Does VC fund diversification pay off? An empirical investigation of the effects of VC portfolio diversification on fund performance

The paper tests different theories of how diversification by Venture Capital (VC) firms affects fund performance. The Financial Intermediation and the Resource-based Theory suggest that lower financial risk associated with diversification implies a lower return. However, the assumptions of these the...

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Bibliographic Details
Published in:International entrepreneurship and management journal 2014-03, Vol.10 (1), p.139-163
Main Authors: Cressy, Robert, Malipiero, Alessandro, Munari, Federico
Format: Article
Language:English
Subjects:
Business and Management
Diversification
Emerging Markets/Globalization
Entrepreneurship
Financial performance
Industry analysis
Investment policy
Management
Portfolio investments
Portfolio management
Portfolio performance
Specialization
Strategic management
Studies
Venture capital
Venture capital companies
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Summary:The paper tests different theories of how diversification by Venture Capital (VC) firms affects fund performance. The Financial Intermediation and the Resource-based Theory suggest that lower financial risk associated with diversification implies a lower return. However, the assumptions of these theories are questionable in the context of venture capital. We test their validity using data on VC portfolio diversification by industry and country using an original dataset of 649 VC funds originating in the United Kingdom over the period 1981–2000. Results show that higher diversification by industry does indeed lower VC fund success rates. Diversification by geographical region, on the contrary, increases returns.
ISSN:1554-7191
1555-1938
DOI:10.1007/s11365-011-0218-8