Venture Capital Investment Decisions Research Articles

The Determinants of Venture Capital Investment Decisions

Venture capital is pivotal in contemporary economic landscapes, as a critical intermediary in funding nascent or expanding young enterprises. This study delves into the intricate interplay between economic growth, research and development (R&D) expenditures, population density, and the aggregate volume of venture capital investments. The primary objective is to enrich the existing knowledge regarding the factors influencing venture capital allocation. Employing a rigorous fixed-effect model, this research unveils a noteworthy and substantiated positive association between population density and the magnitude of venture capital injections into the entrepreneurial ecosystem. In a rapidly evolving global economy, where innovation is a cornerstone of progress, understanding how population density influences venture capital investments assumes paramount importance. Beyond the well-documented relationship between economic growth and venture capital, this study sheds light on the nuanced impact of population density, accentuating its role as a vital determinant in attracting venture capital funding. This research thus extends the frontiers of knowledge in the field of venture capital. It provides valuable insights for policymakers, entrepreneurs, and investors, offering a more comprehensive understanding of the multifaceted dynamics shaping the venture capital landscape. As the global economic landscape continues to evolve, recognizing the influence of population density on venture capital investments serves as a crucial step toward fostering innovation and sustainable economic growth.

Talking with venture capitalists: gender perceptions in investment decisions

PurposeThe venture capital industry is an important provider of capital to start-ups and has grown considerably in recent decades. This study explores how investors' gender perceptions influence venture capital investment decisions in an industry that remains highly gender imbalanced, both amongst the venture capital decision-makers and with respect to the allocation of capital to entrepreneurs.Design/methodology/approachThe authors' approach was informed by a thorough literature review and in-depth qualitative interviews with ten decision-makers at some of the foremost venture capital funds in Norway. Interviews were recorded, transcribed and coded using NVivo.FindingsThe authors' findings demonstrate that the Norwegian venture capital industry is influenced by homophily and role congruity. The authors highlight the challenges entrepreneurs face in gaining access to venture capital if they are not already members of the investors' network, a situation that results in a recycling effect that helps maintain the industry’s gender imbalance. Moreover, it appears that venture capitalists (VCs) favour masculine characteristics when assessing entrepreneurs, revealing a potential incongruence between female characteristics and perceived entrepreneurial attributes.Originality/valueThe authors' study contributes to and extends the extant literature on homophily and role congruity. Indeed, through investigating the gender-based perceptions of VCs, the authors shed new light on the mechanisms involved in their assessment of entrepreneurs, as well as on the drivers and barriers affecting female entrepreneurs.

A Study on the Factors Affecting Investment Decision of Venture Capitalist

This article examines the importance of venture capital to the financial industry and the world economy over the past 30 years. Venture capital is a powerful driver of the U.S. economy and the world economy. Further, this paper cites the research results of different authoritative authors from SSRN for a comprehensive discussion. The data source of this paper mainly uses the form of a questionnaire survey. This article mainly explores the standards and procedures used by eight venture capital firms when making investments. These criteria are generating deal sourcing, investment selection decision, tools and factors in the evaluation, contracting and structuring the investments, monitoring and post-investment value-added, VCs' exit, firm internal structure, and relationships. In the end, this paper refers to the importance of factors for venture capital firms to make decisions in different periods. Comparing different research results, it is shown that not only eight factors are the factors that determine venture capital firms' investment decisions, but also luck is part of the reference factor.

Navigating investment decisions with social connectedness: Implications for venture capital

This study examines how the geographical structure of social networks shapes venture capital (VC) investment decisions. We find that VC firms invest more in portfolio companies in socially connected regions. The effect is more pronounced among independent, smaller, less reputable, early–stage–focused VC firms and those not from a VC hub. We further document that social connectedness lowers the likelihood of a successful exit since it induces VC firms to undertake suboptimal investment decisions. Overall, our findings highlight the role of social connectedness in constituting the geographical differences in VC firms’ capital allocation and investment outcomes.

Venture capital staging under economic policy uncertainty

Drawing upon a duration analysis framework, this study investigates how economic policy uncertainty (EPU) affects investment staging decisions and exit outcomes in China's venture capital (VC) market. Analyses from a sample of 61,661 venture capital investment decisions support the prediction of the real options theory that VCs delay to refinance their portfolio companies under high EPU. However, such delay effect is largely weakened in severe-VC-competition and high-technology industries, and in better economic conditions. In addition, governmental VCs with greater exposure to economic policy uncertainty are more sensitive to EPU. We further provide evidence that the investments made in times of high EPU have a lower likelihood of successful exit.

Invest Local or Remote? COVID-19 Lockdowns and Venture Capital Investment

Exploiting the staggered introductions and lifting of COVID-19 lockdowns across different regions in China, we study how lockdowns affect the investment decisions of venture capital (VC) investors and whether such changes are temporary or permanent. China provides a unique setting that allows us to examine VC investment decisions after the pandemic is under control and lockdowns are lifted. Contrary to the conventional wisdom that VCs tend to invest in local ventures during lockdowns, we find that they invest in remote ventures during lockdowns and such effects persist even after lockdowns are lifted. Such lockdown effects are stronger when there is better internet infrastructure, when the level of information asymmetry between VCs and entrepreneurs is lower, when VCs are more experienced, and when ventures are in the early stages of development. The lockdown effects can be explained by the advancement of remote communication technology as a response to the social distancing requirements. As VCs invest in remote ventures, the regional inequality of entrepreneurial access to VC financing has been reduced. Our findings uncover how VC investors adapt to the pandemic and such changes can have long-lasting effects in the post-pandemic era.

Does religiosity influence venture capital investment decisions?

Theories on contextual behavior (e.g., social norm, self-identity, and legitimacy theories) suggest that the religiosity of the geographical area in which an organization operates influences its behavior. Using a sample of 91,020 VC investments in the U.S., we study whether religiosity influences VC investment decisions. Based on prior literature that finds a positive relation between religiosity and risk aversion, we posit that VCs located in more religious counties make less risky investments. We find that VCs located in more religious areas are more likely to be involved in staging and syndication and have a greater propensity to invest in later and expansion stages of portfolio companies. Taken together, our results suggest that VCs located in religious counties tend to be more risk averse.

Does It Pay to Play? A Multi-Perspective on Follow-On Funding, Funding Structure and Investment Profitability in a Venture Capital Context

Within this paper, I propose a comprehensive modelling framework to evaluate venture capital (VC) investment decisions from an individual investors' portfolio perspective. The approach integrates the perspective of different shareholding parties and allocation of rights usually determined via shares in each one's portfolio. Using a basic model implementation of the modelling framework, I focus on the feasibility of follow-on funding of investment projects given underlying investment profitability. In particular, I evaluate the minimum levels of profitability of the investment, where funding is feasible. Based on the model, I propose alternative explanations on observed phenomena in VC such as underinvestment (non funding of positive net present value investments) and funding of negative net present value projects which are ultimately rooted in common practice of venture funding structure. In a first model extension, I also consider the effectiveness of pay-to-play rights on the minimum levels of profitability. Based on the model's result, I conclude that pay-to-play rights effectiveness is eventually limited by the investment approval of shareholders.

The Crowdfunding Effects on Venture Capital Investments

We study how crowdfunding, as a source of public information, affects competing venture capital (VC) firms' investment decisions in terms of the timing, likelihood, and expected amount of VC investment in a startup. Our economy consists of one startup, one crowdfunding platform, and two VC firms with differing prior beliefs about the startup's probability of success. The startup first approaches both VC firms for funding, which is modeled as a second-price auction between the two firms, and then turns to the crowdfunding platform if rejected by both. After the crowdfunding, the VC firms update their assessments of the startup's success based on the information collected from the crowdfunding platform, and the startup seeks funding from them again. We find that crowdfunding and the competition between the VC firms raise the expected amount of VC investment. Moreover, crowdfunding increases the chance of a startup receiving VC funding only for those startups deemed unfavorable by both VC firms; for debatable startups about which VC firms' views diverge, crowdfunding may reduce their chance of receiving VC investment. We then examine how the relationship between crowdfunding and VC investment is shaped by the characteristics of the startup and the crowdfunding platform. For instance, when the more optimistic VC firm has a moderate expectation for the startup and the investment risk is high (resp., low), that VC firm tends to invest before the startup seeks crowdfunding if the crowdfunding information is sufficiently accurate (resp., noisy). Finally, we observe more nuanced crowdfunding effects in several model extensions, for example, if the startup is allowed to strategically decide on the timing to receive a VC investment, and if VC firms can observe private signals on the startup.

Probabilistic hesitant fuzzy multiple attribute decision-making based on regret theory for the evaluation of venture capital projects

The selection of venture capital investment projects is one of the most important decision-making activities for venture capitalists. Due to the complexity of investment market and the limited cognition of people, most of the venture capital investment decision problems are highly uncertain and the venture capitalists are often bounded rational under uncertainty. To address such problems, this article presents an approach based on regret theory to probabilistic hesitant fuzzy multiple attribute decision-making. Firstly, when the information on the occurrence probabilities of all the elements in the probabilistic hesitant fuzzy element (P.H.F.E.) is unknown or partially known, two different mathematical programming models based on water-filling theory and the maximum entropy principle are provided to handle these complex situations. Secondly, to capture the psychological behaviours of venture capitalists, the regret theory is utilised to solve the problem of selection of venture capital investment projects. Finally, comparative analysis with the existing approaches is conducted to demonstrate the feasibility and applicability of the proposed method.

What determines Venture Capital investment decisions? Evidence from the emerging VC market in Egypt

The decision of a venture capitalist to commit capital in a new risky business is a complex decision. Investors need to consider a number of important criteria simultaneously. Based on the postulates of signaling theory and the investment criteria outlined in the extant literature, we propose a theoretical framework to describe the relationship between a new venture’s characteristics and the funding decision. The proposed framework is tested using actual data of a unique sample of 200 new Egyptian technological startups. The startups were tracked from establishment until applying to a venture capitalist and a decision was made either to accept or to reject them. Logistic regression analysis reveals that venture capitalists prefer to invest in startups with mature products and an initial proof of financial performance. The entrepreneurs’ industry experience and the size of their social networks are important factors that affect the startup’s access to finance. Using decision tree analysis to map venture capitalists’ decisions, we show that the time of applying for funds is critical and serves as a gateway for further evaluation. Startups are more likely rejected for applying later into the VC fund than for lack of experience or unproved products. This suggests that the development of the Egyptian tech ecosystem may be hugely constrained by the limited availability of capital as well as the high aversion to risk on the behalf of venture capitalists.

Does Religiosity Influence Venture Capital Investment Decisions?

Theories on contextual behavior (e.g., social norm, self-identity, and legitimacy theories) suggest that the religiosity of the geographical area in which an organization operates influences its behavior. Using a sample of 91,020 VC investments in the U.S., we study whether religiosity influences VC investment decisions. Based on prior literature that finds a positive relation between religiosity and risk aversion, we posit that VCs located in more religious counties make less risky investments. We find that VCs located in more religious areas are more likely to be involved in staging and syndication and have a greater propensity to invest in later and expansion stages of portfolio companies. Taken together, our results suggest that VCs located in religious counties tend to be more risk averse.

Sustainable Finance in Emerging Markets: A Venture Capital Investment Decision Dilemma

This case is crafted to highlight the dilemma faced by two senior executives of Softbank Asia Infrastructure Fund (SAIF) Partners. It showcases their approach towards an impact investment and an analysis of the same, keeping in perspective the uncertainty in an impact investment resulting due to Indian government regulatory provisions. Lack of standardized tools in measuring impact investment returns hinders the commercial funds to assess the true implications of an impact investment. Sustainable finance is directed towards benefiting both client and society by integrating environmental, social and governance (ESG) criteria, either in a business practice or in an investment decision. Investing in an MSME lending enterprise has elements of impact investment in it and is best catered by sustainable funds and not commercial funds. Impact investment, sustainable funds and microfinance are some of the typical activities falling under sustainable finance. SAIF Partners is evaluating an opportunity to invest in an Indian MSME lending enterprise. The key concern is, can commercial funds like SAIF Partners see matching return opportunities in an impact investment? This case provokes the target audience to examine the nature of social impact investments and the nuances in aligning the same with the objectives of commercial investments.

House Demolition and Household Investment of Financial Risk Assets

Family finance is becoming the focus of people’s attention. Family financial market participation, family asset selection and influencing factors are core issues of family financial research center. Although compared with the past, the current rate of household participation in financial market in our country has been raised, from the current status of financial market, there are still some problems in the household investment of financial risk assets like the low proportion of investment and the low market participation rate. Therefore, under current background conditions that current financial market and financial product development in our country are still unable to meet the diverse and multilevel needs of families, this paper studies the investment of household financial assets, especially the investment of family financial risk assets. It is helpful to the design of new financial products, market orientation and target population setting as for the nation and enterprises, and then the optimization of the household financial asset portfolio. In recent years, with the improvement of the availability of micro-data, more and more scholars have paid their attention to the factors that affect the investment decision-making behavior of family financial risk assets. In this respect, some scholars have revealed the impacts of income, education level, health status, social insurance and social interaction through micro-empirical research. However, according to existing related research, few scholars pay attention to the influence and influence mechanism of money from different sources on the investment decision-making behavior of family financial risk assets. This paper seeks to fill up this gap and provides new micro-empirical evidence in this area. House demolition has always been a hot issue as for the public and the academic community. House demolition in China is usually accompanied by rich demolition compensation. From a perspective of mental account, demolition compensation and wage income earned by families through hard work are two types of money with different sources, that is, the first one belongs to windfall income, and the last one fixed income. Therefore, this paper chooses the impact of house demolition on investment decision-making behavior of family financial risk assets and its impact mechanism as the research topics. First of all, this paper distinguishes the family money sources based on house demolition. Next, on the basis of in-depth theoretical analysis, rigorous empirical research has been carried out to verify the impact of house demolition on the investment decision-making behavior of family financial risk assets and its impact mechanism, and then the impact of money from different sources on the investment decision-making behavior of family financial risk assets and its impact mechanism are revealed. The robust research results show that house demolition can significantly affect household financial risk asset investment, and this impact is reflected not only at the breadth level, but also at the depth level, that is, house demolition significantly increases the family financial risk asset investment willingness and investment proportion. The intrinsic reason lies in that the expected loss of wealth is a mediator, that is, house demolition through the expected loss of wealth affects the family financial risk assets investment. However, the mediating effect is moderated by social insurance, that is, social insurance strengthens the intermediary effect of the expected loss of wealth, and further the impact of house demolition on household financial risk asset investment. The above results also indirectly show that money from different sources has a significant impact on household financial risk asset investment decisions through the expected loss of wealth, and social insurance strengthens the impact. This paper reveals how money from different sources affects the allocation of financial assets in households for the first time. It provides a new insight for human economic behavior and results, which is a further advance of the existing research, and helps to deepen the understanding of household financial venture capital investment decisions, having a strong theoretical vanguard. At the same time, the discovery in this paper provides important reference value and guiding significance for formulating financial investment policies or market strategies, deepens financial system reform and promotes economic growth.

Risk types and risk assessment in venture capital investments: a content analysis of investors' original documents

Venture capital is an important resource for new ventures with no access to the capital market. However, venture capital companies' investment decisions could be extremely risky. Assessing and managing risk is therefore a major task of venture capital companies. Despite the topic's high practical relevance, there is very little literature in this field. We aim to extend the academic discussion by investigating the risk types and risk assessment in venture capital investments. We analysed more than 500 deal documents of nine German venture capital companies, resulting in 2,452 qualitative quotes. We categorised these quotes into seven risk types, namely financial, market, strategy, technology, production, human capital, and legal risks, implying their relevance during the VC investment process. Market risk and technology risk are mentioned the most in the due diligence and the decision papers. Financial risk with 710 quotes is the most often documented risk considering all venture capital documents.

The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment

Our study analyzes the effect of the capital gains tax on the individual investment decisions of venture capitalists. By doing so, we are able to study the decisions for a sample of 61,558 funding rounds in 32 countries from 2000 to 2012. Our results support the predictions of the theoretical model that higher capital gains tax rates are associated with fewer start‐ups financed and a lower probability of receiving follow‐up funding. However, the results concerning the effect on the probability of success of start‐ups show that a higher tax burden is associated with a higher probability of eventual start‐up success.

Trust Cognition of Entrepreneurs’ Behavioral Consistency Modulates Investment Decisions of Venture Capitalists in Cooperation

Abstract Previous studies have established that venture capitalists (VCs) adjust their investment decisions according to the economic outcome of their cooperation with entrepreneurs. However, investment decisions made by VCs are embedded in social interaction and influenced by information from third parties. Therefore, research studies on interpersonal trust in the disciplines of economics, psychology and neuroscience were integrated in this paper to explore how the trust cognition of VCs in entrepreneurs’ behavior consistency affects their investment decision-making. First, behavioral consistency is the criterion used by VCs to assess the credibility of entrepreneurs. Second, a trust game was designed for VCs and entrepreneurs, during which EEG (electroencephalogram) of the VCs was recorded. Finally, a learning model was developed on each participant’s behavior and showed the process of investment decision-making. The results indicated that investment decisions of VCs are significantly affected by trust cognition and rewards of cooperation, VCsʼ investment decisions are guided by their trust cognition in the behavioral consistency of entrepreneurs and investment experiences have a significant impact on investment decisions when VCs are cooperating with entrepreneurs with a moderate level of behavioral consistency. One explanation for these findings may be a result of the fact that the neutral information is ambiguous and uncertain; thus, VCs preferred to rely on the outcome of cooperation to adjust their investment decisions.

Does Religiosity Influence Venture Capital Investment Decisions?

Using a sample of 91,020 VC investments in the US, we study whether religiosity influences VC investment decisions. Based on prior literature that finds a positive relation between religiosity and risk aversion we posit that VC located in more religious counties make less risky investments. We find that VC located in more religious areas are more likely to be involved in staging, syndication, and have a higher propensity to invest in later and expansion stages of the portfolio company. The effect of religiosity on VC behavior is stronger when the VC is located in a county with more Protestants relative to Catholics. Further, we find that religiosity is related to a higher propensity for the VC to exit the investment via an IPO. Taken together our results suggest that VC located in more religious counties are more risk averse and their investments are of better quality.

Identification and prioritization of factors affecting venture capitalists’ investment decision-making process

PurposeThe purpose of this paper is to identify and rank critical factors influencing investment decisions of venture capitalists.Design/methodology/approachTo identify and prioritize factors affecting investment decisions of venture capitalists, a two-phase methodology was adopted: in the first phase, critical factors influencing venture capitalists’ investment decisions were identified using exploratory factor analysis; the second phase entailed the use of a multi-criteria decision-making technique – analytical hierarchal process (AHP) which involved assigning weights to, and prioritizing the identified criteria and sub-criteria.FindingsSeven factors were found to significantly influence investment decisions of venture capitalists: entrepreneur’s characteristics, product or services, market characteristics, management skills, financial consideration, economic environment and institutional and regulatory environment. Findings revealed that entrepreneur’s characteristics, financial consideration and product or services were prime influencers of venture capitalists’ investment decisions.Research limitations/implicationsAs for limitations, first, the study considers limited number of factors influencing investment decisions of venture capitalists; there may be other influencers not considered in this study. Second, the AHP methodology assumes that the various decision-making criteria and sub-criteria are independent of each other; in real life, there may be inter-dependency among criteria. Third, the hierarchal model has been tested in the Indian venture capital industry only, and generalizability of results with respect to other industries is questionable.Practical implicationsThe present study identifies and ranks seven factors found to significantly influence investment decisions of venture capitalists. Venture capitalists could use this list of factors as a guideline before making investment decisions, and if considering all factors is not possible, take into account the factors given top rank so that they arrive at informed and intelligent decisions.Originality/valueThis study is the first to identify economic factors (economic environment and institutional & regulatory environment) as influencers of venture capitalists’ investment decisions. Further, no study in the past has attempted to rank or prioritize factors influencing venture capitalists’ investment decisions; this is the first attempt of the kind.

Risk types and risk assessment in venture capital investments: A content analysis of investors

Venture capital is an important resource for new ventures with no access to the capital market. However, venture capital companies' investment decisions could be extremely risky. Assessing and managing risk is therefore a major task of venture capital companies. Despite the topic's high practical relevance, there is very little literature in this field. We aim to extend the academic discussion by investigating the risk types and risk assessment in venture capital investments. We analysed more than 500 deal documents of nine German venture capital companies, resulting in 2,452 qualitative quotes. We categorised these quotes into seven risk types, namely financial, market, strategy, technology, production, human capital, and legal risks, implying their relevance during the VC investment process. Market risk and technology risk are mentioned the most in the due diligence and the decision papers. Financial risk with 710 quotes is the most often documented risk considering all venture capital documents.