Introduction

Having analysed the venture capital (VC) industry from a macro perspective, we now probe the micro decision-making aspects of VC firms (general partners or fund managers). In this chapter, we investigate the investment decisions of VC firms. Here, we assess the kind of tacit/latent signals and tangible business attributes used by the VC firms in their investment decision making, given the huge information asymmetry risks encountered by them. Based on the literature survey, industry reports, and our discussions with the VC professionals, we have classified the VC firms in our sample into three distinct types of segments. The aim of this chapter is to probe the investment decisions for each of these VC firm segments. The objective of this chapter is manifold: First, to identify, categorize, and quantify the comprehensive set of signals used by VC firms in assessing venture level risks (simultaneously, we also identify and quantify the relevant tangible business attributes that are regarded important by the VC firms). Second, to distinctly identify how these sets of signals (and tangible factors) differ across the three dominant segments of VC firms in our sample. Third, to identify the sets of signals that are distinct in the Indian cultural milieu. Finally, to derive managerial implications based on our findings that would be valuable to the VC and the entrepreneurial communities.

The rest of this chapter is organized as follows: to start with, we present a conceptual model of VC investment decisions and arrive at testable hypotheses based on the same. We then proceed to the description of the research design for this study. This is followed by the discussion of results.

Conceptual Model of VC Investment Decisions

VC firms base their investment decisions about the prospective deals on both tacit signals and tangible business attributes. Based on the available literature, the tacit signals may be broadly classified into entrepreneur and founding team related signals, deal and VC firm related signals, and the overall macroeconomic and policy related factors (Figure 6.1).

The tangible attributes relate to market characteristics, business model, nature of competition, and the financials.