The risk and return of venture capital

This paper measures the mean, standard deviation, alpha, and beta of venture capital investments, using a maximum likelihood estimate that corrects for selection bias. The bias-corrected estimation neatly accounts for log returns. It reduces the estimate of the mean log return from 108% to 15%, and of the log market model intercept from 92% to -7%. The selection bias correction also dramatically attenuates high arithmetic average returns: it reduces the mean arithmetic return from 698% to 59%, and it reduces the arithmetic alpha from 462% to 32%. I confirm the robustness of the estimates in a variety of ways. I also find that the smallest Nasdaq stocks have similar large means, volatilities, and arithmetic alphas in this time period, confirming that the remaining puzzles are not special to venture capital. Published by Elsevier B.V.