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Profit Milestones and Changing Risks and Expected Returns of Venture Capital Projects: An Empirical Exploration Using Comparable Companies

We use a sample of 218 Nasdaq companies with negative earning at the time of IPO as comparables to estimate the changes in risk profiles of venture capital (VC) projects for three development stages defined by post IPO profit milestones. Our results show that there were significant declines in the average specific risks as companies move sequentially to stable earning stages. When total risks need to be compensated, the expected rates of returns would also decline due mainly to declines in the specific risks. These results reconcile well with those drawn from perception based surveys of VC practitioners.