Abstract
We extend current research on entrepreneurial finance through the first theoretically founded and empirically tested comparison between formal and informal venture capital (VC) with respect to their investment diversification strategies and respective portfolio returns. Our novel dataset of more than 12,500 early-stage investors reveals that industry- and stage-diversification seem to drive success for both investor types. However, the underlying dependencies differ between formal and informal VCs and may even reverse the effects of diversification. In our effort to substantiate these divergent dependency effects, we validate that portfolio returns observe a power-law distribution for both investor types.
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