The Beta of Startup Financing

Goals

To determine if there are studies that show what the beta or average return is for startup investing in the early stages (thus Seed, Series A and Series B) in the US.


Early Findings

AVERAGE RETURN
  • According to industry ventures, the early stage venture returns for start-up firms is 64.8% for startups with a gross realized multiple range of 0-1.0.
  • The return is 25.3% for startups with a gross realized multiple range of 1.0-5.0x.
  • The return is 5.9% for startups with a gross realized multiple range of 5.0-10.0x and further decreases to 0.4% for startups with a multiple range of 50.0x.

BETA COEFFICIENT CAPITAL ASSET PRICING MODEL (CAPM)
The studies that were found through initial research are predominantly from older sources and often show results of the beta coefficient for European startups.
  • In Europe, the beta coefficient for startups range from 2.6 to 14.1.
  • According to a study by Cochrane (2005), the "systematic risk for startup investments declines on a round-by-round basis (average beta of .6)". Studies from Korteweg and Sorensen (2010) show an average beta of 2.8. "Hwang, Quigley, and Woodward (2005) point out that Cochrane (2005) relies on a subset of their data and also estimate a beta of less than 1.0."
  • A study on "Volatility and Venture Capital" shows that the market beta of VC is a small 0.47 and that "the VC industry delivers a quarterly alpha of 2.58 percentage points." The problem with this result, is that "the returns to VC as reported by Cambridge Associates are related both to contemporaneous and lagged market returns because of return smoothing and asynchronous prices."

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