International Review of Financial Analysis 31 (2014) 13–24

Contents lists available at ScienceDirect

International Review of Financial Analysis

Does cross-border syndication affect venture capital risk and return?☆

Susanne Espenlaub a, Arif Khurshed a, Abdulkadir Mohamed b,⁎
a
Manchester Business School, University of Manchester, Manchester, UK
b
School of Management, University of Liverpool, Liverpool, UK

a r t i c l e i n f o a b s t r a c t

Article history: Venture capital (VC) cross-border syndication has increased significantly in recent years. This study examines the
Received 19 March 2012 risk and returns of investments of US–European cross-border syndicates in US portfolio companies. We use a
Received in revised form 10 October 2013 large sample of investments across four financing stages, and highlight several noteworthy differences between
Accepted 12 October 2013
cross-border syndicates and previous US-only evidence. By comparison, US–European syndicates are larger than
Available online 21 October 2013
US-only syndicates, involve younger VCs, and focus more on later financing stages. Controlling for sample
JEL classification:
selection bias caused by the endogenous choices of exit route and exit timing, we examine the risk and returns
G24 of investments backed by cross-border syndicates. Consistent with evidence from US-only syndicates, alpha
G32 and beta decrease monotonically from the earliest (start-up) stage to the later stages of financing.
© 2013 Elsevier Inc. All rights reserved.
Keywords:
Venture capital
Cross border
Risk and return
Syndication

1. Introduction of the VC investment (Lerner, 1994). Amit (2002) concludes that

In recent years, cross-border venture capital (VC) investments
have increased substantially in terms of the amounts of capital,
numbers of deals and range of industries involved (Guler & Guillen,
2010). Typically, in an international VC syndicate, local investors team
up with foreign investors in order to invest in a local entrepreneurial
company (Meuleman & Wright, 2011). Cross-border syndication may
provide access to more complementary skills and capabilities than
domestic syndicates. VC firms may play an important role in the inter-
nationalization of their portfolio companies through their respective
home-country product and capital markets (Tykvova & Schertler,
2011). During the period from 2000 to 2008, more than one third of
portfolio companies globally received financing from foreign VC firms
(Tykvova & Schertler, 2011). Previous studies of VC syndication focus
on motives for syndication, and document that VC firms syndicate in
order to spread the investment risk, including risks due to the illiquidity
☆ We are grateful to the editor, Brian Lucey and an anonymous referee for suggestions
that significantly improved the paper. We also thank Ranko Jelic, Norman Strong,
Michael Brennan, Murray Dalziel, Olan Henry, Gary Cook, Martin Lozanno, Ning Gao,
Pawel Bilinski, Brahim Saadouni and Axel Buchner for their valuable comments and
suggestions. The authors also wish to thank their colleagues at Manchester Business
School, Liverpool University and the participants of the Financial Management Association
(Denver 2011) for their helpful comments on earlier drafts of this paper.
⁎ Corresponding author. Fax: +44 151 794 2000.
E-mail addresses: Susanne.Espenlaub@mbs.ac.uk (S. Espenlaub),
Arif.Khurshed@mbs.ac.uk (A. Khurshed), Abdulkadir.Mohamed@liv.ac.uk (A. Mohamed).
syndication can add value to the investment, based on his finding
that the more VC firms participate in the financing, the greater are
the overall benefits to backers and entrepreneurs. Recent studies on
cross-border syndicates outside the US investigate why VC firms rely on
cross-border syndicates when they internationalize their investments,
and emphasize the importance of the legal and institutional frameworks
(Lu & Huang, 2010; Tykvova & Schertler, 2011). Wright, Pruthi, and
Lockett (2005) examine Asian VC markets and point out that investments
syndicated between local and foreign VC firms require further study.
Dimov and Milanov (2009) find that more than 73% of VC invest-
ments in the US are syndicated. To date, little is known about the
prevalence of cross-border syndicates between US VC firms and foreign
VC providers. Also, to our knowledge, there are no prior studies of the
performance of VC investments in US portfolio companies financed by
such cross-border syndicates. Prior studies of syndication, both domestic
and cross-border, examine portfolio companies located outside the US. By
contrast, this study analyzes VC investments in US portfolio companies
made by US VCs syndicating with VCs from outside the US (specifically
Europe).
Measuring the risk and returns of VC investments is challenging.
Valuations of VC investments can only be observed when a portfolio
company goes public or is acquired. Those companies within a VC
portfolio that manage to go public or are acquired are likely to be a
select subsample of comparatively good performers. In addition, the
timing of exits, and the resulting return observations, are likely to
vary systematically depending on the characteristics of the investment
and the portfolio company, and on the nature and success of the VC

1057-5219/$ – see front matter © 2013 Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.irfa.2013.10.003
14 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24

Table 1
Previous studies of venture capital risk and returns. The table summarizes the findings of the previous studies on venture capital investments. Only the studies by Cochrane (2005) and
Korteweg and Sorensen (2010) evaluate the risk and returns of investment rounds.

Authors Country of venture Sample and period Methodology Returns (Ri) STD (σ) Systematic
capital firm risk (β)

Seppä and Laamanen (2001) US VC fund level (1998–1999) Binomial/OLS model NR NR NR

Chen, Baierl, and Kaplan (2002) US VC fund level (1999) Method of moments 45% all stages 115.6% NR
(repeated sale approach)
Ljungqvist and Richardson (2003) US VC fund level (1981–1993) Proportional hazard model 19.81% all stages 22.29% 1.09 all stages
Woodward (2004) US Company data (1990–2003) Method of moments NR 50% 2.0 all stages
(building an index)
Cochrane (2005) US Company data (1987–2000) Selection bias (maximum likelihood) 71% Start-up 96% 1.1 Start up
65% Early stage 98% 0.9 Early stage
60% Expansion 98% 0.7 Expansion
50% Later stage 99% 0.5 Later stage
Hege et al. (2008) US & Europe Company data (1997–2003) OLS 62% (US) NR NR
106% (EU)
Korteweg and Sorensen (2010)ab US Company data (1985–2005) Selection bias 2246% Seed 117% 0.7414
60.10% Early 134% 2.742
10.9% Late 148% 2.628
85.41% Mezz 135% 5.888

NR: not reported.

a
The returns are annualized and based on Table 8.
b
The standard deviations are annualized and based on Table 5.

investments. For instance, Gompers and Lerner (2000) highlight the
tendency of VCs to delay the liquidations of poor investments and
the consequent realization and reporting of negative returns. The
resulting sample selection biases with regard to observed exit routes
and timing is a fundamental problem in evaluating the risk and returns
of VC investments, and our study seeks to address and control for these
biases.
We study the risk and returns of syndicated financing rounds
between US and European VC firms in US portfolio companies.1 We
focus on portfolio companies that received VC financing from two or
more VC firms, where at least one VC firm is European and at least
one is based in the US. We chose Europe because it is the second largest
VC industry after the US. US–European cross-border syndicates are an
interesting case whose study minimizes the impact of differences in
legal and institutional settings on cross-border risk and returns. This
facilitates the comparison of our results with those of prior studies of
the risk-return trade-off of VC investments by US-only VCs and VC
syndicates (Cochrane, 2005; Korteweg & Sorensen, 2010).
We document some interesting similarities and differences between
US VCs and US–European cross-border syndicates, in terms of the invest-
ment behavior and performance. Comparable to studies of US VCs, we
find that US–European cross-border syndicates face a monotonically
decreasing relationship between both abnormal performance (alpha)
and systematic risk (beta), on the one hand, and the stage of VC financing,
on the other hand. That is, VC investments in earlier financing stages have
higher abnormal returns and higher systematic risk than corresponding
investments in later stages. We document significant evidence of sample
selection bias. Nevertheless, our findings on the risk and returns of VC
investments are remarkably robust across alternative methods of dealing
with selection bias.
The rest of the paper is organized as follows: Section 2 reviews the
literature on the returns of VC investments; Section 3 describes the
motivation, data sources and the methodology employed; Section 4
discusses the empirical findings; Section 5 presents the conclusion.
1
There are a handful of studies of VC returns that analyze the returns at the fund level
rather than the returns of each investment round (Chen et al., 2002; Hege et al., 2008;
Ljungqvist & Richardson, 2003; Woodward, 2004). Typically, there are more financing
rounds than VC funds.
2. Literature review
Sahlman (1990) is a seminal study of the structure of the US VC
industry and the relationship between investors and VC firms.
Gompers (1995) investigates the structure of staged VC investments in
the presence of agency and monitoring costs. Hellmann and Puri (2002)
investigate the contributions of VC firms to start-up companies located
in Silicon Valley.
Lerner (1994) studies (US-only) VC syndication in biotechnology
entrepreneurial companies and investigates the rationales for syn-
dication. He finds that experienced VCs syndicate with other experienced
backers in early-stage investments, while in later-stage investments ex-
perienced VCs syndicate with both experienced and inexperienced ones.
Lockett and Wright (2001) report that small VC firms have difficulty
achieving optimal portfolio diversification, and syndication allows them
to achieve a well diversified portfolio. According to Arberk, Filatotchev,
and Wright (2006), the fact that VC investments are illiquid and syn-
dication is used as a risk-sharing mechanism means that studying VC
syndication is crucial to understanding the activities of VC firms.
The aim of this study is not to contribute to our understanding of the
motives for syndication (Bent, Williams, & Gilber, 2004; Brander, Amit,
& Antweiler, 2002; Casamatta & Haritchabalet, 2007; Fleming, 2004;
Lockett & Wright, 2003). Rather we aim to investigate the risk and
returns of US–European cross-border syndicated investments (taking
the composition of these syndicates as given).
There are a number of studies that examine the risk and returns of
VC investments (see Cochrane, 2005; Korteweg & Sorensen, 2010;
Woodward, 2004), but these studies focus on investments by US-only
VCs and VC syndicates. As we document below, US VC firms have
been co-investing with European VCs since the late 1980s. Yet, little
is known about the syndicates. To our knowledge, the risk and returns of
European VCs co-investing with US players is as yet unexplored. Table 1
summarizes the results of previous studies of VC risk and returns. Only
Cochrane (2005) and Korteweg and Sorensen (2010) investigate the
risk and returns of VC investments at the level of the individual portfolio
company as opposed to the performance of the VC fund overall.
Seppä and Laamanen (2001) investigate the risk and return profiles
of investments at the VC fund level (correcting for sample selection bias
using a binomial model). For a sample of 597 investment rounds
between 1998 and 1999, they find that early-stage investments have
higher returns and implied volatility than other investment rounds.
Manigart et al. (2002) examine the determinants of VC returns in five
 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24
markets: the US, the UK, the Netherlands, Belgium and France from
1994 to 1997. The authors show that VC firms require higher returns
for early-stage investments than expansion or later-stage financing. In
addition to depending on the financing stage, the required returns
depend on the size of the investment and the country of origin of the
portfolio company.
Chen, Baierl, and Kaplan (2002) examine the long-term risk and
return characteristics of VC investments, and their role in long-term
strategic asset allocation. They use 148 VC funds that had liquidated as
of 1999. They report an average arithmetic return of 45%, and a standard
deviation of 115.6%. They conclude that one should only allocate between
2% and 9% of a portfolio to VC for the minimum-variance portfolio, due to
the high volatility of VC returns.
Cochrane (2005) examines the mean, standard deviation, alpha
(abnormal performance) and beta (systematic risk) of VC investments
in the US. Based on a sample of 16,613 investment rounds between
1987 and 2000, the results show that the expected returns for the first
round are 71%, for the second 65%, for the third round 60% and for the
fourth round 51%. The betas corresponding to the stages are 1.1, 0.9,
0.7 and 0.5, respectively. Similarly, Korteweg and Sorensen (2010)
examine the alpha and beta of VC investments in entrepreneurial
companies. The authors focus on US VC firms and examine the risk
and returns from 1985 to 2005. Correcting for sample selection bias
due to the endogenous timing of VC exits (‘dynamic selection bias’),
they find that monthly alphas range from 3.3% to 3.5%, while the betas
are more than 1 using the Capital Asset Pricing (CAPM) and three-
factor models.
With the exception of Cochrane (2005) and Korteweg and Sorensen
(2010), previous studies evaluate the risk and returns of VC investments
at the fund level (e.g., Kaplan & Schoar, 2005), often using proprietary
data on the portfolios of companies held by specific VC firms or funds
(e.g., Kaplan & Stromberg, 2003, 2004). At the fund level, it is difficult
to analyze changes over time and variations across industries, while
our study (along with Cochrane, 2005; Korteweg & Sorensen, 2010) is
able to examine these aspects using data at the level of the individual
deal (or portfolio company). An added advantage of using deal-level
data is that there are many more observations of deals than of VC funds.
A larger sample improves the reliability of the statistical estimates in
our risk-return analysis.
This is the first study to examine the risk and returns of co-
investments by US and European VC firms, as most previous studies
focus on separate samples of either US or European firms. For instance,
Hege, Palomino, and Schwienbacher (2008) compare the performance
of VC investments between the US and Europe and report internal
rates of return (IRR) of 62% for US VCs and 106% for European VCs.
Our analysis sheds light on the differences and similarities between
US–European cross-border syndicates and US-only (or European-only)
VCs and syndicates in terms of their characteristics and performance.
3. Data and methodology
3.1. Data
From VentureXpert we extract all investments made during 1985–
2008 by US–European cross-border syndicates of VC firms, and identify
whether they were exited through an IPO, M&A (including trade sales)
or liquidation, or not exited, during 1990–2010. From the database, we
collect information on the value of the backed company after receiving
VC financing (post-VC financing value), the country of origin of the VC
firms, the choice of exit route, the number of rounds a portfolio company
received, and the number of VCs in the syndicate.
To be included in our sample, a portfolio company should have
received financing from at least one US and one European VC. Further,
we require that data need to be available on (i) the amount invested
by the VCs, (ii) the post-VC financing company value, and (iii) the
founding dates of the VCs and the portfolio company. These filter rules
15
result in a final sample of 26,865 investment rounds made by 2641
US–European VC syndicates. Of these investments, 6774 result in IPO
exits, 13,907 in M&A exits, 2152 in liquidations and 4032 had not
been exited by the end of the sample period (i.e. 31 December 2010).
Our risk-return calculations are based on the subsample of IPOs and
M&As for which realized values are available (not available in the case
of liquidations and non-exited investments).
3.2. Calculation of holding period returns
We compute the holding period return (RT) for each financing round
using the following equation:

 
IT It0
RT ¼ −1 where IT ¼ W MT : ð1Þ
It0 V t0
IT is the amount a VC firm receives at the time of exit; It0 is the initial
investment in a target company; Vt0 is the value of a portfolio company
immediately after receiving VC funding at t0; W is an adjustment factor
correcting for changes (dilution) in VC ownership due to changes in
the portfolio company's valuation across successive investment rounds,
as discussed below; MT is the market value of the portfolio company
upon exit. The market value (MT) of the portfolio company is the key
factor in the return calculation, but this information is available only
for IPO and M&A exits.
For investments exited through an IPO, we need to take into account
the fact that VC backers usually do not sell their entire stake at the time
of the IPO (see Cumming, 2008), but instead exit gradually over the first
two post-IPO years.2 To account for this, we compute the market value
of the portfolio company not only at the time of the IPO but also in the
aftermarket up to two years post-IPO. To calculate the market value at
IPO, we multiply the number of shares outstanding after the IPO by
the IPO offer price. To calculate the aftermarket values, we multiply
outstanding shares by the end-of-month share price for each of the
17 months starting from the end of the lock-up agreement (typically
6 months after the IPO) and ending roughly 24 months after the IPO.
For each of these 17 months, we compute VC returns adjusting for the
different holding periods. Finally, we compute the VC returns on the
investment exited (gradually) through an IPO as the weighted average
of one third of the return at the IPO and two thirds of the average
monthly returns over the 17-month aftermarket period.3 We apply a
similar method to the market benchmark to ensure synchronicity in
the price observations and the matching of holding periods.
Note that this adjustment only applies to IPO exits. For M&A exits, we
assume that the VCs fully realize their investments in a single transaction,
and we use transaction values to calculate the holding period return.
VentureXpert does not provide information on VC holdings in a
portfolio company. We infer VC holdings using an approach similar to
that of Cochrane (2005) and Korteweg and Sorensen (2010). This
approach is best explained using an example. Assume that a portfolio
company receives $5 m from a VC firm and is valued at $15 m post-
financing. From these values we can infer that the VC firm owns 33%
of the company. If the company were to receive an additional $15 m
from a different VC firm and was then valued at $40 m, the second VC
would own 38%, while the first VC's ownership would be reduced to
21%.4
2
We are grateful to the referee for drawing our attention to the limitations of
calculating returns based on IPO prices.
3
The weights (1/3, 2/3) are based on the average rate of post-IPO VC exit documented,
e.g., by Cumming (2008). For comparison, we report returns calculated (i) on the
assumption that the entire VC holding is sold through IPO (at the offer price), and
(ii) on the assumption that it is sold immediately at the end of the lock-up period;
see Appendix A for details.
4
Share of the old venture investor I ¼ 0:33ð40
40−15Þ
 100 ¼ 21%: We are aware that
some VCs have ‘ratchet agreements’ protecting them from ownership dilution that might
arise due to subsequent investment rounds. However, VentureXpert provides no
information on the type and extent of these agreements for our sample firms.
16 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24
Finally, we annualize the holding period returns using
1
RAnnual ¼ ð1 þ RT Þ t −1 ð2Þ
where t is the period over which investments are held (in years).5
3.3. Sample selection bias
In the absence of sample selection bias, systematic risk for a given
financing stage can be estimated using the following equation:
R j ¼ Xβ j þ ε j ð3Þ
where Rj is the excess return in stage j, X is the market excess returns, and
βj is the systematic risk in stage j, measuring changes in the investment
returns in stage j relative to the market excess returns.
However, due to the systematic sample selection criterion that invest-
ment returns can only be observed for investments exited through an
IPO or M&A, the βj estimate is likely to be biased. Therefore, a sample
selection model is required to provide unbiased estimates. If the objective
were to control for the binary outcome of inclusion versus exclusion from
the sample, the Heckman (1979) model would be an appropriate method
by which to control for sample selection bias. However, VC firms do not
face the binary choice of an IPO exit or a non-exit. Instead, they choose
to exit (or not) through one of several routes, including IPO, M&A or
liquidation. This complicates the estimation of βj, as documented in
previous studies (Cochrane, 2005, Korteweg & Sorensen, 2010).
To address the problem of selectivity in the presence of multiple
outcomes, we use a sample selection model proposed by Dahl (2002).
The model extends the classic Heckman (1979) model in two ways:
first, it models various choices as opposed to a single choice in the
selection equation. Second, the probabilities of these choices are
transformed through a polynomial function.
To overcome the issue of exit-route selectivity, we use the Dahl
(2002) model. Consider the following two equations:
R1 ¼ Xβ1 þ μ 1 ð4Þ
 of Korteweg and Sorensen (2010), who deal with the sample selection
P k ¼ Zγk þ ηk k ¼ 1; 2; …m ð5Þ
where Eq. (4) is a linear regression model and Eq. (5) is a probability (or
choice) model. R1 is an excess return for stage 1, and the variable X
contains market excess returns, industry and year dummies. μ1 is the
disturbance term of the outcome equation and satisfies E(μ1|X,Z) = 0
and V(μ1|X,Z) = σ2. P*k is the probability of observing no exits through
IPO, M&A and liquidation. k is a categorical variable and describes m
choices (m = 1, IPO, m = 2, M&A, m = 3, liquidation and m = 4, no
exit). The variable Z contains control variables for the probabilities of
exits. These variables include the following: age of VCs, amount invested
by VCs, VCs syndicated (measured as the number of VCs in the
syndicate), age of portfolio companies, number of rounds a portfolio
company has received, financing stage, and year and industry dummies.
ηk is the residual of the selection model, independently and identically
distributed (i.i.d.). The stage return (R1) is observed only when the VC
investors make an investment and then exit through an IPO. This
condition is expressed as
  
P k N Max P k : ð6Þ
K≠1
5 9
Our estimate of the annualized return is based on valuation estimates of the portfolio
company pre-IPO. These estimates are clearly subject to all the biases and inaccuracies
typically arising in valuations, particularly in the context of VC portfolio companies. We
thank the referee for highlighting this issue and for noting that this is a problem common
to all empirical research into VC.
The conditional probability (P⁎k) is estimated through a multinomial
logit using

 exp Zγ j
P j InvjExitIPO;M&A;Liq0 n;no exit ¼X : ð7Þ
expðZγ k Þ
k
Pj is the probability of exit j (or no exit) and is estimated through a
multinomial logit. It is transformed using a polynomial approximation:
 
j nj
λ Pj ¼ λ M j Pj ð8Þ
where Mj is a dummy variable that equals one for choice j and zero
otherwise, n is the degree of the polynomial function for Pj. λ(Pj) is a
sample correction term, which depends on the probability Pj and is
equivalent to the inverse Mills in the Heckman model. The correction
function λ() is assumed to have the same form for all financing stages
that are exited through the IPO route.6
A consistent estimate of systematic risk for the financing round is
estimated using pooled cross-sectional regression and given by

R j ¼ Xβ j þ λ P j þ ζ j j¼1 ð9Þ
where Rj is the excess return for stage j (j = 1 start-up stage, j = 2 early
stage, j = 3 expansion stage, and j = 4 the later stage), X contains the
market return, and year and industry dummies. λ(Pj) is the sample
correction term and includes first- and second-order polynomial
approximations of the probability of an IPO exit.7 Eqs. (7) to (9) are
estimated simultaneously. We use clustered standard errors to adjust
for the cross-sectional dependence of VC investments.
In addition to adjusting for selection bias due to the choice of exit
route and the availability of data only for IPO and M&A exits (and not
for other routes), we also need to address the endogenous nature of
the timing of the VC exit and the resulting idiosyncratic variation in
the holding period across VC investments. In estimating the risk and
returns of VC investments it is clearly essential to control for the fact
that VC returns are realized in a discrete and lumpy fashion over widely
varying holding periods.8 To do so, we adopt an approach similar to that
bias due to the endogenous timing of observed returns. While they
address this ‘dynamic selection bias’ using Markov Chain Monte Carlo
(MCMC) estimation, we estimate an amended Heckman model with
the first stage involving a duration Cox (1972) model.
In Stage I of our model, we estimate, using a Cox (1972) model, the
time from investment to exit by the VC firms. This allows us to model
and control for the endogeneity of the exit-timing decision. In Stage II,
we estimate the systematic risk by including, in the form of an inverse
Mill's ratio, the predicted hazard of exit (i.e., the instantaneous prob-
ability of exit at a given point), modeled in Stage I as an additional
explanatory variable. This adjusts the estimated systematic risk for the
dynamic sample selection (due to endogenous timing). A significant
coefficient for the inverse Mill's ratio would indicate the presence of
dynamic selection bias.9
6
Bourguignon, Fournier, and Gurgand (2007) present a survey of the selection bias
models available in the literature, including Lee (1983) and Dubin and McFadden
(1984). Using a Monte Carlo experiment, they conclude that Dahl's model performs better
than both Lee's (1983) and Dubin and McFadden (1984).
7
Dahl (2002) recommends the transformation of second- or third-order polynomial
approximations for the correction term. Using a third-order polynomial function does
not change the results and hence we report the second-order (polynomial function)
results.
8
We are grateful to the referee for drawing our attention to this issue.
The results of our analysis of the risk and returns of VC investments below need to be
interpreted bearing in mind that they are only generalizable to the extent that our
methods for correcting the sample selection biases are fully valid. Unfortunately, as the
selection biases outlined above are an inherent feature of any VC dataset, the resulting
limitations are unavoidable.
 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24
3.4. Determinants of the selection equation
The determinants included in the two steps are motivated as follows:
(a) VC age: The age of the VC company is measured as the difference
between founding date and investment date. Previous studies
(Gompers, 1996; Lee & Wahal, 2004) document that the IPO
exit is an important exit method and that VCs improve their
reputations by exiting through this route. Generally, young VCs
will rush to exit through an IPO so as to gain a reputation, as
reported by Gompers (1996). Hence, the probability of an exit
of this type is influenced by the age of the VCs.
(b) Investment size: The size of the VC investment in a portfolio
company is expected to influence the decision to exit the portfolio
company. VCs tie up substantial amounts of capital in illiquid
investments in portfolio companies. The amount of capital
invested influences the expected value; hence a large invest-
ment reflects a VC's confidence in the future success of a portfolio
company. If VCs have any predictive ability, we expect the prob-
ability of a successful exit (through IPO or M&A) to increase with
investment size.
(c) Syndication allows VCs to diversify their investment risk. Syndicate
size typically increases as the portfolio company develops and its
need for VC funds increases. Giot and Schwienbacher (2007)
argue that larger syndicates facilitate successful trade-sale and
IPO exits by providing valuable contacts, connections and quality
certification. Hence, we expect VC syndicate size to increase
the probability of exit through M&A or IPO. At the same time,
larger syndicate size may also increase the probability of
liquidation. A larger syndicate has greater bargaining power
vis-à-vis the entrepreneur(s) and can exert more pressure
on the entrepreneur(s) to liquidate an unsuccessful venture
(e.g., Sharifzadeh & Walz, 2012).
(d) Company age: The age of the backed company is measured in
years from founding date to investment date. VCs invest in
young companies, and their investment decision might be
influenced by the characteristics of the backed company. For
instance, a young company with high growth opportunities
might be more attractive to VC firms than a mature company
with low growth opportunities.
(e) Market excess return (Rm − Rf) is the main variable of interest,
in that its coefficient is interpreted as a measure of systematic
risk (beta). Like all investors, VC firms are likely to benchmark
the returns of their investments against market excess returns.
According to the CAPM, VC backers will require a return that is
in direct relation to the beta of the investment and to the market
return. We use the US risk free rate for US VC firms, while for the
European VC firms we use the average risk free rate of European
countries in the sample.
We use industry and year dummies as additional control variables.
Table 2 shows the definitions of the independent variables.
4. Descriptive statistics, results and analysis
4.1. Descriptive statistics
Table 3 shows the descriptive statistics of the VC and portfolio
company characteristics by exit route. Panel A shows VC-related variables,
while Panel B shows portfolio company characteristics.
For IPO and M&A exits, we find that the mean age of the VC firms
in US–European cross-border syndicates ranges from 21 to 23 years,
with the median ranging from 17 to 20 years. For comparison, Giot
and Schwienbacher (2007) report for US-only syndicates average
ages of 28.8 and 27.6 for IPO and M&A exits, respectively. This may
in part be explained by the greater focus of our cross-border syn-
dicates on expansion-stage investments, which tend to be backed
17
Table 2
Definition of the variables.
Variables Definition and unit of measurements Data source
Early stage returns Annualized returns for the early stage rounds. VentureXpert
Expansion returns Annualized returns for the expansion stage VentureXpert
rounds
Later stage returns Annualized returns for the later stage rounds. VentureXpert
Start-up returns Annualized returns for the start-up rounds. VentureXpert
Benchmark Is the annualized returns computed from Bloomberg
returns Morgan
(market Stanley World Capital Index (MSCI). S&P 500
returns) and
MSCI Europe.
VC-age Age of venture capital firm invested in a portfolio VentureXpert
company and measured in years as the
difference
between founding date and date of investment.
FFind1–FFind12 Fama and French industry classification VentureXpert
Risk free rate Annualized risk free rate DataStream
Invest size($m) Is the amount invested by venture capital firm in VentureXpert
a given round measured in millions of dollars
Comp age Age of a portfolio company, measured (in years) VentureXpert
as the difference between the founding date and
the date of investment.
Synd (#) Is the number of venture capital firms syndicated VentureXpert
in financing a portfolio company
by less experienced VCs (Lerner, 1994). We find that approximately
45 to 46% of the investments by our cross-border syndicates are
made at the expansion stage, while start-ups attract the smallest
proportion of investments (around 11 to 12%); see also Table 4. By
contrast, previous studies on US VCs show a much smaller proportion
of expansion-stage investments and a higher proportion of early-stage
investments. For instance, Cochrane (2005) reports that early-stage
investments account for 46% of his sample, compared to 14.7% for
expansion rounds. Thus, while US VC's investments tend to cluster in
early-stage financing, our findings highlight that US–European cross-
border syndicates focus on mature investments, where the risk tends
to be lower than in the earlier stages (as we will show below).
We find that the size of US–European cross-border syndicates (at 10
members for IPOs and 8 for M&As) is around double that reported by
Giot and Schwienbacher (2007) for US-only VC syndicates (5 for IPOs
and 4 for M&As). The larger syndicate size may be related to the greater
focus of US–European cross-border syndicates on expansion-stage
investments and the younger average age of the syndicate members
(Lerner, 1994).
Interestingly, we find that syndicate size is larger for investments
that are liquidated (12 members) than for investments exited through
other routes. This may be due to the relative inexperience (low average
age) of the VCs and VC syndicates involved in investments that go on to
be liquidated. Another possible explanation may be that, in particularly
large syndicates, the costs of syndication (e.g. due to free-riding among
VC members) offset the benefits (in terms of risk sharing, etc.). Free-
riding by self-interested syndicate members may cause each individual
VC to spend too little time and effort on screening and monitoring the
portfolio companies, and this may make liquidation more likely. For a
discussion of the costs and benefits of syndication, see, e.g., Sharifzadeh
and Walz (2012).
At over 50%, the proportion of investments exited through M&As is
higher than that for all other routes. This is followed by IPOs with
around 25 to 30% of the investments. Similarly, previous studies (Giot
& Schwienbacher, 2007) document that the M&A route is the most
common exit method for VCs, followed by IPOs.
Comparing IPOs and M&As, we find that portfolio companies that are
exited through the IPO route tend to receive relatively larger investments
than those exited via M&As (the average investment sizes are $5.90 m
 18
Table 3
Descriptive statistics by exit route. The table shows the descriptive statistics for the sample (1990–2010) based on the exit method. Panel A shows VC firms' characteristics while Panel B shows the portfolio company statistics. VC-age is the age of
venture capital firm investing in a portfolio company and is measured as the difference between founding date and date of investment (in years). Invest size is the amount invested by venture capital firm in a given round ($m). Synd (#) is the number
of venture capital firms syndicated in financing a portfolio company. Comp age is the age of a portfolio company and is measured as the difference between founding date and date of investment (in years). Start-up, Early, Expansion and Later are
dummy variables taking a value of 1 for each stage and zero otherwise. The industries are dummies based on the Fama and French 12 industry classifications.

S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24

IPO exits M&A exits Un-exited Liquidation exit

Mean Median STD Max Min Mean Median STD Max Min Mean Median STD Max Min Mean Median STD Max Min

Panel A: Venture capital firms characteristics

VC-age 20.670 16.953 16.944 189.069 4.000 22.759 19.912 16.528 192.751 3.000 19.367 17.000 15.147 148.000 0.000 16.162 15.000 14.774 135.000 0.000
Invest size ($m) 5.909 2.532 16.853 620.000 0.300 4.767 2.877 6.706 334.995 0.100 2.959 2.110 2.920 30.500 0.300 2.770 2.000 2.719 30.792 1.000
Synd (#) 10 9 5 35 2 8 7 5 31 2 12 11 6 28 2 12 11 6 33 2

Panel B: Portfolio company characteristics

Comp age 8.392 6.789 8.293 24.340 1.000 9.008 7.690 6.901 20.049 1.000 10.118 9.000 7.419 19.000 2.000 5.720 5.000 3.559 21.000 1.000
Start-ups 0.125 0 0.331 1 0 0.114 0.000 0.317 1.000 0.000 0.057 0.000 0.231 1.000 0.000 0.079 0.000 0.271 1.000 0.000
Early 0.203 0 0.402 1 0 0.254 0.000 0.435 1.000 0.000 0.163 0.000 0.369 1.000 0.000 0.148 0.000 0.355 1.000 0.000
Expansion 0.454 0 0.498 1 0 0.448 0.000 0.497 1.000 0.000 0.506 1.000 0.500 1.000 0.000 0.513 1.000 0.500 1.000 0.000
Later 0.218 0 0.413 1 0 0.184 0.000 0.388 1.000 0.000 0.275 0.000 0.446 1.000 0.000 0.260 0.000 0.439 1.000 0.000
Consumer non-durable 0.010 0 0.099 1 0 0.012 0.000 0.111 1.000 0.000 0.006 0.000 0.074 1.000 0.000 0.001 0.000 0.038 1.000 0.000
Consumer durable 0.006 0 0.078 1 0 0.006 0.000 0.080 1.000 0.000 0.001 0.000 0.022 1.000 0.000 0.011 0.000 0.103 1.000 0.000
Manufacturing 0.026 0 0.159 1 0 0.018 0.000 0.135 1.000 0.000 0.022 0.000 0.146 1.000 0.000 0.017 0.000 0.129 1.000 0.000
Energy, oil & gas 0.003 0 0.056 1 0 0.002 0.000 0.042 1.000 0.000 0.000 0.000 0.016 1.000 0.000 0.000 0.000 0.000 0.000 0.000
Chemicals and allied products 0.008 0 0.090 1 0 0.003 0.000 0.054 1.000 0.000 0.001 0.000 0.036 1.000 0.000 0.003 0.000 0.053 1.000 0.000
Business equipment 0.463 0 0.499 1 0 0.655 1.000 0.475 1.000 0.000 0.490 0.000 0.500 1.000 0.000 0.558 1.000 0.497 1.000 0.000
Telecom 0.041 0 0.199 1 0 0.035 0.000 0.184 1.000 0.000 0.043 0.000 0.202 1.000 0.000 0.086 0.000 0.280 1.000 0.000
Utilities 0.002 0 0.043 1 0 0.002 0.000 0.045 1.000 0.000 0.005 0.000 0.071 1.000 0.000 0.000 0.000 0.000 0.000 0.000
Wholesale & retail 0.047 0 0.212 1 0 0.035 0.000 0.185 1.000 0.000 0.040 0.000 0.196 1.000 0.000 0.113 0.000 0.317 1.000 0.000
Healthcare 0.251 0 0.433 1 0 0.128 0.000 0.334 1.000 0.000 0.263 0.000 0.440 1.000 0.000 0.100 0.000 0.300 1.000 0.000
Money finance 0.020 0 0.139 1 0 0.019 0.000 0.137 1.000 0.000 0.010 0.000 0.098 1.000 0.000 0.018 0.000 0.132 1.000 0.000
Others 0.123 0 0.328 1 0 0.084 0.000 0.277 1.000 0.000 0.120 0.000 0.325 1.000 0.000 0.094 0.000 0.292 1.000 0.000
No of obs 6774 13,907 4032 2152
 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24 19

Table 4
Descriptive statistics by financing round. The table shows descriptive statistics for the sample (1990–2010) based on financing stage. VC-age is the age of venture capital firm investing in a
portfolio company and is measured as the difference between founding date and date of investment (in years). Invest size is the amount invested by venture capital firm in a given round
($m). Synd (#) is the number of venture capital firms syndicated in financing a portfolio company. Comp age is the age of a portfolio company and is measured as the difference between
founding date and date of investment (in years). IPO is the number of investments exited through IPO route. MA is the number of investments exited through mergers and acquisitions.
Liqu'd is the number of investments exited through liquidation. Private is the number of investments not exited by the end of the sample period. We use Fama and French 12 industry
classifications.

Variable Start-up stage Early stage Expansion stage Later stage

Mean Median STD Mean Median STD Mean Median STD Mean Median STD

VC-age (years) 21.323 18.000 15.848 22.755 20.000 17.292 20.998 18.000 16.553 20.128 17.000 15.403
Invest size ($m) 9.913 2.083 29.406 14.796 3.396 45.651 23.040 5.000 47.869 32.540 6.749 59.392
Synd (#) 8 7 5 8 6 5 9 8 5 11 10 6
Comp age (years) 7.562 6.488 7.061 7.545 6.499 5.742 9.091 7.636 7.554 9.859 8.742 7.739
IPO 0.303 0 0.460 0.236 0 0.425 0.250 0 0.433 0.261 0 0.439
MA 0.556 1 0.497 0.598 1 0.490 0.499 0 0.500 0.448 0 0.497
Liqu'd 0.060 0 0.238 0.054 0 0.226 0.088 0 0.284 0.098 0 0.297
No exit 0.081 0 0.272 0.111 0 0.314 0.163 0 0.369 0.194 0 0.395
Consumer non-durable 0.012 0 0.107 0.008 0 0.089 0.011 0 0.102 0.009 0 0.097
Consumer durable 0.003 0 0.056 0.006 0 0.079 0.007 0 0.085 0.003 0 0.058
Manufacturing 0.022 0 0.147 0.019 0 0.138 0.022 0 0.145 0.020 0 0.139
Energy, oil & gas 0.001 0 0.038 0.001 0 0.032 0.003 0 0.052 0.001 0 0.023
Chemicals and allied products 0.004 0 0.065 0.004 0 0.060 0.006 0 0.075 0.001 0 0.026
Business equipment 0.524 1 0.500 0.594 1 0.491 0.571 1 0.495 0.585 1 0.493
Telecom 0.033 0 0.180 0.040 0 0.196 0.044 0 0.204 0.044 0 0.204
Utilities 0.002 0 0.046 0.001 0 0.032 0.002 0 0.046 0.004 0 0.063
Wholesale & retail 0.045 0 0.208 0.032 0 0.176 0.050 0 0.218 0.048 0 0.213
Healthcare 0.233 0 0.423 0.178 0 0.383 0.163 0 0.370 0.178 0 0.383
Money finance 0.017 0 0.129 0.019 0 0.136 0.018 0 0.134 0.016 0 0.126
Others 0.103 0 0.303 0.097 0 0.296 0.104 0 0.306 0.091 0 0.288
No of obs 2843 5897 12,500 5625

and $4.76 m, respectively). By contrast, companies exited through IPOs
tend to be younger at the time of investment than those exited through
M&As and those not exited. Companies that are liquidated are the
youngest (at around 5–6 years on average). We find little variation in
terms of the investment stages between IPO and M&A exits.
As expected, VC investments are clustered in the business equipment
and healthcare industries, regardless of the exit route. This is consistent
with previous studies (Cochrane, 2005; Giot & Schwienbacher, 2007).
There are differences in the VC characteristics between investments
that end up being liquidated and others. The results show that liquidated
investments were backed by young VCs, and generally the portfolio
companies too were younger on average than those portfolio com-
panies in the sample that were yet to be exited. Nearly half of the
liquidated investments are from the expansion-stage round. Giot and
Schwienbacher (2007) report similar shares of liquidations between
the early and expansion stages. Interestingly, the syndicate size is
typically larger for liquidated investments than for portfolios exited via
an IPO or M&A. The association between syndicate size and liquidation
suggests that VC syndication is not necessarily good news for a portfolio
company, possibly due to free-riding by VC firms resulting in too little
VC screening and monitoring and a greater chance of liquidation.
Table 4 shows the characteristics of the VC firms and portfolio
companies by stage of financing. VC experience (as measured by the
average age of the syndicate members) is quite similar across all the
different financing stages, ranging from 21–22 years in the start-up
and early stages to 20–21 years in the expansion and later stages. This
is an interesting observation, as it has previously been found that start-
up and early-stage rounds are typically financed by experienced VCs,
while expansion or later stages are funded by less experienced ones.
For instance, Lerner (1994) finds that experienced US VCs syndicate
only with other experienced VCs in the early-stage round. By contrast,
we find that, among our US–European cross-border syndicates, the
average age of the syndicate members varies little across all the financing
stages.
Consistent with Giot and Schwienbacher (2007), we find that the
size of investment is smaller in the start-up and early stages than in
the expansion and later stages. Again, as in Giot and Schwienbacher
(2007), who report that syndicates are smaller in the start-up and
early stages than in the expansion and later stages, we find that syndicate
size rises to 11 in later stages compared to 8 in the earlier stages. On
average, portfolio companies that have received financing at the start-
up or early stage are younger than those that have received expansion
and later-stage financing.
Cochrane (2005) reports that around 9% of investments with
funding from US VCs in the early and expansion stages are liquidated.
We find a similar proportion of liquidations among investments backed
by US–European syndicates in the expansion and later stages. However,
surprisingly, we find a much lower liquidation rate of only 5 to 6% in the
start-up and early stages.
In conclusion, our preliminary analysis identifies a number of
interesting similarities and differences between US VCs and US–
European cross-border syndicates.
4.2. Results and analysis
Table 5 provides information on the average annualized returns for
VC investments (without correcting for any sample selection biases)
exited through IPOs and M&As. The IPO figures in Panel A are calculated
so as to account for gradual post-IPO exit by the VC (as outlined in Data
and methodology Section 3.2 above) by basing returns on a weighted
average of the IPO offer price and aftermarket prices. The returns on
the stock indices shown in Table 5 are calculated based on staggered
holding periods to match the calculation of the returns on investments
exited (gradually) through and after IPOs. Panel B shows the returns for
investments exited through the M&A route. While Table 5 reports only
the returns on investments exited through IPOs or M&As, it is reasonable
to assume that the corresponding returns on the 2152 investments in our
sample that were exited by liquidation are −100% in each case.10
10
While we do not report a return averaged across all exit routes, such an estimate
would have to take into account the number of and returns on liquidations.
20 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24

Table 5 the Dahl model (outlined in Section 3.3).12 Following Cochrane (2005),
IPO/MA annualized returns. The table shows mean, median, standard deviation, maximum we deal with the issue of return skewness, noted above, by calculating
and minimum values of venture capital returns exited through IPO and M&A exits. Returns
are annualized and computed over the period 1990 through 2010 using a weighted
logarithmic returns.
average of IPO and aftermarket prices. The rows entitled ‘Start-up stage’, ‘Early stage’, It is evident from the table that in many exit years the uncorrected
‘Expansion stage’ and ‘Later stage’ show returns for the respective financing stages. returns are higher than the corrected returns. These differences are
‘MSCI World’ is the annualized MSCI world index returns. ‘MSCI Europe’ is the annualized often statistically significant at 5% or higher. VC's returns are positive
MSCI Europe index returns. ‘S&P 500’ is the annualized S&P 500 composite returns. ‘Risk
in the vast majority of exit years and financing rounds. However, the
free’ is the annualized risk-free rate for US and Europe, respectively.
returns are particularly high in the bubble year of 1999. After the
Mean Median STD Max Min credit crisis in 2007–8, returns for the expansion and later stages
Panel A: Annualized returns for IPO exits (corrected for gradual VC exit post-IPO) fell dramatically by around 80% from their average levels in 2006.
Start-up stage 2.532 0.402 7.554 31.148 −0.959 While returns did not decline as much for those investments made in
Early stage 1.632 0.301 6.253 27.597 −0.967 the earlier stages, exit activity declined. In fact, no IPO exits occurred
Expansion stage 1.228 0.146 4.533 24.947 −0.977
for start-up investments during 2008–9.
Later stage 0.987 0.114 3.531 21.871 −0.927
MSCI world 0.116 0.104 0.091 0.311 −0.119 As Table 6 shows, adjusting for selection bias has a major impact on
MSCI Europe 0.121 0.114 0.131 0.398 −0.162 reported returns. From this we conclude that it is important to control
S&P 500 0.141 0.122 0.110 0.370 −0.098 for selection bias when estimating the risk-return trade-off.13 As outlined
FTSE all shares 0.105 0.091 0.108 0.322 −0.134
in Section 3.3, we control for exit-route selection bias using Dahl's (2002)
Risk free rate (US) 0.045 0.049 0.017 0.059 0.000
Risk free rate (Europe) 0.061 0.055 0.019 0.147 0.033 two-stage model. This involves a multinomial logit model in the first
No of obs 6774 stage, predicting the chosen exit route, and in the second stage, a linear
regression of excess return on the VC investment on the market risk
Panel B: Annualized returns for M&A exits
Start-up stage 1.315 0.282 3.241 19.287 −0.921
premium (proxied by the excess return on the S&P 500 index). We
Early stage 1.091 0.228 3.016 18.166 −0.912 calculate both VC and benchmark returns taking into account the fact
Expansion stage 0.669 0.052 2.629 16.194 −0.879 that VCs do not sell all of their holdings at the time of the IPO
Later stage 0.563 0.008 2.428 15.188 −0.795 (i.e. correcting returns for gradual VC exit). Table 7 shows the
MSCI world 0.037 0.045 0.109 0.236 −0.223
estimated parameters of this model. As expected, we find clear evidence
MSCI Europe 0.058 0.071 0.135 0.336 −0.235
S&P 500 0.045 0.042 0.117 0.293 −0.211 of selection bias, as shown by the statistical significance of the estimated
FTSE all shares 0.041 0.047 0.108 0.263 −0.223 selection-bias parameters, λ(P1) and λ(P2).
Risk free rate (US) 0.030 0.033 0.019 0.080 0.000 We find that returns on investments in all stages are positively
Risk free rate (Europe) 0.053 0.055 0.011 0.146 0.033
related to the market benchmark (i.e. they have positive betas that are
No of obs 13,907
statistically significant at 5% or above). As is to be expected, start-up
and early-stage investments have higher systematic risk (higher betas)
than expansion and later-stage investments. The start-up and early-
stage betas of 1.316 and 1.122, respectively, mean that returns on invest-
Comparing Panels A and B, we find that IPO returns are higher than ments made in these stages are expected to change by 1.31 and 1.12%,
M&A returns in each of the four financing stages. This is consistent with respectively, for every one-percent change in the market benchmark
prior studies that document that IPOs are the preferred and most (S&P 500). The betas for expansion and later-stage investments are
profitable form of exit (e.g., Black & Gilson, 1998). 1.079 and 0.797, respectively.
For both IPO and M&A exits, the table shows that expansion and For comparison, Cochrane (2005) reports betas of 1.1 for start-up
later-stage returns are on average lower than start-up and early-stage investments, 0.9 for early-stage, 0.7 for expansion and 0.5 for later-
returns, based on both means and medians returns.11 On invest- stage investments. Both Cochrane's and our results demonstrate that
ments exited through an IPO, VC firms earn median returns of VC investors are exposed to higher systematic risk in earlier stages of
40.2% on investments in the start-up stage, 30.1% in the early stage, financing, and that systematic risk (beta) declines continually, the
14.6% in the expansion stage, and 11.4% in the later stages. The later the stage of investment.
cross-sectional standard deviations (which can be interpreted as This may be due to the difficulty of selling a portfolio company in its
total risk) corresponding to these stage are 755%, 625%, 453% and early phase of development. Previous studies have suggested that the
353%, respectively. higher returns in earlier stages are required to attract and compensate
The corresponding median returns (standard deviations) for the the more experienced VC firms that are more likely than less experienced
M&A exits are 28.2 (324)% in the start-up stage, 22.8 (301)% for the VCs to invest in these riskier stages. In line with Cochrane (2005), we find
early stage, 5.2 (262)% for the expansion stage, and 0.8 (242)% for the higher risk and returns in earlier stages, but we find little variation in the
later stages. level of experience of US–European cross-border syndicates across
For both IPO and M&A exits, total risk decreases significantly from financing stages (see Table 4).
the start-up to the later stages of financing. This is to be expected as Abnormal performance, as measured by the coefficient of the constant
portfolio companies mature from earlier to later stages (see Table 4), in our second-stage regression, is shown in Panel B of Table 7. This
reducing the level of risk and thus the expected return. measure is the so-called alpha. We estimate alpha as 41.6%, 35.2%,
As noted above, the returns shown in Table 5 are not corrected for 28.1%, and 23.5% for the start-up, early, expansion and later stages,
sample selection bias. Table 6 examines the impact of controlling for respectively. Similar to beta, we find alpha to decline monotonically, the
exit-route selection bias on returns. By year of (IPO) exit, it shows the later the financing stage. This is comparable to Cochrane, who reports
VC returns on investments exited through an IPO with and without alphas of 71% for start-up, 65% for early, 60% for expansion, and 50% for
correction for sample selection bias. The returns are corrected using later-stage investments.

11
The following discussion focuses on median returns. A large difference between mean
and median values suggests that returns are skewed and driven by a few investments with
very high returns. Skewness is to be expected for VC investments, where a few deals
typically provide very high returns to compensate for large numbers of unsuccessful and
liquidated investments. We thank the anonymous referee for highlighting this issue.
12
The Dahl method (similar to the method used by Cochrane) gives us estimates of the
mean of the (logarithmic) return. For comparison, we focus similarly on the means (rather
than the medians) of the uncorrected returns.
13
In interpreting the figures in Table 6, it is important to bear in mind that they may still
provide a biased estimate of the typical return on a VC investment. The returns reported
here are only representative to the extent that our correction for sample selection bias is
valid.
Table 6
Venture capital returns corrected for (exit-route) sample-selection bias. The table shows the descriptive statistics of annualized log returns for the Start-up stage, Early, Expansion and Later stage round based on the subsample of investments exited
through an IPO. The statistics are tabulated by the year of IPO. We report both corrected and uncorrected returns for sample selection bias. The corrected returns for sample selection bias are estimated using Dahl (2002) semi-parametric
method. T-test shows if the difference in means between corrected and un-corrected returns is statistically significant.

S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24

Start-up returns Early stage returns Expansion stage returns Later stage returns

Un-corrected Corrected Un-corrected Corrected Un-corrected Corrected Un-corrected Corrected

IPO-year Mean Std Mean STD T-test Mean Std Mean STD T-test Mean Std Mean STD T-test Mean Std Mean STD T-test

1990 −0.834 1.081 −0.250 0.893 −3.623 0.204 0.575 0.281 0.620 −0.789 −0.295 1.005 0.261 0.564 −4.334 0.169 0.235 0.253 0.383 −1.656
1991 0.046 0.098 0.452 0.899 −4.988 0.570 0.750 0.582 0.725 −0.100 0.023 0.090 0.298 0.200 −11.611 0.457 0.375 0.326 0.261 2.522
1992 −0.344 0.910 −0.404 0.682 0.457 0.273 0.593 0.415 0.391 −1.767 −0.010 0.080 0.029 0.059 −3.352 0.328 0.417 0.378 0.307 −0.856
1993 0.083 0.998 0.453 0.748 −2.601 0.326 0.443 0.366 0.482 −0.539 0.037 0.779 0.157 0.051 −1.771 0.387 0.524 0.278 0.259 1.705
1994 −0.175 1.088 −0.483 0.705 2.101 0.274 0.581 0.326 0.718 −0.492 0.158 0.225 0.130 0.217 0.769 0.480 0.457 0.349 0.304 2.107
1995 0.496 0.921 0.436 0.692 0.455 0.482 0.623 0.480 0.643 0.021 0.420 0.795 0.518 0.750 −0.783 0.434 0.330 0.574 0.228 −3.074
1996 0.293 0.952 0.577 0.881 −1.898 0.625 0.737 0.640 0.134 −0.218 0.213 0.839 0.521 0.538 −2.734 0.402 0.727 0.484 0.401 −0.892
1997 0.111 0.905 0.645 0.678 −4.131 0.547 0.720 0.623 0.438 −0.798 0.420 0.576 0.707 0.636 −2.905 0.320 0.582 0.382 0.268 −0.897
1998 0.709 0.796 0.788 0.979 −0.544 0.895 0.962 0.836 0.665 0.443 0.602 0.784 0.749 0.679 −1.236 – – – – –
1999 0.895 1.031 1.010 1.076 −0.671 1.175 0.859 1.113 0.774 0.466 1.084 1.161 1.001 1.278 0.418 0.692 0.722 0.705 0.823 −0.106
2000 0.299 0.458 0.649 0.836 −3.319 0.242 0.864 0.716 0.637 −3.868 0.258 0.531 0.169 0.201 1.487 0.220 0.379 0.125 0.157 2.160
2001 0.137 0.342 0.840 0.700 −8.269 0.573 0.854 0.770 0.689 −1.568 0.004 0.009 0.037 0.091 −3.946 0.292 0.611 0.376 0.317 −1.113
2002 −0.323 0.731 −0.355 0.548 0.308 0.213 0.120 0.451 0.767 −3.280 −0.128 0.258 −0.119 0.172 −0.253 0.023 0.061 0.047 0.040 −2.823
2003 0.337 0.870 0.674 0.653 −2.705 0.451 0.391 0.426 0.230 0.482 0.263 0.305 0.438 0.240 −3.941 0.215 0.302 0.301 0.196 −2.100
2004 0.218 0.685 0.519 0.403 −3.399 0.503 0.369 0.527 0.305 −0.444 0.302 0.523 0.458 0.430 −2.013 0.264 0.245 0.402 0.245 −3.436
2005 0.186 0.782 0.453 0.586 −2.391 0.463 0.498 0.491 0.401 −0.371 0.100 0.173 0.288 0.393 −4.051 0.044 0.052 0.179 0.126 −9.238
2006 0.218 0.670 0.405 0.502 −1.958 0.370 0.374 0.396 0.282 −0.488 0.263 0.522 0.422 0.290 −2.400 0.209 0.209 0.423 0.299 −5.151
2007 0.003 0.094 0.436 0.234 −16.154 0.107 0.089 0.046 0.039 5.827 0.256 0.495 0.496 0.399 −3.286 0.261 0.346 0.424 0.105 −4.448
2008 – – – – – 0.053 0.373 0.228 0.304 −3.156 0.038 0.168 0.126 0.106 −3.952 0.051 0.038 0.045 0.073 0.660
2009 – – – – – 0.057 0.166 0.239 0.133 −7.465 0.043 0.375 0.047 1.915 −0.023 0.062 0.075 0.056 0.060 0.583
2010 0.388 0.351 0.449 0.753 −0.677 0.068 0.211 0.233 0.101 −6.486 0.066 0.051 0.090 0.077 −2.283 0.033 0.046 0.062 0.095 −2.516
No of obs 858 1389 3068 1459

21
22 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24

Table 7
Risk-return estimation allowing for gradual post-IPO disinvestment by VCs. The estimation of Stage 1 in Panel A uses the full sample, while Stage 2 in Panel B uses only investments exited
through IPOs. Returns in Panel B are based on a weighted average of the IPO offer price and post-IPO market prices, as described in Section 3.2. The coefficients are estimated using Dahl's
(2002) semi-parametric method. We use clustered standard errors as opposed to robust standard errors allowing for cross sectional dependence of the returns. Market is the excess market
returns using MSCI Europe and S&P 500. The correction terms in the Dahl (2002) model are transformed using first and second order polynomial approximations. *** Significant at 1%, **
significant at 5% and * significant at 10%.

Panel A: Stage I selection equation

Variables IPO exits M&A exits Liquidation exits

Coeff Odds Coeff Odds Coeff Odds

VC-age 0.032*** 1.033 0.040*** 1.041 −0.007*** 0.993

Invest size 0.014*** 1.014 −0.015*** 0.985 −0.004 0.996
Synd 0.058*** 1.060 0.020*** 1.020 0.023*** 1.023
Comp-age 0.008** 1.008 −0.024*** 0.976 −0.256*** 0.774
Start-up −0.672*** 0.511 −1.144*** 0.319 0.266** 1.305
Early −0.609*** 0.544 −0.441*** 0.643 −0.388*** 0.678
Expansion −0.220*** 0.803 −0.171*** 0.843 0.105** 1.111
Cons 3.866*** 4.035*** 1.041 1.859*** 6.417
Industry & year Yes Yes Yes
Pseudo R2 0.317
No of obs 26,865

Panel B: Stage II outcome equation

Variables Start-up Early stage Expansion stage Later stage

Coeff P-values Coeff P-values Coeff P-values Coeff P-values

Constant 0.416*** 0.000 0.352*** 0.000 0.281** 0.028 0.235*** 0.004

Market 1.316*** 0.000 1.122*** 0.000 1.079*** 0.000 0.797** 0.033
λ(P1) −0.688* 0.089 −0.461** 0.430 −0.421* 0.096 −0.368* 0.086
λ(P2) 0.326 0.257 0.257* 0.085 0.068 0.897 0.189 0.272
Industry Yes Yes Yes Yes
Year Yes Yes Yes Yes
R2 0.161 0.221 0.181 0.137
No of obs 858 1389 3068 1459

To address the dynamic selection bias that is due to the endogenous We find clear evidence of sample selection bias, as evidenced by the
timing of VC exits, we use a Heckman-type two-stage model (outlined statistical significance of the coefficient of the selectivity parameter (the
in Section 3.3), where the selection equation is estimated using a Cox inverse Mill's ratio), in all stages except the start-up stage. Taking account
(1972) duration model. Table 8 shows the results. of the bias, we find results on the risk and returns of VC investments that

Table 8
Cox estimation model. As in Table 7, the estimation of Stage 1 in Panel A uses the full sample, while Stage 2 in Panel B uses only investments exited through IPOs; returns in Panel B are
based on a weighted average of the IPO offer price and post-IPO market prices, as described in Section 3.2. The coefficients are estimated using Heckman with Cox model (proportional
hazard). We use clustered standard errors as opposed to robust standard errors allowing for cross sectional dependence of the returns. Market is the excess market returns using MSCI
Europe and S&P 500. *** Significant at 1%, ** significant at 5% and * significant at 10%.

Panel A: Stage I selection equation

Variable Coeff Hazard ratio

VC-age 0.008*** 1.008

Invest-size 0.005*** 1.005
Synd 0.005*** 1.005
Comp-age 0.086*** 1.090
Start-up −0.357*** 0.700
Early −0.662*** 0.516
Expansion −0.377** 0.686
Industry & year Yes
Pseudo R2 0.387
No of obs 26,865

Panel B: Stage II outcome equation

Variables Start-up Early stage Expansion stage Later stage

Coeff P-values Coeff P-values Coeff P-values Coeff P-values

Constant 0.457*** 0.000 0.418*** 0.000 0.273** 0.028 0.212*** 0.004

Market 1.403*** 0.000 1.2143*** 0.000 1.102*** 0.000 0.868** 0.033
Inv. mills 0.031 0.563 −0.297*** 0.000 −0.419*** 0.000 0.235*** 0.000
Industry Yes Yes Yes Yes
Year Yes Yes Yes Yes
R2 0.163 0.224 0.189 0.141
No of obs 858 1389 3068 1459
 S. Espenlaub et al. / International Review of Financial Analysis 31 (2014) 13–24 23

are remarkably robust. The results for alpha (abnormal performance) and
Mean Median STD Max Min
beta (systematic risk) adjusted for dynamic selection bias (in Table 8) are
Panel A: Annualized returns for 100% IPO exits
remarkably similar to those adjusted for exit-route selection bias
Start-up stage 2.056 0.544 9.139 51.267 −0.901
(in Table 7). While the start-up and early stages have higher alphas in Early stage 3.058 0.596 11.156 57.267 −0.910
the dynamic selection model than in the exit-route selection Expansion stage 4.594 0.367 16.017 61.267 −0.951
model (46 and 42% compared to 42 and 35%, respectively), the Later stage 6.338 0.491 18.772 77.267 −0.931
reverse holds for the expansion and later stages (27 and 21% MSCI world 0.101 0.093 0.088 0.296 −0.118
MSCI Europe 0.101 0.099 0.120 0.385 −0.157
compared to 28 and 24%, respectively). Nevertheless, both models
S&P 500 0.122 0.116 0.101 0.360 −0.093
indicate clearly that abnormal performance is lower, the later the FTSE all shares 0.081 0.090 0.092 0.305 −0.122
stage of financing. Risk free rate (US) 0.043 0.048 0.016 0.079 0.000
In terms of the systematic risk, measured by beta, we similarly Risk free rate (Europe) 0.061 0.055 0.019 0.147 0.033
No of obs 6774
find that both selection models show beta to drop continually from
the start-up stage to the later stage. The estimated betas are between Panel B: Annualized returns for post-IPO exits at the end of the IPO lock-up period
3 and 10% higher in the dynamic selection model than in the exit- Start-up stage 2.367 0.376 7.063 29.123 −0.897
route (Dahl) selection model. The beta for the start-up stage is Early stage 1.611 0.297 6.173 27.244 −0.955
Expansion stage 1.192 0.142 4.402 24.224 −0.949
1.316 in the exit-route model compared to 1.403 in the dynamic Later stage 0.965 0.111 3.453 21.390 −0.907
selection model. The later-stage beta is around 40% lower than the MSCI world 0.115 0.103 0.090 0.307 −0.118
start-up beta, at 0.797 in the exit route model and 0.868 in the MSCI Europe 0.119 0.112 0.129 0.391 −0.159
dynamic selection model. S&P 500 0.140 0.121 0.109 0.367 −0.097
FTSE all shares 0.104 0.090 0.107 0.319 −0.133
Risk free rate (US) 0.045 0.049 0.017 0.058 0.000
5. Conclusion Risk free rate (Europe) 0.060 0.054 0.019 0.144 0.032
No of obs 6774
This study examines exit choices and the risk and returns of invest-
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