Factors Affecting Capital Structure of Indian Venture Capital Backed Growth Firms

Entrepreneurship is an engine for bringing about positive changes in the form of socioeconomic welfare (Kortum and Lerner, 2000). One of the major constraints faced by entrepreneurs is access to finance. Recently, venture capital has emerged as one of the alternative sources of financing for new ventures. Studies indicate a trend towards venture capitalists’ preference towards late stage deals (e.g. Gompers and Lerner, 2001). Therefore, it becomes essential to understand the various factors that venture capitalists consider before investing in growth firms. This paper seeks to identify the various financial indicators that venture capitalists consider before funding growth firms by analyzing their capital structure. This paper draws from the capital structure literature to carve out the variables, i.e., tangible assets, profitability, size, volatility, growth opportunities, etc., that affect the capital structure of firms which receive venture financing later. Propositions are drawn on the basis of this reasoning and a conceptual framework is put forth that tries to identify an optimal capital structure strategy for Indian growth firms that seek venture capital.