Institutional barriers to venture capital financing: an explorative study for the case of Iran

Abstract

PurposeThis paper aims to explore the barriers that constrain the venture capital (VC) financing in Iran based on the institutional theory.Design/methodology/approachTo answer the question, “How institutional barriers constrain the VC financing in Iran?”, 31 detailed interviews were conducted, and the interviewed data were analysed by using the grounded theory method.FindingsThere exist several institutional barriers (formal and informal) in different stages of the VC investment process in Iran. Major formal institutional deficiencies include lack of appropriate financial regulations, inefficacy in tax, labour, property rights, financial disclosure, bankruptcy, investor’s protection laws and regulations, lack of credit rating/scoring system, inefficacy in small and medium-sized enterprise-supporting policies and capital market underdevelopment. Moreover, there exist some informal institutional barriers such as culture of capitalism disapproval, culture of secrecy, individualistic customs and weakness of managerial skills that constrain VC activities in Iran.Research limitations/implicationsThe research findings imply that the government’s role should change from “establishment of government-sponsored VC funds” to “enforcement of institutional reforms that lead to an appropriate framework for VC investment”.Originality/valueThis paper has made three key contributions. First, it has provided comprehensive insights into how institutional barriers constrain the VC investment in a developing country. Second, a new stage-wise model is proposed for analysing the VC investment process. Third, existing knowledge about the role of both formal and informal institutions in the VC investment is extended.