Financial Risk Management
Venture Capitalists’ Investment Criteria as Determinants of Risks and Returns: Evidence from India

Article Details
Pub. Date : Sep, 2022
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM010922
Author Name : M Tanzeem Raza and P Natarajan
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 33



Considering the risk-taking behavior of Venture Capitalists (VCs) expecting higher returns, this paper investigates their investment criteria. Two broad hypotheses tested in a structural equation modeling show that Management Team Characteristics (MGTC), Market Characteristics (MKTC), Product Characteristics (PRC), and Entrepreneurial Characteristics (ENTC) positively affect the returns. On the other hand, MKTC and PRC negatively affect the expected risk. Moreover, the expected risk is weakly associated with ENTC and financial considerations. The study concludes that MKTC and PRC are commonly responsible for expected risk and returns. The findings will help VCs to choose the criteria based on their risk appetite or returns expectation. It also helps entrepreneurs to understand VCs and develop their skills according to VCs expectations. The study suggests that VCs should not avoid risky ventures but avoid risks by involving measurement criteria in evaluating the proposals.


The essence of venture capital in new business operations has motivated researchers globally to identify the investment criteria of Venture Capitalists (VCs). VCs often choose to invest in new ventures which give five to seven times returns on their investment. These ventures may have a very little history where the risk of losing the investment is very high, corresponding with higher returns. It leads VCs to evaluate a new venture proposal intensely before making a funding decision and to avoid the risk of adverse selection. VCs follow some criteria which result in a successful exit and capital gains for the passive investors. This study investigates the investment criteria that yield higher returns, and missing such criteria maximizes the risks. Expected risk and return are the dependent variables for capturing the VCs investment criteria (Kaplan and Stromberg, 2004, p. 2208). VCs rated expected risk and returns on their investments on a four-point scale, i.e., 0 to 4 (Tyebjee and Bruno, 1984). The expected risks, rated as four, is considered a highly risky venture with a low chance of survival. High-risky ventures with an expected risk of 4 are highly likely to fail and have been assigned zero scores by the author. Similarly, less risky ventures rated as 0 have been assigned the highest score of 4. This implies that the high risky ventures have less chance of survival, while low risky