Size and Focus of a Venture Capitalist's Portfolio
| Autor: | Merih Sevilir, Paolo Fulghieri |
|---|---|
| Rok vydání: | 2009 |
| Předmět: |
Finance
Economics and Econometrics Application portfolio management business.industry Investment strategy media_common.quotation_subject Economic rent Venture capital Investment (macroeconomics) Human capital Microeconomics Private equity fund Incentive Replicating portfolio Accounting Active management Economics Portfolio Business Project portfolio management media_common |
| Zdroj: | The Review of Financial Studies. 22:4643-4680 |
| DOI: | 10.1093/rfs/hhp012 |
| Popis: | We take a portfolio approach to analyze the investment strategy of a venture capitalist (VC) and show that portfolio size and scope affect both the entrepreneurs’ and the VC’s incentives to exert effort. A small portfolio improves entrepreneurial incentives because it allows the VC to concentrate the limited human capital on a smaller number of startups, adding more value. A large and focused portfolio is beneficial because it allows the VC to reallocate the limited resources and human capital in the case of startup failure and allows the VC to extract greater rents from the entrepreneurs. We show that the VC finds it optimal to limit portfolio size when startups have higher payoff potential—that is, when providing strong entrepreneurial incentives is most valuable. The VC expands portfolio size only when startup fundamentals are more moderate and when he can form a sufficiently focused portfolio. Finally, we show that the VC may find it optimal to engage in portfolio management by divesting some of the startups early since this strategy allows him to extract a greater surplus. (JEL G24) The existing theoretical work on venture capital has so far concentrated on a venture capitalist’s (VC) investment in a single entrepreneurial startup in which the VC provides monetary and non-monetary resources to turn the entrepreneur’s project idea into a viable business. 1 However, VC funds typically invest in more than one startup at any given time, and engage in active portfolio management to maximize the return from their investment. In recent research, Kaplan and Schoar (2005) find substantial heterogeneity in performance across private equity funds of different size. They also find that better-performing VC funds grow proportionally slower, and they argue that better VCs may choose to stay small (by deliberately limiting the amount of capital raised) to avoid |
| Databáze: | OpenAIRE |
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