The Performance of Venture Capital Investments: Do Investors Overreact?

Center for Entrepreneurial and Financial Studies Working Paper No. 2012-02

46 Pages Posted: 3 Apr 2012

See all articles by Ann‐Kristin Achleitner

Ann‐Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies

Nico Engel

Technische Universität München - Center for Entrepreneurial and Financial Studies

Uwe Reiner

Technische Universität München (TUM) - Center for Entrepreneurial and Financial Studies (CEFS)

Date Written: April 3, 2012

Abstract

Using a unique proprietary data set of over 5,400 realized and unrealized venture capital investments between 1980 and 2005, we examine the impact of supply-related factors, i.e. money provided by VC investors, as well as demand-related factors, e.g. entrepreneurial activity, on the return of individual VC investments. This way, we are able to shed more light on the question whether volatile VC investment returns are rather driven by fundamental changes with regard to the number of attractive investment opportunities or by overreaction by investors. We find that rising demand for VC, i.e. an increase in entrepreneurial activity, results initially in higher returns. However, our results also indicate that overreaction on the supply side can be observed, destroying deal-level results. Over-funding, specifically over-investing seems to be a recurring characteristic of the VC industry. In fact, contra-cyclical investment strategies yield highest deal-level returns.

Keywords: venture capital, performance, overreaction, market volatility, IRR, Cash Multiple

JEL Classification: G24, E32

Suggested Citation

Achleitner, Ann-Kristin and Engel, Nico and Reiner, Uwe, The Performance of Venture Capital Investments: Do Investors Overreact? (April 3, 2012). Center for Entrepreneurial and Financial Studies Working Paper No. 2012-02, Available at SSRN: https://ssrn.com/abstract=2033762 or http://dx.doi.org/10.2139/ssrn.2033762

Ann-Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25181 (Phone)

Nico Engel

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Uwe Reiner (Contact Author)

Technische Universität München (TUM) - Center for Entrepreneurial and Financial Studies (CEFS) ( email )

Arcisstr. 21
Munich, 80333
Germany
+49 (0)89 289 251-87 (Phone)

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