This paper examines the return on recent venture capital (VC) investment and its impact on the long‐run stock market performance of initial public offerings (IPOs). Firms with higher return on recent VC investment underperform firms with lower return on recent VC investment by 32 to 43% in the 3‐year period following the offer. This effect is robust to various risk‐adjustment procedures. Market conditions at the time of the VC valuation and changes in these market conditions thereafter are the main drivers of this result, suggesting that investors are too optimistic or do not properly understand the informational content of the recent return on VC investment.