Corporate strategy scholars have long been interested in how the scope of a firm’s activities, its diversification, affects its performance. While their work provides many important insights, they are not able to untangle effects associated with leveraging tangible assets from those of knowledge assets. We contend that understanding how firms can leverage knowledge assets is critical to understanding the scope of activities a knowledge intensive firm can successfully undertake and, more generally, how all firms can manage their knowledge assets alongside their tangible assets.

In order to investigate the relationship between diversification and performance in the case of knowledge assets, we examine venture capital firms. The nature of the activities a VC engages in provide an ideal context in which to study diversification related to knowledge assets. Venture capital firms apply their knowledge assets to select and coach portfolio companies (e.g., Sapienza, 1992; Lerner, 1995; Edelman, 2002; Dimov and Shepherd, 2005), but do not use tangible assets, other than money, to develop these firms. Thus, the effect on performance of VC investments in portfolio companies in a narrow to broad range of different industries allows us to examine diversification and knowledge assets.