Returns to Venture Capital

The returns to private equity investment have become a vexed issue, attracting widespread debate in the media, government, and among researchers. Much of the attention has focused on later-stage buyout investments, but there is a general move towards greater transparency and disclosure of the returns to both early and late-stage venture capital (VC) investments. Shortcomings in the information provided to investors may mean that limited partners are restricted in their ability to judge the investment record of the VC funds in which they seek to invest. In this chapter, returns are examined at two levels. First, we examine returns at the level of VC funds. Second, returns at the investee firm level are discussed. The literature on returns to venture capital is, unsurprisingly, mainly concentrated in finance and economics journals, but a stream of studies has also appeared in entrepreneurship journals. Reviews of the literature relating to the different stages of the venture capital investment process, from deal sourcing through to exit, are available in Wright and Robbie (1998) and Wright, Sapienza, and Busenitz, (2003). In this review, we focus specifically on the earlier venture capital stage of the private equity market. Comparisons are made with the later management buyout stage of this market where appropriate and where studies are available. Detailed surveys of the later buyout stage of the private equity market are available in Wright (2007); Cumming, Siegel, and Wright (2007); and Bruining and Wright (2008). The main findings from the studies reviewed are summarized in Exhibit 19.1.