Abstract
This paper finds that industry specialization within a fund is associated with superior project picking ability in the venture capital market. We find that ex-ante judgments of superior project quality are associated with positive abnormal performance for specialist funds, while they are associated with negative abnormal performance for the average fund. During cold IPO markets, abnormal performance associated with project-picking ability is greater than abnormal performance associated with specialization (portfolio risk) independent of project picking ability. During hot IPO markets, however, project picking ability is not rewarded, while specialization is associated with positive abnormal performance independent of project picking ability. Our findings indicate that the ability to shift investments into sectors that are 'hot' is associated with superior performance independent of project picking ability. Consistent with this conclusion, ex-ante judgments of low quality are associated with positive abnormal performance for the average fund during hot IPO markets but not during cold IPO markets.
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