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Does venture capitalist activism improve investment performance?

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  • Jackson, William E.
  • Bates, Timothy
  • Bradford, William D.

Abstract

We investigate whether venture capitalist (VC) activism is associated with higher investment returns. Advising portfolio firms is time consuming and creates tradeoffs between intensity of VC activism and portfolio size. As the number of assisted firms expands, advice can be stretched too thin, reducing portfolio company prospects. We test the hypothesis that increasing the number of investments while intensely assisting portfolio companies is negatively associated with investment returns (the profit destruction effect). We find that aggressive VC activism does predict higher investment returns, but the profit destruction effect operates as well. Portfolio size growth thus risks overextending scarce VC resources and lowering returns.

Suggested Citation

  • Jackson, William E. & Bates, Timothy & Bradford, William D., 2012. "Does venture capitalist activism improve investment performance?," Journal of Business Venturing, Elsevier, vol. 27(3), pages 342-354.
  • Handle: RePEc:eee:jbvent:v:27:y:2012:i:3:p:342-354
    DOI: 10.1016/j.jbusvent.2011.02.003
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    3. Timothy Bates & William D. Bradford & William E. Jackson, 2018. "Are minority-owned businesses underserved by financial markets? Evidence from the private-equity industry," Small Business Economics, Springer, vol. 50(3), pages 445-461, March.
    4. Jeffrey J. Reuer & Ramakrishna Devarakonda, 2017. "Partner Selection in R&D Collaborations: Effects of Affiliations with Venture Capitalists," Organization Science, INFORMS, vol. 28(3), pages 574-595, June.
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    6. Buchner, Axel & Mohamed, Abdulkadir & Schwienbacher, Armin, 2017. "Diversification, risk, and returns in venture capital," Journal of Business Venturing, Elsevier, vol. 32(5), pages 519-535.
    7. Rohit Aggarwal & Michael J Lee & Braxton Osting & Harpreet Singh, 2021. "Improving Funding Operations of Equity‐based Crowdfunding Platforms," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4121-4139, November.
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    10. 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).

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