Probabilistic Modeling of Venture Capital Portfolio Outliers

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Authors: Kensei Sakamoto, H. U. Köylüoglu, Fuat Alican, Yigit Ihlamur
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Abstract

In this paper, we define probabilistic measures for venture portfolio performance based on individual outlier probability for each investment and the dependence across investments. This work is inspired by loan portfolio modeling against default risk used in banking. In mathematical terms, we calculate the probability distribution of the sum of N non-homogeneous Boolean outcomes (investments becoming outliers) that are correlated through common factors such as overall market conditions and sector effects. Specifically, we implemented a latent-factor model in which each investment's success is the exceedance of a Gaussian latent variable composed of idiosyncratic returns and returns from interpretable shared factors (stock markets, industry sector indices, geography and founder type). The formulation follows a simulation approach to preserve heterogeneous deal-level success probabilities and uses empirically estimated correlation matrices. When applied to synthetic portfolios, our model reveals that expected outlier counts alone are insufficient statistics for evaluating venture portfolios. Portfolios with identical expected outcomes can exhibit drastically different levels of reliability and risk when various levels and forms of correlation are embedded. Diversification improves the probability of achieving a minimum number of outliers by reducing exposure to common shocks, but at the cost of lower upside, underscoring a fundamental tradeoff between reliability and magnitude of clustered successes. The framework provides a practical bridge between deal-level outlier probability assessment and objective-aware portfolio construction.

Fields of Study & Subjects

Private Equity and Venture Capital Risk and Portfolio Optimization FinTech Crowdfunding Digital Finance

Publication details

Journal / source
arXiv (Cornell University)
Publication date
8 February 2026
Language
EN
Document type
Preprint