The Opportunity Cost of Venture Capital

Abstract

Using a new set of risk benchmarks, we estimate the opportunity cost of equity capital for entrepreneurs, limited partners and general partners of venture capital funds. The figures we obtain turn out to be well below the internal rates of return (IRRs) customarily targeted in the private equity industry. Those venture capitalists who keep employing target IRRs to discount cash flows may thus be risking a free fall into a loser’s curse — the systematic bypassing of potentially profitable investments deals.