Revisiting the Risk-Return Relationship in Venture Capital: Market Cycles, Investor Heterogeneity and Regional Environments

Christian Hermann Hennings

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: Venture capital (VC) plays a central role in financing entrepreneurial ventures. Despite its importance, the relationship between risk and return remains difficult to explain by standard financial theory. Standard asset pricing theory conceptualizes risk as an ex-ante, observable characteristic that is compensated by expected returns through a stable, separable relationship. However, in VC markets illiquidity, staged financing, information asymmetries, and highly skewed payoff distributions violate these assumptions. Risk and return are jointly determined by financing dynamics, investor heterogeneity, and market conditions, so that realized returns reflect a combination of technological, financing, timing, and macroeconomic risks. This dissertation advances the argument that the risk-return relationship in VC is not a stable trade-off but varies systematically with financing conditions and investor composition. The seven empirical chapters collectively examine how staged financing, capital supply dynamics, and regional and organizational heterogeneity across investor types influence observed performance patterns. The findings show that risk and return in VC are shaped by market conditions, investor structure, and regional environments. Expansionary periods increase venture survival and delay the realization of downside risk. In contrast, contractionary periods reduce capital supply and accelerate selection. Consequently, identical underlying venture risk may result in different observed performance outcomes, depending on the prevailing market regime, the type of investor providing capital, and the institutional and financial depth of the regional ecosystem. Differences in investor resources, organizational form, and regional institutional frameworks systematically affect funding continuity, exit timing, and the distribution of realized returns. Overall, this dissertation contributes a unified framework that integrates insights from asset pricing, entrepreneurial finance, behavioral finance, and macro finance. It demonstrates that deviations from classical risk-return logic in VC arise systematically from the interaction of staged financing, investor heterogeneity, and regime-dependent capital supply, implying that observed performance patterns reflect structural market dynamics rather than stable risk premia.

Date: 2026-08-27
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