Inadvertent Systemic Risk in Financial Networks: Venture Capital and Institutional Funds

Enterprise Risk Management: Review, Critique, and Research Directions

“…The disastrous outcomes for the most sophisticated risk managers in the subprime meltdown (and Wall Street firms) suggest that risk management models are not a panacea and may be part of the problem. Checkley's (2009) study of institutional funds investing in venture capital firms found that risk management by individual actors d that is, the institutional investors d actually increased systemic risk for the group. Advocates have implicitly assumed firms will use "better" tools in ways the originators intend, and that the tools will influence firm behavior in obvious, desirable ways.…”

Venture Capital Syndication: Synthesis and future directions

“…To illustrate the differences between the two antecedents and to provide an example of how they offer an effective approach to analysing the motives, consider the oft‐cited motive of the diversification of a portfolio (e.g. Bygrave 1987; Checkley 2009; Kaiser and Lauterbach 2007; Lerner 1994; Lockett and Wright 2001). One view in the extant research has addressed the diversification of the portfolio as a financial motivation, considering it as a means to reduce the variability of portfolio returns and thus emphasizing diversification as a goal in itself (Kaiser and Lauterbach 2007; Lerner 1994; Lockett and Wright 1999, 2001; Manigart et al .…”

“…2006). However, as noted by Checkley (2009), diversification on the fund level may even increase the risks of limited partners (LPs) on the aggregate level. Therefore, another view on diversification has suggested that diversification reduces the risks of producing low results that might compromise the VC firm's abilities to attract further funds (Lerner 1994; Lockett and Wright 2001).…”

“…One view in the extant research has addressed the diversification of the portfolio as a financial motivation, considering it as a means to reduce the variability of portfolio returns and thus emphasizing diversification as a goal in itself (Kaiser and Lauterbach 2007;Lerner 1994;Wright 1999, 2001;Manigart et al 2006). However, as noted by Checkley (2009), diversification on the fund level may even increase the risks of limited partners (LPs) on the aggregate level. Therefore, another view on diversification has suggested that diversification reduces the risks of producing low results that might compromise the VC firm's abilities to attract further funds (Lerner 1994;Lockett and Wright 2001).…”

Editorial

“…3 A more recent piece by Checkley in 2008 foreshadows recent events in arguing that the application of simple network analyses as used by strategy thinkers shows clearly how organisational design purposefully engineered by finance experts to reduce strategic risk has actually exacerbated the situation. 4 Until more is done to unpick this puzzle, and better models are built, managers will continue to struggle with these problems and make more mistakes.…”