| dc.description.abstract | In recent years, the increased emphasis on digitalisation aided by advancements in technology has led to the growth of digital startups in India. Compared to non-digital startups, digital startups are those that focus on leveraging digital technology elements such as digital artefacts, digital platforms, and digital infrastructure as an inherent part of the value proposition. The advancements in digital technologies such as cloud, mobile, social media, 3-D printing, data analytics etc. have led to these startups having increased entrepreneurial opportunities for growth. Their steep rise within the tech startup eco-system has contributed to the emergence of digital entrepreneurship as a separate and unique field of research.
However, considering the enhanced uncertainty in the lifecycle of a digital startup and their high failure rates compared to non-digital ventures, accessing VC financing is a challenge as well as a decisive element that influences their survival and scale-up. Another reason why VC financing seems to have gained enormous importance particularly in emerging economies like India is because, contrary to developed regions where debt funding is considered an important source of funding for startups in their initial years, debt funding gap in India pertaining to new ventures is huge. With VC investments in India in the year 2021 having grown 3.8X over the year 2020, young and innovative tech startups in India seem to mainly rely on VC financing to finance their businesses. But, considering the fact that India’s tech startup ecosystem has emerged as the third largest globally, startups in India are likely to face much steeper challenges in obtaining VC financing compared to their counterparts in developed regions.
Thus, it becomes pertinent for us to examine what signals the quality of these digital startups to external financiers such as VCs and subsequently influences their likelihood of accessing VC financing. Subsequently, after accessing VC financing, startups also benefit from the value-added services that VCs provide in the post-investment period such as mentorship, strategic advice, monitoring financial performance etc., among others. But, despite the growing prominence of VC financing, recent studies have begun to accentuate that not all entrepreneurs unanimously accept VC’s involvement with portfolio companies as value-adding and such perceptions subsequently impact venture performance. Therefore, it becomes pertinent for us to examine whether entrepreneurs still tend to value the contributions made by VCs beyond the provision of financial resources and if so, under what circumstances. And finally, although the impact of VC involvement with startups in general has been examined, digital startups being a relatively new context, it remains to be seen what impact VCs’ involvement has on the performance of digital startups.
Analysing a sample of 124 startups in India, we find that during the selection stage, the founders’ perception of VCs’ ability to contribute non-financial value-added services influences their decision to seek VC financing. But at the decision stage, signals emanating from younger stage entrepreneurs with an education pedigree from premier institutes, startups that are incubated in an incubator or are part of an accelerator program, or those building businesses focusing on digitally enabled business models, are likely to be valued highly by VCs and therefore have a higher likelihood of receiving VC financing.
Further, from our analysis of the second research objective, we infer that entrepreneurs do tend to perceive the VCs’ involvement with their startups as value-adding rather than solely relying on them for financing. Such perceptions are likely to be influenced by the external resource dependencies of the entrepreneurial team as indicated by their prior industry experience and whether the startup is part of an accelerator or incubator program. In addition, entrepreneurs who explicitly solicited the advice from VCs as well as entrepreneurs who were encouraged and supported by VCs to bring in new ideas on work-related issues were also likely to construe the non-financial services from VCs as useful. Thus, our findings highlight the importance of a procedurally just relationship within the entrepreneur-VC dyad from the perspective of the entrepreneurs, for them to find the involvement of VCs as value-adding.
Furthermore, from our analysis of the third research objective, we find that financial performance related milestones of the startup do not appear to be influenced by the involvement of VCs. In addition, our results also suggest that founders who seek to retain control of their ventures could also do without involving VCs as involvement of VCs is more likely to result in hiring external CXOs. On the contrary, our results indicate that startup founders who are looking for non-financial value-added services such as mentorship and aid in professionalisation of their ventures, access to strategic networks, etc. along with meeting their financing requirements are likely to derive better value through VCs’ involvement | en_US |
