The Effects of Diversification on Venture Capitalist

You are comparing the required returns of two venture capitalists, who are interested in investing in the same software firm. One venture capitalist has all of his capital invested in only software firms, whereas the other venture capitalist has invested her capital in small companies in a variety of businesses. Which of these two will have the higher required rate of return?

a. The venture capitalist who is invested only in software companies b. The venture capitalist who is invested in a variety of businesses c. Cannot answer without more information

If both venture capitalists described above had the same expected cash flow estimates for the business, which one would demand a larger share of the ownership for the same capital investment?

a. The venture capitalist with the higher required rate of return

Venture Capital: This is usually equity capital provided to a private firm by an investor or investors, in exchange for a share of the ownership of the firm.

b. The venture capitalist with the lower required rate of return

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