Specialization Versus Diversification As A Venture Capital Investment Strategy
Much important work has up to date us of rates of come back earned by venture capitalists, the importance of project capitalists to the “going public” process, and the requirements project capitalists use to evaluate deals. This paper seeks to increase the books by testing hypotheses, based upon both the finance and tactical management books, regarding certain opportunity capitalist investment methods. Venture capitalists seek to control or manage risk (Driscoll 1974; MacMillan, Siegel, and SubbaNarasimha 1985). Financing framework and investment strategy provide several opportinity for opportunity capitalists to get this done. Tools available to the venture capitalist include portfolio diversification to spread risk across different industries, firms, or hot/cold IPO markets to minimize unsystematic or investment-specific risk.
Information writing, networking, and specialization can be used to control unsystematic risk also. Several hypotheses are developed from these conflicting perspectives. Data used to check the hypotheses derive from replies to a study of enterprise capitalists. Three hundred surveys were mailed to venture capitalists; 98, or 32.7%,returned usable responses. Stock portfolio diversification is a well-known methods to control risk publicity by reducing specific or unsystematic dangers. However, Bygrave (1987, 1988), as well as financial intermediation theorists, argues that maintaining a higher degree of specialization is useful for controlling risk as well as for gaining access to networks, information, and deal flow from other venture investors.
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The analyses of the paper build upon Bygrave’s work. We construct more strenuous checks to solve the discord between your information-sharing and diversification hypotheses. Our hypothesis tests were solved in favor of the information-sharing view usually. For instance, venture capitalists in the sample which were heavily involved in seed round financing were diversified across fewer numbers of firms and industries. Further proof and only information sharing sometimes appears in investment patterns across different financing phases. Diversification would imply preserving a portfolio of investments across the different investment stages. The info writing/specialization view would claim that it’s far better stay focused on a single stage or several “connected” phases. The empirical proof from the sample once again favors the specialization perspective.
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