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 Classification: G24, L22, G11, M13