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Show 249 THE UNIVERSITY OF UTAH This paper is a discussion of the effects of diversification in venture capital portfolios. The venture capital structure is formed by three components: the firm, a fund (or funds), and port-folio companies within each fund. One single firm can have simultaneous active funds, which typically last between five and ten years, and contain multiple portfolio companies within each fund. A VC firm's fund can either be specialized or diversified depending on the strategy of the general partners. A specialized fund is attractive to firms who have specific knowledge or industry expertise. This expertise aids in superior selection decisions, value added to firm, and reduced agency costs via staged capital infusion. The drawback, like in any undiversi-fied por tfolio, is the increase in vulnerability of unsystematic risk on the limited par tner 's investment. Diversification within a firm's fund can be defined by naïve, dynamic, and systematic measure-ments. Naïve diversification includes the number of portfolio companies, dynamic measures diversification over time, and systematic looks at diversification across time, the industry, and country. What I am then testing is to see is if specialized funds outperform diversified funds with the vintage year of 2005 by regressing performance measurements with the multiple diversifica-tion variables. I choose 2005 because it gives a better snapshot of the effects of diversifica-tion on a level playing field for the sample by accounting for changes in economic volatility between years. The performance measurements I am looking at is simply if the company within the fund had an exit. The only performance measure for exit that can be collected from Thompson One's Venture Xpert is if the company has had an initial public offering. Also, I look at how diversification affects volatility of performance. I found that the systematic diversification measures had little effect on performance. I also found a significant negative effect of diversification across time on IPO% and across countries in terms of performance volatility. Based off of the dataset, specialized funds are superior due to the inherent benefits of this type of fund as well as the negative effects of increases in diversification across time and number of portfolio companies. US VENTURE CAPITAL AND THE EFFECTS OF DIVERSIFICATION Philip Green (Feng Zhang) Department of Finance University of Utah honors college Philip Green Feng Zhang |