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Venture Capital Investment Strategy and Portfolio Failure Rate: A Longitudinal Study

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  • Dimo Dimov
  • Dirk De Clercq

Abstract

Given the importance and prevalence of new venture failure, having a better understanding of the factors that affect its occurrence is a paramount research objective. In view of the increased focus on venture capital firms (VCFs) as important stakeholders for entrepreneurial ventures, in this study we examined the relationship between VCFs’ investment strategies and their portfolio failure rates. We examined two aspects of a VCF's investment strategy: (1) the extent to which the VCF develops specialized expertise and (2) the extent to which the VCF undertakes investments in cooperation with other investors through syndication. We tested our hypotheses on longitudinal data of the realized strategies of 200 U.S.–based VCFs over a 12–year period. We found that a VCF's specialized development stage expertise had a negative effect on the proportion of defaults in the VCF's portfolio. We also found that the level of syndication positively—rather than negatively—affected the proportion of defaults. We discuss our findings from both theoretical and practical points of view.

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  • Dimo Dimov & Dirk De Clercq, 2006. "Venture Capital Investment Strategy and Portfolio Failure Rate: A Longitudinal Study," Entrepreneurship Theory and Practice, , vol. 30(2), pages 207-223, March.
    • Handle: RePEc:sae:entthe:v:30:y:2006:i:2:p:207-223
    DOI: 10.1111/j.1540-6520.2006.00118.x
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    3. Antretter, Torben & Sirén, Charlotta & Grichnik, Dietmar & Wincent, Joakim, 2020. "Should business angels diversify their investment portfolios to achieve higher performance? The role of knowledge access through co-investment networks," Journal of Business Venturing, Elsevier, vol. 35(5).
    4. Hull, Tyler J., 2021. "The effect of venture capitalists straying from their industry comfort zones," Journal of Business Venturing Insights, Elsevier, vol. 16(C).
    5. Uparna, Jayaram & Bingham, Chris, 2022. "Breaking “Bad”: Negativity’s benefit for entrepreneurial funding," Journal of Business Research, Elsevier, vol. 139(C), pages 1353-1365.
    6. Rose, Julia & Kirchler, Michael & Palan, Stefan, 2023. "Status and reputation nudging," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 105(C).
    7. Stephanie A. Fernhaber & Patricia P. McDougall-Covin, 2009. "Venture Capitalists as Catalysts to New Venture Internationalization: The Impact of Their Knowledge and Reputation Resources," Entrepreneurship Theory and Practice, , vol. 33(1), pages 277-295, January.
    8. Thomas, V.J. & Bliemel, Martin & Shippam, Cynthia & Maine, Elicia, 2020. "Endowing university spin-offs pre-formation: Entrepreneurial capabilities for scientist-entrepreneurs," Technovation, Elsevier, vol. 96.
    9. Humphery-Jenner, M., 2011. "Diversification in Private Equity Funds : On Knowledge-sharing, Risk-aversion and Limited-attention," Other publications TiSEM 3e22d8a9-6846-484f-a09e-7, Tilburg University, School of Economics and Management.
    10. Eric Braune & Jean-Sébastien Lantz & Jean-Michel Sahut & Frédéric Teulon, 2021. "Corporate venture capital in the IT sector and relationships in VC syndication networks," Small Business Economics, Springer, vol. 56(3), pages 1221-1233, February.
    11. Carolin Bock & Maximilian Schmidt, 2015. "Should I stay, or should I go? – How fund dynamics influence venture capital exit decisions," Review of Financial Economics, John Wiley & Sons, vol. 27(1), pages 68-82, November.
    12. Ungerer, Christina & Reuther, Kevin & Baltes, Guido, 2021. "The lingering living dead phenomenon: Distorting venture survival studies?," Journal of Business Venturing Insights, Elsevier, vol. 16(C).

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