Diversification, inter-firm ties, and firm failure in the U.S. VC industry

This study examines how firms' level of diversification and inter-firm ties affect the risk of failure in the U.S. venture capital (VC) industry. Drawing on organizational knowledge and the learning literature we test our hypotheses on the 41-year data on the failure of VC firms. We find that there is an inverted J-shaped relationship between the degree of firms' diversification and the risk of failure. Our analysis also shows that highly diversified VC firms depend more on inter-firm ties in avoiding failure than specialized firms, and that diversified and specialized firms minimize the risk of failure by accessing each other's complementary knowledge resources. These results advance our understanding of the joint effects of diversification and network ties on performance in knowledge-based industries.