What is it about?
We find evidence for reversals in the exit performance of venture capitalists. Leveraging on theories of performance reversals that are rooted in investor rationality but behavioral in nature, we find reversals in performance can be explained by a focus on the ability of a venture capitalist as opposed to a focus on the performance quality of the projects backed by the venture capitalist.
Why is it important?
As a venture capitalist draws down on the best projects within his opportunity set, in the absence of the arrival of new projects of the highest quality, the average quality of projects decreases over time. If the venture capitalist does not diversify his portfolio by reaching outside of his initial opportunity set, portfolio performance can remain positive, yet deteriorate over time, resulting in performance reversals.
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This page is a summary of: Performance reversals and attitudes towards risk in the venture capital (VC) market, Journal of Economics and Business, November 2010, Elsevier,
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