Venture capital financing in India: a study of venture capitalist's valuation, structuring, and monitoring practices

Venture capital as a source of financing high technology, small and medium enterprises (SMEs) is well established in the developed economies. Now, this activity is becoming a focus of attention in emerging markets. India has registered a significant growth in terms of the amount and number of venture capital funds. But there is no academic research to date, devoted to understanding how this new investor class behave through the investment cycle. This research is the first-ever investigation of how venture capitalists in India conduct the Valuation, Structuring and Monitoring of their investments. After introduction, the thesis presents an overview of the Indian economy, followed by its financial landscape. The third chapter covers a survey of the economic contribution that SMEs make and the funding problems they face, together with a review of the Indian venture capital sector. An extensive literature review on venture capital research follows. After finding the research gaps, a theoretical framework, based on the adverse selection, moral hazard, corporate governance, and the asymmetric information that characterises the risk capital market is used. Eight hypotheses are developed to test how venture capitalists address the adverse selection through (a) a variety of information sources used in preparing the valuation memorandum, and (b) applying various quantitative and qualitative methods to determine the realistic value. How do they address moral hazard by (a) using covenants in their deal structures, and (b) what financial products are used to minimise the risk? Finally, how frequently and extensively do they monitor their investee companies to overcome the information asymmetry and corporate governance problems? Data from 40 of the most active 42 venture capitalists operating in India were gathered. Then, the data were analysed using Chi Square, Cluster Analysis, ANOVA and Logistical Regression. The results present a descriptive profile of the Indian venture capital sector, including the characteristics of the fund management teams, the sectors and stages of investments and the tests of the hypotheses. This is followed by methodical statistical analysis by splitting the sample based on seven demographic characteristics. The final chapter includes the conclusion, recommendations and the implications of this research for the venture capitalists, entrepreneurs and regulators. Finally, future research areas are suggested that may further improve the understanding of the venture capital market in India.