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Comparing the Risk and Return of Early Stage with Expansion/Late Stage Venture Capital Funds

by Gary Broughton

  • 28 Oct 2011
  • PE

Venture capital funds make up a significant portion of the alternatives industry and choosing the most appropriate investment stage is a key decision for fund managers when raising these funds. By comparing the median and standard deviation of returns for early stage and expansion/late stage funds, we can gain an insight into the risk and return patterns across the different venture investment stages.

Preqin holds performance data for 896 venture funds with vintage years between 1999 and 2008 which represents the most appropriate period to examine meaningful returns and to build up a picture of the risk and return of early stage and expansion/late stage funds.

The analysis has shown that over this period early stage vehicles represent the investment stage with the greatest level of risk with a standard deviation of 81.4% compared to 20.9% for expansion/late stage funds. However it should be noted that the high standard deviation of early stage fund returns are boosted by a few funds with very high returns. Early stage funds also show lower median returns than expansion/late stage funds with 5.1% compared to 8.1%.

The nature of each investment stage causes variations in the risk and return trade-offs, therefore making direct comparisons of the risk and returns of these investment stages should be viewed with context in mind.

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