The Optimal Portfolio of Start-up Firms in Venture Capital Finance

Item Type Journal paper
Abstract

Venture capitalists (VCs) not only finance but also add value to start-up companies. Advising firms is time consuming and creates a trade-off between intensity of advice and portfolio size. We jointly determine the optimal number of portfolio companies and the intensity of managerial advice. Diminishing returns to advice per firm call for a larger portfolio. With progressively increasing managerial effort cost, however, a larger number crowds out advice to each individual firm. As they receive less support, entrepreneurs request a larger profit share, making further portfolio expansion eventually unprofitable. Comparative static analysis shows how optimal portfolio size responds to venture returns and other parameters.

Authors Kanniainen, Vesa & Keuschnigg, Christian
Journal or Publication Title Journal of Corporate Finance
Language English
Keywords Venture capital finance, double moral hazard, company portfolio.
Subjects other research area
HSG Classification not classified
Refereed No
Date 1 November 2003
Publisher Elsevier
Place of Publication Amsterdam
Volume 9
Number 5
Page Range 521-534
Number of Pages 14
ISSN 0929-1199
ISSN-Digital 1872-6313
Publisher DOI 10.1016/S0929-1199(02)00021-4
Depositing User Wolfgang Lechthaler
Date Deposited 15 Dec 2004 12:59
Last Modified 23 Aug 2016 10:52
URI: https://www.alexandria.unisg.ch/publications/2123

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Citation

Kanniainen, Vesa & Keuschnigg, Christian (2003) The Optimal Portfolio of Start-up Firms in Venture Capital Finance. Journal of Corporate Finance, 9 (5). 521-534. ISSN 0929-1199

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https://www.alexandria.unisg.ch/id/eprint/2123
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