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Do venture capitalists imitate portfolio size?

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Abstract

Venture capitalists face the challenge of determining how many entrepreneurial ventures they should invest in. Kanniainen and Keuschnigg (J Corp Finance 9:521–534, 2003) develop a theoretical model based on economic factors that shows how a venture capital fund should set its portfolio size in order to achieve optimal returns. Determining the required economic inputs to this model is difficult in practice however, given the informational asymmetries, uncertainties and ambiguities present in the decision-making environment of venture capitalists. Hence, we contend that general partners of venture capital funds also use their prior venture capital fund management experience, which we refer to as social capital, to overcome the difficulties they face in solving the above optimization problem. Our results support our hypotheses that portfolio size is explained by the interplay of economic and social factors.

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Authors and Affiliations

  1. Department of Finance, Faculty of Economics and Commerce, University of Melbourne, VIC, 3010, Parkville, Australia

    André F. Gygax

  2. Credit Suisse, One Cabot Square, London, E14 4QJ, UK

    Anna Griffiths

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  1. André F. Gygax
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  2. Anna Griffiths
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Correspondence to André F. Gygax.

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Gygax, A.F., Griffiths, A. Do venture capitalists imitate portfolio size?. Fin Mkts Portfolio Mgmt 21, 69–94 (2007). https://doi.org/10.1007/s11408-006-0040-4

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