Does venture capital portfolio size matter?

Abstract

PurposeThe purpose of this study is to investigate the effects of increased fund commitments on portfolio size and subsequent effects on portfolio success rates. This paper empirically analyzes the changes in average portfolio size over a 20‐year time period and how these changes affect the venture capitalists' ability to successfully exit their investments.Design/methodology/approachThe authors utilize venture capitalists' fund level data and conduct both univariate and multivariate analysis. The multivariate analysis is conducted using a two‐limit regression tobit model. This is justified since the authors' dependent variable is a ratio bounded by zero and one, hence the tobit specification is the most appropriate methodology.FindingsThe authors find that increasing the size of portfolios not only leads to a decrease in the number of successful investments but also significantly affects portfolio success rates. They also find evidence which suggests that some optimal portfolio size exists.Research limitations/implicationsThe sample was limited to independent private partnerships that raised funds specifically for investment in US portfolio companies and it represents all funds maintained in the SDC database with non‐missing data on fund size and other fund characteristics.Practical implicationsThere are three main practical implications derived from this study. First, venture capitalists overextend themselves by investing in too many portfolio firms. Second, some optimal portfolio size exists beyond which success rate of the venture capitalist's portfolio declines. Third, portfolio size is an important determinant of venture capital portfolio success rates.Originality/valueThe study presents new evidence that venture capitalists have a tendency to increase their portfolio size in years following growth in fund inflows, an idea that has not been investigated earlier. The authors also use data that is not adulterated by significant economic and financial conditions such as internet bubble burst of 2000 and financial crisis of 2007/2008.