Much of the work on this paper was done while I was a doctoral student at the University of Maryland. I would like to thank the faculty there, especially Vojislav Maksimovic, for useful comments on this work. I would also like to thank Josh Lerner, William Megginson, and Douglas Cumming for their input. Other useful comments were given by Jeff Clark, James Doran, James Ang, David Peterson, Yingmei Cheng, Ali Nejadmalayeri, and the seminar participants at the WAFA Conference, AOEF Conference, and SFA Conference. I am very grateful to an anonymous referee for useful comments.
Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital
Article first published online: 2 SEP 2009
© 2009 Financial Management Association International
Volume 38, Issue 3, pages 441–486, Autumn 2009
How to Cite
Knill, A. (2009), Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital. Financial Management, 38: 441–486. doi: 10.1111/j.1755-053X.2009.01044.x
- Issue published online: 2 SEP 2009
- Article first published online: 2 SEP 2009
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.