While existing theory suggests venture capital firms will expand their activity to overcome underperformance, this may only be partly true. Taha Havakhor and his coauthors found that context, such as their starting portfolio and network access, strongly influenced the firm’s search for solutions.

Research found that firms that started with diverse portfolios narrowed down to a smaller set of successful activities, and firms that specialized expanded to a wider set of promising activities. 

Additionally, access to an open network of co-investors seemed to impede diversified firms from narrowing activities, but supported specialized firms’ efforts to expand activities when searching for solutions.

Havakhor’s research encourages investors and business leaders to consider these key pieces of context when strategizing to overcome underperformance.