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

Vesa Kanniainen
University of Helsinki - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Christian Keuschnigg
University of St. Gallen - Department of Economics (IFF-HSG); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)

December 2000

CESifo Working Paper Series No. 381

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.

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

JEL Classifications: D82, G24, G32, L9

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Christian Keuschnigg (Contact Author) University of St. Gallen - Department of Economics (IFF-HSG) ( email ) Varnbuelstrasse 19 CH-9000 St. Gallen Switzerland +41 71 224 2520 (Phone) +41 71 224 2670 (Fax)
CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Poschinger Str. 5 DE-81679 Munich Germany
Centre for Economic Policy Research (CEPR) 90-98 Goswell Road London EC1V 7RR United Kingdom
Vesa Kanniainen University of Helsinki - Department of Economics ( email ) P.O. Box 54 FIN-00014 Helsinki Finland +358-0-9-1911 (Phone) +358-0-191-8877 (Fax) HOME PAGE: http://www.cesifo.de
CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Poschinger Str. 5 DE-81679 Munich Germany HOME PAGE: http://www.CESifo.de