Information Asymmetry Risks in Venture Capital Investments: Strategies of Transnational Venture Capital Firms in India

Venture Capitalists (VCs) are niche financial intermediaries known to possess the forte in selecting and monitoring projects with an extreme level of information asymmetry. In the absence of tangible historical data on an investee firm, VC firms often base their risk estimates on tacit signals. While information asymmetry risks are the main stay of VC funded projects in general; those funded by transnational VC firms in destinations different from their countries of origin are even more risky owing to the geographical distance and cultural dissimilarities. The aim of this paper is to conceptualize, empirically investigate and statistically ascertain the relevant set of signals that matter to the transnational VC firms in India. To start with, we analyze the most pertinent signals such as the investee venture’s funding-stage, syndication, domain specialization and the past startup experience of the prospective founding team. Furthermore, we investigate the specific set of signals that are relevant in the Indian economic, political and socio-cultural milieu.