In my post, How Much Capital You Should Raise: Entrepreneur’s Perspective, I described the conflicting incentives that entrepreneurs face when deciding how much money to raise from VCs. VCs also face similar conflicting incentives:
Minimize portfolio concentration: Venture is an inherently unpredictable business. Markets can change, competitors can crop up and consumer preferences can evolve. This is especially risky for VCs since they never know everything about the companies that they are investing in (entrepreneurs know more about their companies). As a result, VCs are required to develop a diversified portfolio of investments to mitigate their exposure to any single company. This creates an incentive for VCs to minimize their investment in each company, building a large and diverse portfolio.
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