Venture Capital Investment Strategy and Portfolio Failure Rate : A Longitudinal Study

In this study, longitudinal data are used to examine theeffects of venture capital firms' (VCFs) investment strategies on the failurerates in their portfolios. Particular attention is paid to two specificstrategic choices faced by VCFs—the choice to develop specialized expertise andthe choice to invest together with syndicate partners. First, a theoretical framework for VCFs' contribution to new venturesurvival is used to generate two hypotheses, the first of which proposes thatthe development of a special expertise through an investment specializationstrategy decreases the proportion of failures in a VCF's portfolio. The secondhypothesis predicts the effects of management by a syndicate on failurerates. Data on 200 U.S.-based VCFs that have invested in at least 20 portfoliocompanies are used to test the hypotheses. Spanning the years 1990-2001, thedata reveal that VCFs' specialized expertise decreases the relative number offailures in their portfolio. They also suggest that investment syndicatesincrease the chances that portfolio firms will fail. (SAA)