Q. Why build an index of venture capital?
To measure return and risk for venture capital. Without unbiased measures of return, investors in venture capital and private equity will not be able to measure risk or performance or thus determine appropriate shares of these assets for their portfolios.
Q. How can the index be used?
For limited partners in venture funds, the index can be used to compare the risk and return for their own portfolios to those of venture capital overall, and to mark-to-market the value of their venture fund holdings. General partners in venture funds can use the index to evaluate the performance of their individual funds, including analysis by region, funding stage, industry sector and vintage year.
Q. Why haven't we seen an index like this before?
To create a true index of venture capital required solving several problems and developing new econometric techniques, requiring expertise from several fields of economics, including finance and econometrics, and filling in some substantial holes in venture data. To learn more about how the index is constructed, please see the Index Construction page.
Q. What questions can the index answer?
What are the gross returns to venture capital? What is the risk of venture capital? How much of the risk in venture capital is diversifiable? What is the correlation of venture returns with market returns? Indexes for subsets of venture capital (such as software, hardware, biotech, and retail) can answer industry-specific versions of these questions.
Q. Where does the data come from?
We use the Dow Jones VentureSource database together with some proprietary data from Sand Hill Econometrics. For more detail, please see About Our Data.
Q. What about alternative asset classes other than venture capital?
Given an individual investor’s historical quarterly (or for hedge funds, monthly) returns, we can measure risk for any class of alternative investments. Building an index is also theoretically possible, but requires deal-level detail that is the universe of deals (what we have for venture capital) or at least a random sample. So far, we have sufficient data for building an index only for venture capital.
Q. What about the rest of the world?
We can see the time when it might be feasible to add Canada and Israel to a version of the index. For the rest of the world, getting either representative data or the universe of data is much more difficult.
Q. Does the Index keep companies in until their lock-up expires?
No. Our philosophy is that public companies are already well-followed by all sorts of indexes. Thus, when a company goes public, it leaves our index. Nonetheless, for the determined customer, we can create an index that keeps each company in the index for 6 months after its IPO. It should be no surprise that such an index looks a little more like the public markets than does the index for pure venture capital.
Q. Is this an index of market value?
Not quite. The index is built like the Dow Jones Total Stock Market Index and the S&P500, to reflect changes in market value that come from changes in price, and only from changes in price, but not from capital inflows and outflows. For example, when there is a new round of funding and new money is invested in venture-funded company, market value will rise even if there is no per share change in the value of the company. Or when there is a big exit, such as Google goes public, there would be a big outflow and the market value of venture-funded companies would fall because Google is now public, not venture any more.
One goal of index construction is to not confuse inflows and outflows with returns. The index shows what an investor would get if she invested in every venture-funded company in proportion to its value, and then re-invested all money from acquisitions or IPOs in the remaining companies.
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