Specialization and Success:

This paper examines how organizational structure affects behavior and outcomes by looking closely at the performance of different types of venture capital organizations. We find a strong positive relationship between the degree of specialization by individual venture capitalists at a firm and its success. At the same time, however, the marginal effect of increasing specialization at the firm is much weaker when the individual investment professionals are highly specialized themselves. The deterioration in performance appears due to both an inefficient allocation of funding across industries and poor selection of investments within industries. Organizational characteristics, however, are not irrelevant: venture capital organizations with more experience tend to outperform those with less experience.