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Do venture capitalists imitate portfolio size?

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  • André Gygax

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  • Anna Griffiths

    ()

Abstract

Venture capitalists face the challenge of determining how many entrepreneurial ventures they should invest in. Kanniainen and Keuschnigg (J Corp Finance 9:521–534, 2003) develop a theoretical model based on economic factors that shows how a venture capital fund should set its portfolio size in order to achieve optimal returns. Determining the required economic inputs to this model is difficult in practice however, given the informational asymmetries, uncertainties and ambiguities present in the decision-making environment of venture capitalists. Hence, we contend that general partners of venture capital funds also use their prior venture capital fund management experience, which we refer to as social capital, to overcome the difficulties they face in solving the above optimization problem. Our results support our hypotheses that portfolio size is explained by the interplay of economic and social factors. Copyright Swiss Society for Financial Market Research 2007

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Bibliographic Info

Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 21 (2007)
Issue (Month): 1 (March)
Pages: 69-94

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Handle: RePEc:kap:fmktpm:v:21:y:2007:i:1:p:69-94

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Web page: http://www.springerlink.com/link.asp?id=119763

Related research

Keywords: Venture capital; Portfolio size; Venture capital fund interlocks; G32; M13;

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References

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  1. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, vol. 23(3), Fall.
  2. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  3. Kanniainen, Vesa & Keuschnigg, Christian, 2003. "The optimal portfolio of start-up firms in venture capital finance," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 521-534, November.
  4. Svenja C. Sommer & Christoph H. Loch, 2004. "Selectionism and Learning in Projects with Complexity and Unforeseeable Uncertainty," Management Science, INFORMS, vol. 50(10), pages 1334-1347, October.
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  7. April Knill, 2009. "Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital," Financial Management, Financial Management Association International, vol. 38(3), pages 441-486, 09.
  8. Enrico Giorgi & Thorsten Hens, 2006. "Making prospect theory fit for finance," Financial Markets and Portfolio Management, Springer, vol. 20(3), pages 339-360, September.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  10. Josh Lerner, 2002. "Boom and bust in the venture capital industry and the impact on innovation," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 25-39.
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  12. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January.
  13. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
  14. Christoph H. Loch & Stylianos Kavadias, 2002. "Dynamic Portfolio Selection of NPD Programs Using Marginal Returns," Management Science, INFORMS, vol. 48(10), pages 1227-1241, October.
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  16. Lerner, Joshua, 1994. "Venture capitalists and the decision to go public," Journal of Financial Economics, Elsevier, vol. 35(3), pages 293-316, June.
  17. Douglas Cumming & Sofia Johan, 2007. "Advice and monitoring in venture finance," Financial Markets and Portfolio Management, Springer, vol. 21(1), pages 3-43, March.
  18. Douglas J. Cumming, 2006. "The Determinants of Venture Capital Portfolio Size: Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1083-1126, May.
  19. Sapienza, Harry J., 1992. "When do venture capitalists add value?," Journal of Business Venturing, Elsevier, vol. 7(1), pages 9-27, January.
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  21. Rainer Lauterbach & Isabell Welpe & Jan Fertig, 2007. "Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments," Financial Markets and Portfolio Management, Springer, vol. 21(1), pages 45-67, March.
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Citations

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Cited by:
  1. Douglas Cumming & Sofia Johan, 2007. "Advice and monitoring in venture finance," Financial Markets and Portfolio Management, Springer, vol. 21(1), pages 3-43, March.
  2. Rainer Lauterbach & Isabell Welpe & Jan Fertig, 2007. "Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments," Financial Markets and Portfolio Management, Springer, vol. 21(1), pages 45-67, March.
  3. Armin Schwienbacher, 2008. "Venture capital investment practices in Europe and the United States," Financial Markets and Portfolio Management, Springer, vol. 22(3), pages 195-217, September.
  4. Michael D. McKenzie & William H. Janeway, 2011. "Venture capital funds and the public equity market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(3), pages 764-786, 09.

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