This article proposes that the attention allocated by venture capitalists to portfolio companies impacts their performance. The article develops arguments for optimal portfolio size and for the moderating roles of syndication frequency and role. The hypotheses receive support from analyses employing longitudinal data of the leading U.S. venture capital firms. Our results indicate the value of venture capitalist involvement and give guidance for its optimal allocation and syndication.

Using the valuation data of 421 US venture capital transactions and 176 initial public offerings, we test a simple binomial valuation model in modelling the risk-return profiles of venture capital investments. We find that the model is consistent with the previous knowledge on the risk-return profile of venture capital investments. The results also confirm the hypotheses that early-stage ventures have higher implied risk and implied volatility of the returns than more established ones.Additionally, we analyse the predictive power of the binomial pricing model and compare it to corresponding`traditional' models that utilize risk-adjusted rates of return. We construct one-step ex post return forecasts for the sample ventures and compare the results to the actually realized returns. The findings indicate that the fit of the binomial model is better than the fit of the corresponding`traditional' models.The results imply that option-based methods have empirical relevance in the pricing analysis of privately held companies and projects. Furthermore, practitioners can benefit from using these methods when analysing the risk-return structure of private companies and R&D projects.