Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure‐Play Strategies in Venture Capital

April Knill

Financial Management, 2009, vol. 38, issue 3, 441-486

Abstract: Managing the different companies in which they invest while 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: 1) a specialist “pure‐play” strategy that maximizes venture capital involvement and 2) 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.

Date: 2009
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