Why Venture Capitalists Stray From Their Industry Comfort Zones

38 Pages Posted: 3 Jan 2019

See all articles by Tyler Hull

Tyler Hull

University of Massachusetts Boston

Date Written: December 18, 2018

Abstract

Within the industry of venture capital I analyze what are the contributing factors that lead to venture capitalist investing outside of their preferred investment industry, despite a documented subpar result when doing so. I find that the greatest contributing factor to be the VC’s preferred industry deal flow, where low deal flow significant increases the likelihood of a VC making non-preferred industry investments. The next greatest contributing factors are if the VC has a high percentage of recent investments that are non-preferred industry investments or if the VC has low levels of VC industry specialization. Additionally, higher recent IPO activity in a non-preferred investment industry, higher past experience levels, lower round numbers, higher the number of co-investing VC investors, all significantly increase, although to a lesser extent, the likelihood of a VC investing outside of their preferred investment industry. No support is shown that VCs make non-preferred industry investments for the purpose of diversification.

Keywords: venture capital; industry specialization; dry powder

JEL Classification: G24

Suggested Citation

Hull, Tyler, Why Venture Capitalists Stray From Their Industry Comfort Zones (December 18, 2018). Available at SSRN: https://ssrn.com/abstract=3303466 or http://dx.doi.org/10.2139/ssrn.3303466

Tyler Hull (Contact Author)

University of Massachusetts Boston ( email )

100 William T Morrissey Blvd
Boston, MA 02125
United States

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