India is one of the biggest recipients of venture capital (VC) in the world. Between 2004 and 2016 alone, the country got over $9.5 billion in VC investment, according to a new study. Various factors affect how much a venture capitalist invests in a startup, but the study finds that the biggest determinants are the stage of investment and size of stake to be acquired.
The study, by Richa Gupta and Abha Shukla of the Delhi School of Economics, is based on data on around 2,700 VC transactions in India from 2004 to 2016.
Startups in the ‘growth stage’—five to 10 years old and in their first to fourth round of funding—receive investments of $6.8 million on average. This is over three times the investment of an average ‘early-stage’ startup, which is under five years old and in its first or second round of funding.
The reason is that early-stage startups are more of a risk for investors compared to growth-stage ones for which there is more information available to judge their track record.
Another factor affecting deal size is the size of the stake VCs acquire in return for investment. A 1% increase in stake in a startup increases VC funding by 0.7%, the authors find. On average, VCs acquire a quarter of a startup’s stake and get a say in how it is run.