On Venture Capital Fund Returns: The Impact of Sector and Geographic Diversification

Abstract

Using rich United States venture capital (VC) investment allocations and returns data from PitchBook, we study the effects of US VC sector and geographic portfolio company investment diversifications on funds’ returns during 1999-2013 and through four public equity markets and two economic cycles. We find evidence of increasing diversification trends for VC investments over time. This study also reveals that VC funds’ returns are positively related with sector and geographic diversifications. We find that investment diversification produces enhanced returns especially during economic and public market booms and diversifications reduce or insignificantly affect funds’ returns during busts