Metrics & Performance
Risk-Adjusted Return
Return on investment measured relative to the risk taken — a 3x return in venture capital represents a different risk-adjusted return than a 3x return in bonds.
Risk-adjusted return is a framework for comparing investment returns that accounts for the risk required to generate those returns. In venture capital, investors accept extremely high risk (most investments fail) in exchange for the possibility of exceptional returns (10-100x winners). A 3x return on a VC investment (where the company could have gone to zero) represents a very different risk-adjusted outcome than a 3x return on a Treasury bond. Common risk-adjusted metrics: Sharpe ratio (return per unit of volatility), IRR vs. benchmarks, and PME (Public Market Equivalent — how VC returns compare to the S&P 500 over the same period). Top-quartile VC funds generate returns that justify the illiquidity and risk premium relative to public market alternatives.