Venture Capitalists’ Decision to Withdraw: The Role of Portfolio Configuration from a Real Options Lens

Strategic Management Journal, Forthcoming

35 Pages Posted: 9 Apr 2012 Last revised: 13 Apr 2017

Yong Li

State University of New York at Buffalo

Tailan Chi

University of Kansas

Date Written: December 1, 2013

Abstract

When does a venture capital firm withdraw from an investment project prior to its completion? This study offers a real options view on this decision by examining the contingent effects of portfolio configuration. We explore how project withdrawal can be influenced by two distinct dimensions of portfolio configuration, portfolio focus in a strategic domain and portfolio diversity across multiple domains. The empirical analysis shows that while portfolio focus weakens the negative effect of industry-level uncertainty on a venture capitalist’s propensity to withdraw from a project, portfolio diversity strengthens the effect of uncertainty. This study informs current research on the boundary of real options theory and sheds light on the behavior of venture capitalists in financing entrepreneurship.

Keywords: venture capital, project withdrawal, real options, uncertainty, portfolio configuration

Suggested Citation

Li, Yong and Chi, Tailan, Venture Capitalists’ Decision to Withdraw: The Role of Portfolio Configuration from a Real Options Lens (December 1, 2013). Strategic Management Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2036399 or http://dx.doi.org/10.2139/ssrn.2036399

Yong Li (Contact Author)

State University of New York at Buffalo ( email )

326 Jacobs Management Center
Amherst, NY 14260
United States

Tailan Chi

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

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