The new risk and return of venture capital investments (with F. Burguet)

This paper revisits the study of Cochrane (2005), to estimate the risk and returns of venture capital investments, while correcting for the selection bias. We use an up-to-date dataset and enhance it to account for missing firm valuations using machine learning. The model is able to infer, with a median error of less than 4%, the true log-value of the firm, for a total of nearly 120,000 observations, or six times more than the original paper, from 2010 to 2022. We find an annualized expected return of around 38%, an annualized alpha of 32.14%, a beta of 1.37, and a 40% idiosyncratic risk. Our results are robust to the choice of the benchmakr index. Depending on the sector, we find a beta lower than 1 for the health industry and of up to 1.86 for the tech sector. The health industry exhibits the lowest alpha (24%) and the tech the highest (36%). We use the cyber-security sector as case-study and find an alpha of 36%, on par with the tech sector, but with a lower beta of 1.56