Should Venture Capitalists Put All Their Eggs in One Basket? Diversification Versus Pure Play Strategies in Venture Capital

Abstract:     
Managing the different companies in which they invest and 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: a specialist pure-play strategy that maximizes venture capital involvement, and 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.

Keywords: venture capital, firm organization, portfolio choice, entrepreneurship

JEL Classifications: G24, L22, G11, M13

Working Paper Series