Deriving successful venture capital deal profile through decision tree analysis in Indian context
| DOI | https://doi.org/10.1108/WJEMSD-03-2018-0031 |
| Published date | 10 April 2020 |
| Pages | 97-108 |
| Date | 10 April 2020 |
| Author | Sarita Mishra,Dinabandhu Bag |
| Subject Matter | Strategy,Business ethics,Sustainability |
Deriving successful venture capital
deal profile through decision tree
analysis in Indian context
Sarita Mishra
Faculty of Commerce and Management, Sri Sri University, Cuttack, India and
School of Management, National Institution of Technology, Rourkela, Rourkela,
India, and
Dinabandhu Bag
School of Management, National Institution of Technology, Rourkela, Rourkela, India
Abstract
Purpose –This study is based on the development of predictive classification for the success of a venture
capital (VC) deal derived from both qualitative and quantitative indicators.
Design/methodology/approach–Decision tree analysis has used for devising the success model of VC deal.
Various deal characteristics are considered in this study as the observable component of success.
Findings –The finding of this analysis indicates that the successof the deal does not only depend on the final
outcome like post company valuation (POST_COMP), realised revenue (RREV) but also depends on various
observable contractual characteristics like syndication, use of convertible security and ownership percentage
with some noticeable deal features.
Practical implications –This study increases the further scope of study on a contractual mechanisms such
as allocation of cash flow right and control right in the deal contract between venture investor and entrepreneur
firm. This could give a better understanding of success path of a venture deal.
Originality/value –This study has attempted to derive a performance model based on observable attributes
of a VC deal.
Keywords Success model, Decision tree analysis, Observable component
Paper type Research paper
Introduction
In the present era, venture capital (VC) emerged as one of the potential pillars in private equity
industry. For funding, a budding start-up venture fund garners their mainstream interest. In
recent years many VC backed start-up have witnessed higher return across the globe i.e
Flipkart, Yes Bank, Facebook, Inc., Google, Xactly, Chegg, etc.
The great support of VC industry is that venture capitalist effectively increases output
with a given input through innovation. They invest in start-up firm because innovation is
brought to market by these young entrepreneurs. But innovation encounters a higher risk of
investment return. This risk arises due to various problems like agency problem, information
asymmetry and adverse selection problem. Venture investors are considered to be experts in
handling problems. They structure the whole investment process that each and every
mechanism found interlinked and provide scope for managing the adversity of any situation.
They start with proper screening criteria for selection of portfolio firm (Chan, 1983), then
make use of financial contract (Kaplan and Stromberg, 2004) and constantly monitor the
progress (Hellman, 1998a, b;Cornelli and Yosha, 2003) for the development of business and
success of the deal. An active VC market can spur the economy as it can provide positive
externalities in the economy. Therefore the success of a VC deal is auspicious for the growth
of country’s economy.
Information regarding VC industry and various deals are available in many electronic and
print media. But all these information are not sufficient to understand the deal flow and
Deriving
successful
venture capital
deal
97
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/2042-5961.htm
Received 24 March 2018
Revised 29 May 2019
6 August 2019
Accepted 17 December 2019
World Journal of Entrepreneurship,
Management and Sustainable
Development
Vol. 16 No. 2,2020
pp. 97-108
© Emerald Publishing Limited
2042-5961
DOI 10.1108/WJEMSD-03-2018-0031
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