The Effect of Venture Capitalists Straying from Their Industry Comfort Zones

Abstract

I analyze the effect of venture capitalist's exit performance for investments made outside of a venture capitalist's preferred investment industry. I find that venture backed investments are significantly more likely to have successful exits when the backing venture capitalists makes an investment in a firm within their preferred investment industry. Co-investing with another venture capitalist that has the same investment focus as the investment firm partially mitigates this effect. Furthermore, the negative effect is shown to be more pronounced the greater the degree of difference between the venture capital's preferred investment industry and the investment industry.

Keywords: venture capital, style drift, speicalization

JEL Classification: G24