Impact Studies Of Industrial Organization Characteristics Of The Portfolio Strategy Of Start-ups

The core of Industrial Organization Theory is monopoly and competition, which focus on monopolistic relationships and competitive relationships between producers who produces the same products or close substitutes. In other words, industrial organization is mainly used to describe the monopolistic relationships and competitive relationships between firms. Traditional theory thinks that portfolio is not a fundamental characteristic of venture capital. Research on venture firms portfolio is relatively rare in theoretical and empirical literature of venture capital at home and abroad. Moreover, the extant research focuses on the relationships between portfolio size and influence factors.This paper reviews the classic literature on the integration of Industrial Organization Theory into venture capital field from two aspects. That is, the integration of Industrial Organization Theory into venture capital industry and venture firms industry. This paper proposes a construction strategy of venture firms portfolio from industrial organization perspective, and devised a questionnaire to the venture capital organizations that focus on investing in Mainland China, which provides rich data for the empirical test.Our empirical results suggest that constructing venture firms portfolio from industrial organization perspective improves investment efficiency, because it has a significantly negative impact on over investment and has a significantly positive impact on return of first round investment of venture capital organizations.Furthermore, our results also indicate that constructing venture firms portfolio from industrial organization perspective has a significantly negaitive impact on the hours that venture capitalists devote to investee firms but increases the probability of collaborations and intercommunions within the portfolio firms. Consequently, venture capitalists have extra time and energy to manage more firms and thus require more profit shares because of providing extra value-added services. Moreover, it also explains the disparity of portfolio size and structure of profit sharing between the venture capital organizations in Mainland China and Western Countries from a new perspective: comparing with the results suggested by Bernile, Cumming and Lyandres(2006), the portfolio size of venture capital organizations in mainland China is bigger but the entrepreneur`s shares is much smaller.Finally, additional tests indicate that the probability of constructing venture firms portfolio from industrial organization perspective is higher when the venture capital organization obtains government assistance, and the probability of investing seed projects is higher when venture capitalists construct its venture firms portfolio from industrial organization perspective. All these findings above indicate that government potentially promotes the venture capital organizations to invest more firms, especially the seed projects, which fits in with the leading national strategy: Independent Innovation Strategy.