Portfolio Industry Strategy in Venture Capital Investments

Abstract

Venture capitalists make investments decisions at the level of the individual companies and at the level of the portfolio of companies. This article studies the impact of a VC industry portfolio strategy on portfolio performance. Three types of strategies are considered: industry specialization, industry diversification, and complementary networks investments. I find that venture capital firms that specialize in terms of industry exhibit better portfolio performance. When I look further at portfolios with investments in information technology, I find that these portfolios are diversified at a narrower industry classification level. I apply the concept of “software stack” to capture the existence of complementary network effects and find that venture capitalists may pursue a strategy of investing in ventures that are complementary components of a network system. The results also show that these complementary investments are comparably more successful.

TOPICS: Private equity, portfolio construction, statistical methods, performance measurement