Diversification over time: a dynamic approach of diversification in the US venture capital industry
by Lei Xu; H. Shawna Chen; Qian Gu; Hans Hansen
International Journal of Management and Enterprise Development (IJMED), Vol. 23, No. 2, 2024

Abstract: Predictors of diversification are commonly time-variant but are often treated as static. In this paper, the role of time in firms' diversification decisions is explored using discontinuous growth modelling. Informed by the literature, three salient factors affecting change of organisational diversification over time were identified: founding team heterogeneity, reputation, and status. Our sample of 785 US venture capital (VC) firms from 1991 to 2016 show that the level of diversification among the US VC firms follows an inverted U-shaped pattern over time. Moreover, only founding team heterogeneity has a significant moderating effect on the relationship between diversification and time. To better inform and enrich our interpretation of these interesting findings, we conduct qualitative interviews with VC firm general partners and founders. It is suggested that, over time, founding team heterogeneity pull firms back toward their initial strategic choice of lower diversification. Founding team imprinting may explain this inverted U-shape of diversification over time - firms that initially chose low levels of diversification but later diversified in pursuing investments with high returns, would pull back to initial diversification levels over time in an attempt to achieve consensus among founding team members.

Online publication date: Fri, 28-Jun-2024

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