venture funds dominated the S&P Market Index than did the mutual funds, and by much larger margins. When combined in portfolios, the venture capital funds demonstrated very low beta coeficients and very low covariance of returns among portfolio components when compared with portfolios of mutual funds. To aid in interpreting these results, we analyzed the discounts and premia from net asset value on the funds involved and compared them to Thompson's findings regarding the contribution of such dtfferences to abnormal returns. We found that observed excess returns greatly exceed the level which would be explained by these differences. Address reprint requests to DavidThe implications of these results for the practitioner are sign$cant. They essentially tell us that, while investment in individual venture capital deals is considered to have high risk relative to potential return, combinations of deals (i.e., venture capitalportjolios) were shown to produce superior risk adjusted returns in th...

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An Analysis of the Performance of Publicly Traded Venture Capital Companies

Cited by 46 publications

References 9 publications

The Venture Capital Revolution

The Venture Capital Revolution

Economic Geography, Venture Capital and Focal Points of Entrepreneurial Activity

Publicly traded venture capital funds: implications for institutional “fund of funds” investors

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