Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies

Korteweg, Arthur G.; Sørensen, Morten

doi:10.2139/ssrn.1108610

Cited by 53 publications

(50 citation statements)

References 21 publications

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“…To construct a sample of CVCs unbiased by cross-country differences, like the institutional or cultural environment (Wright et al 2005), we searched Dow Jones' VentureSource database, which is commonly used in the VC literature (Korteweg and Sorensen 2010), for accessing details of domestic startup investments by U.S. CVCs. To account for the cyclical nature of CVC, we considered the time period between January 2009 and January 2016 because CVCs have played an increasingly important role in startup investments since the economic crisis in 2008, and because it is apparently the most recent CVC wave (Dushnitsky and Lenox 2006;Roof 2015).…”

Section: Data and Sample Designmentioning

confidence: 99%

A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation

et al. 2017

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Corporate venture capital (CVC) investors are regularly painted with the same brush, a fact underscored by the often observed belief in the extant literature that corporate venture capitalists (CVCs) form a homogeneous group. In contrast to this simplifying perspective, this paper categorizes CVCs into subgroups by examining their levels of strategic and financial investment motivation using computer-aided text analysis and cluster analysis. To validate the resulting clusters, this paper studies the impact of CVC type on startup valuation from an intra-group perspective by applying hierarchical linear modeling, thus illustrating which particular investment motivation might be preferable to others in the context of negotiating valuations. An empirical analysis of 52 CVC mission statements and 147 startup valuations between January 2009 and January 2016 revealed that first, CVCs with a strategic investment motivation assign lower startup valuations than CVCs with an analytic motivation that have moderate levels of the two scrutinized dimensions, suggesting that entrepreneurs trade off these CVCs' value-adding contributions against a valuation discount; second, CVCs with an unfocused investment motivation pay significantly higher purchase prices, thus supporting the hypothesis that they have a so-called liability of vacillation; and third, the valuations of CVCs with a financial investment motive are not significantly different from JEL Classification C12 Á C30 Á C38 Á G24 Á G32 Á M13

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Section: Data and Sample Designmentioning

confidence: 99%

A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation

et al. 2017

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“…We first introduce the classic repeat sales regression (RSR) model, which was originally developed by Bailey, Muth, and Nourse (1963) and Case and Shiller (1987) to estimate real estate price indices, but has subsequently been modified and used for other illiquid asset classes, such as municipal bonds (Wilkoff 2013), venture capital (e.g., Peng 2001Woodward and Hall 2003;Korteweg and Sorensen 2010), as well as for art (e.g., Baumol 1986;Buelens and Ginsburgh 1993;Goetzmann 1993Goetzmann , 1996Mei and Moses 2002;Zanola 2007;Goetzmann, Renneboog, and Spaenjers 2011). The standard RSR model decomposes the log return of an artwork, i, from time t-1 to t, into two components:…”

Section: Standard Repeat Sales Regression Modelmentioning

confidence: 99%

Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective

2015

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This paper shows the importance of correcting for sample selection when investing in illiquid assets that trade endogenously. Using a sample of 32,928 paintings that sold repeatedly between 1960 and 2013, we find an asymmetric V-shaped relation between sale probabilities and returns.Adjusting for the resulting selection bias cuts average annual index returns from 8.7% to 6.3%, lowers Sharpe ratios from 0.27 to 0.11, and materially impacts portfolio allocations. Investing in a broad portfolio of paintings is not attractive, but targeting specific styles or top-selling artists may add value. The methodology naturally extends to other asset classes. (JEL D44, G11, Z11) 2 Over the last three decades investors have started allocating increasingly larger shares of their portfolios to alternative assets. Many of these alternative asset classes, such as private equity and real estate, and even certain traditional assets, such as corporate bonds, are highly illiquid, complicating return evaluation. In particular, when sales are endogenously related to the performance of the asset, a sample selection problem arises that is pervasive across asset classes. This paper develops a methodology to quantify the magnitude of the selection bias and demonstrates its empirical first-order importance when evaluating investment performance and constructing optimal portfolios that include alternative assets. 6% to 18% of their total wealth to art and collectibles (depending on the region), and the majority 1 Following the literature, we use the terms "art" and "paintings" interchangeably throughout the paper.

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“…Section 4.1 describes the quantitative effect of this correction. Korteweg and Sorensen (2010) propose an alternative correction which I discuss in Section 3.5.…”

Section: Venture Capital Indexesmentioning

confidence: 99%

“…There is also a substantial literature on the risk and return characteristics of VC investments: Cochrane (2005), Kaplan and Schoar (2005), Hall and Woodward (2007), Korteweg and Sorensen (2010), and Korteweg and Nagel (2016). A large literature on the implications of idiosyncratic risk for entrepreneurs and managers is summarized by Heaton and Lucas (2004) and Hall and Woodward (2010).…”

Section: Introductionmentioning

confidence: 99%

Volatility and Venture Capital

Peters

2017

SSRN Journal

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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 reinvest. At the asset-class level, shocks to aggregate volatility explain a substantial fraction of VC returns. At the fund level, consistent with the reinvestment channel, this exposure is concentrated in years two through four of fund life and in early-stage VC funds, which have more embedded reinvestment options. For VC-backed portfolio companies, volatility shocks correlate with faster and more frequent reinvestment. The level of volatility at the time of 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. 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 reinvest. At the asset-class level, shocks to aggregate volatility explain a substantial fraction of VC returns. At the fund level, consistent with the reinvestment channel, this exposure is concentrated in years two through four of fund life and in early-stage VC funds, which have more embedded reinvestment options. For VC-backed portfolio companies, volatility shocks correlate with faster and more frequent reinvestment. The level of volatility at the time of 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.JEL codes: G11, G24

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Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies

Cited by 53 publications

References 21 publications

A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation

A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation

Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective

Volatility and Venture Capital

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