Background

The aim of this study was two-fold. To start with, we were interested in analysing the principal components of the Indian VC ecosystem. For this, we identified the key stakeholders, gained an insight into their operations, and analysed how these elements interacted with one another to advance the interests of the Indian VC industry. The other purpose of this study was to probe in detail the decision-making processes of the individual VC firms at each critical stage of their investment lifecycle – investment in fledgling start-ups, involvement with the funded entity, and exits from the same.

At the outset, we surveyed the theoretical and empirical literature in this domain in order to familiarize ourselves with the findings from the previous studies. The literature survey covered both VC ecosystem related aspects and the aspects pertinent to the micro-strategic VC decision-making processes. The VC ecosystem comprised three core entities: limited partners (LPs, or fund providers), general partners (GPs, or fund managers), and entrepreneurs (fledgling start-ups). The LPs and GPs made up the supply side of the VC ecosystem while the entrepreneurs constituted the demand side.

To gain an insight into aspects of the strategic decision-making processes of the individual VC firms (GPs) at a micro level, we reviewed literature pertaining to the entire VC lifecycle – investment decisions, portfolio involvement intensity, and exit related strategies. We probed how the VC firms address the risks arising from information asymmetry, namely adverse selection and agency risks, at each subsequent phase during their lifecycle.

Summary of Findings and Inferences

The findings and inferences from this research study have been discussed under two broad heads: one, those pertaining to the VC ecosystem related macro aspects and, two, those related to the micro-strategic decisions during the VC lifecycle. These have been discussed in detail in the next two subsections.

VC Ecosystem in India: Findings and Inferences

To start with, we modelled for the supply side of the VC ecosystem using ordinary least squares (OLS) regression models. Two sets of models were built here: a macro-level model to identify the nature of systematic influences on aggregate fund-raising (that is, the funds raised in aggregate by all VC firms [that is, general partners] operating in India) and a micro-level model to understand the nature of non-systematic influences that determined the fund-raising potential of the individual VC firms.