Acknowledgments

This study examines how a venture capitalist determines the optimal number of companies in her portfolio of investments. We especially focus our analysis on the relationship between a portfolio‟s size and its concentration in a particular sector (industry, geographical, or developmental stage). Our empirical investigation uses a dataset of 2,125 VC funds that made 91,486 investments between 1975 and 2003. We hypothesize, based on a literature review of incentives and agency costs related to portfolio size, that a fund focused on one sector will invest in more companies. This hypothesis draws upon the theory that a concentrated fund benefits from an improved ability to reallocate resources across startups. However, we find the opposite to be the case; portfolio size is significantly negatively related to concentration. We present a model that demonstrates that the constrained deal flow faced by a fund concentrated in a specific sector may negatively impact portfolio size. Finally, we provide evidence in support of this alternate hypothesis by utilizing the concept of a VC firm‟s “network position.”