Before Going Public, How to Construct an Optimum Portfolio?

Abstract

Investors in companies that haven't gone public yet like venture capital and SME face high uncertainty and often make costly investments in new business ideas without knowing the expected payoff , Using Modern portfolio theory to construct a well-diversified portfolio should minimize unsystematic risk, but applying it to these types of investments face many practical problems. Trying to solve this uncertainty problem is the main objective of this research through providing a framework for systematizing and streamlining the process in an attempt to establish a realistic, suitable process for portfolio construction.The study utilized a sample of the most active 29 corporate venture capital in Silicon Valley (580 observations) and analyze their characteristics. The model starts by investigating the diversification effect with success rates.An optimum portfolio is constructed using a new empirical model (combination of single linear regression model and linear programming) to generate a model that can generate the optimum weights for each industry to maximize success rates even more than the levels of the 29 benchmark companies. 138 investments found to be the minimum number of investments that can construct a well diversified portfolio through main 10 different venture capital sectors.