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The Optimal Portfolio of Start-Up Firms in Venture Capital Finance

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  • Vesa Kanniainen
  • Christian Keuschnigg

Abstract

A venture capitalist faces a trade-off between the extent of managerial advice allocated to each start-up and the total number of firms advised. Diminishing returns to advice per firm call for a larger portfolio. As advice gets diluted, further expansion of the portfolio eventually becomes unprofitable.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-12/cesifo_wp381.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 381.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_381

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Keywords: Venture capital finance; double-sided moral hazard; company portfolio;

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References

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  1. Steven N. Kaplan & Per Strömberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," CRSP working papers 513, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Raphael Amit & Lawrence Glosten & Eitan Muller, 1990. "Entrepreneurial Ability, Venture Investments, and Risk Sharing," Management Science, INFORMS, vol. 36(10), pages 1233-1246, October.
  3. Christian Keuschnigg, 2002. "Venture Capital Backed Growth," University of St. Gallen Department of Economics working paper series 2002 2002-04, Department of Economics, University of St. Gallen.
  4. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers.
  5. Gavin C Reid & Nicholas G Terry & Julia A Smith, 1995. "Risk Management in Venture Capital Investor-Investee Relations," CRIEFF Discussion Papers 9505, Centre for Research into Industry, Enterprise, Finance and the Firm.
  6. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
  7. Casamatta, Catherine, 2002. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," CEPR Discussion Papers 3475, C.E.P.R. Discussion Papers.
  8. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(1), pages 169-197, 02.
  9. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
  10. Kanniainen, V. & Keuschnigg, C., 2001. "Start-up Investment With Scarce Venture Capital Support," University of Helsinki, Department of Economics 503, Department of Economics.
  11. Bascha, Andreas & Walz, Uwe, 2001. "Convertible securities and optimal exit decisions in venture capital finance," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 285-306, September.
  12. Laura Bottazzi & Marco Da Rin, 2002. "Venture capital in Europe and the financing of innovative companies," Economic Policy, CEPR & CES & MSH, vol. 17(34), pages 229-270, 04.
  13. Paul Gompers & Josh Lerner, 2001. "The Venture Capital Revolution," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 145-168, Spring.
  14. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-84.
  15. Norton, Edgar & Tenenbaum, Bernard H., 1993. "Specialization versus diversification as a venture capital investment strategy," Journal of Business Venturing, Elsevier, vol. 8(5), pages 431-442, September.
  16. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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