The risk and return of venture capital
John H Cochrane
- Problem: selection bias is rampant in venture capital, as we only observe valuations when a firm has an event, i.e. going public, raising a new round of private capital, being acquired, etc. These events are all more likely when a startup has experienced a high return. As a result, at any given time most companies haven’t had a recent valuation event
- Idea: construct a model of 1) how venture valuations evolve over time and 2) how this selection process occurs as a function of firm value and use maximum likelihood to fit the model to the measured return data
Related to Public and Private Valuations are not Comparable and Transaction Comps are not Valuation Comps