Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital
Abstract"Managing the different companies in which they invest while at the same time performing portfolio optimization for themselves, venture capitalists position themselves as a pure-play or diversified conglomerate through their cumulative portfolios. I examine the effects of two investment strategies of venture capitalists:" 1) "a specialist "pure-play" strategy that maximizes venture capital involvement and" 2) "a more generalist strategy of diversification at the "firm" level that minimizes portfolio risk. I find that neither strategy optimizes both venture capital growth and time to entrepreneurial exit, which highlights a need for institutional investors to clarify fund objectives at the time a fund is established." Copyright (c) 2009 Financial Management Association International.
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Bibliographic InfoArticle provided by Financial Management Association International in its journal Financial Management.
Volume (Year): 38 (2009)
Issue (Month): 3 (09)
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- Cumming, Douglas & Dai, Na, 2011. "Fund size, limited attention and valuation of venture capital backed firms," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 2-15, January.
- André Gygax & Anna Griffiths, 2007. "Do venture capitalists imitate portfolio size?," Financial Markets and Portfolio Management, Springer, vol. 21(1), pages 69-94, March.
- Humphery-Jenner, M., 2011. "Diversification in Private Equity Funds: On Knowledge-sharing, Risk-aversion and Limited-attention," Discussion Paper 2011-046, Tilburg University, Center for Economic Research.
- Obrimah, Oghenovo A. & Prakash, Puneet, 2010. "Performance reversals and attitudes towards risk in the venture capital (VC) market," Journal of Economics and Business, Elsevier, vol. 62(6), pages 537-561, November.
- Shawky, Hany A. & Dai, Na & Cumming, Douglas, 2012. "Diversification in the hedge fund industry," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 166-178.
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