When Focus Helps and Collaboration Hurts: How Venture Capital Strategies Shape Portfolio Failure

What is it about?

This study examines why some venture capital firms (VCFs) experience higher rates of failed investments than others. It focuses on two important strategic dimensions: how specialized firms are in particular types of ventures and how often they collaborate with other investors through syndication. By analyzing these strategies together, the research aims to explain how different approaches to expertise and cooperation affect the likelihood that a venture capital portfolio will contain unsuccessful investments. Drawing on longitudinal data from 200 U.S.-based VCFs over 12 years, the authors find that VCFs with more specialized expertise experience fewer failures. In contrast, firms that engage more heavily in syndicated investments tend to experience more portfolio defaults. This suggests that while focus and depth of knowledge help reduce risk, collaboration may expose firms to investments in which they have less control or weaker oversight. In other words, specialization protects against failure, but partnerships can sometimes spread risk unevenly or reduce accountability. For practitioners and investors, these findings highlight a critical tension between focus and collaboration. While syndication offers benefits like shared knowledge and risk distribution, it may also dilute decision-making discipline and increase exposure to poor ventures. VCFs should therefore consider when and with whom to partner, ensuring that syndication complements rather than replaces their internal expertise.

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Photo by Sebastian Herrmann on Unsplash

Photo by Sebastian Herrmann on Unsplash

Why is it important?

This research offers a rare, systematic examination of how venture capital investment strategies influence failure rates rather than success alone. By analyzing both specialization and syndication over an extended period, it provides robust evidence that not all risk-sharing mechanisms are beneficial. At a time when collaborative investing has become widespread, this study reminds practitioners that expertise focus remains a crucial safeguard against failure. Its insights extend beyond venture capital, offering valuable lessons for any organization that must balance depth of knowledge with the pursuit of collaborative opportunities.