The main purpose of this study is to analyze the investment-decision of the venture capital firms. Based on the literature review of venture capital itself the research framework and hypotheses are derived.
The questionaire measured the venture's industry, the stage of financing and product development, ratings of the venture proposal on 28 items, an assessment of the potential return and perceived risk and the decision to invest or not.
Factor analysis reduced the 21 items of the proposal to 6 underlying dimensions namely (1) Managerial capability factor (2) Entrepreneurial quality factor (3) Product factor (4) Potential profit factor (5) Market factor (6) Environment factor.
The 6 hypotheses are tested by F-statistic and are accepted under the significance level at $\alpha$ = 0.05 or 0.01.
The influence of the characteristics of the proposals on investment decision is examined by chi-square test.
The results of the test are that the funding decision depends upon the technological source of proposals, the investment size of proposals the employment of entrepreneur and the stage of product life-cycle.
The results of regression analysis show expected return to be determined by Product factor and Potential profit factor. Similarly perceived risk is determined by product factor and potential profit factor.
Finally, a discriminant analysis correctly predicted, in 84% of the proposals, whether or not a venture capital firm is willing to commit funds to the proposal on the basis of the expected return and perceived risk. Also the fact that the signs of the discriminant coefficients are different indicates a trade-off relationship between risk and return.
