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
Date Written: December 1, 2013
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
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