Does venture capitalist activism improve investment performance?

We investigate whether venture capitalist (VC) activism is associated with higher investment returns. Advising portfolio firms is time consuming and creates tradeoffs between intensity of VC activism and portfolio size. As the number of assisted firms expands, advice can be stretched too thin, reducing portfolio company prospects. We test the hypothesis that increasing the number of investments while intensely assisting portfolio companies is negatively associated with investment returns (the profit destruction effect). We find that aggressive VC activism does predict higher investment returns, but the profit destruction effect operates as well. Portfolio size growth thus risks overextending scarce VC resources and lowering returns.

Research Highlights► Venture capital (VC) activism is positively correlated with IRRs. ► But, the positive impact of VC activism is negatively moderated by portfolio size. ► Gains from expanding the size of the VC's portfolio are diminished by activism. ► VCs must decide how to optimally allocate activism among their portfolio companies. ► These findings advance our understanding of the VC-Entrepreneur relationship.