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Why Start-Ups Struggle to Secure Venture Capital Funding: Investigating the Factors that Shape Venture Capital Investment Decisions

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  • Junada Sulillari

Abstract

Start-ups are pivotal to economic development and innovation, yet many face failure, often due to limited access to finance. Venture capital emerges as a crucial funding source, yet only a slim fraction of start-ups seeking such investments succeed. This research delves into the allure of venture capital for start-ups and the challenges they encounter in securing funding. Additionally, it explores the perspectives of venture capitalists, identifying key factors influencing their investment decisions. Through a blend of primary and secondary research, including a survey completed by 107 venture capitalists from the author's LinkedIn network, this study offers descriptive insights into the venture capital landscape. The findings underscore the significance of growth potential, industry knowledge, risk mitigation, the ability to secure substantial funding, and increased visibility as factors making venture capital appealing to start-ups. From the venture capitalists' viewpoint, the pivotal elements shaping investment decisions include the quality of the management team, founders' experience and expertise, financial projections, product scalability, and industry attractiveness. Notably, the application of the Friedman two-way analysis of variance by ranks revealed statistically significant differences in the prioritization of these factors, highlighting the nuanced criteria venture capitalists employ in their evaluations. Conversely, the impact of winning prestigious grants appeared minimal, while specialized skills, education, and referrals held moderate importance. This research offers valuable guidance for start-ups, providing a clearer understanding of the criteria emphasized by venture capitalists. Armed with this knowledge, start-ups can refine their strategies to align more closely with investors' priorities, potentially enhancing their prospects of obtaining venture capital funding.

Suggested Citation

  • Junada Sulillari, 2024. "Why Start-Ups Struggle to Secure Venture Capital Funding: Investigating the Factors that Shape Venture Capital Investment Decisions," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 21-46.
    • Handle: RePEc:bas:econst:y:2024:i:7:p:21-46
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    References listed on IDEAS

    as
    1. Islam, Mazhar & Fremeth, Adam & Marcus, Alfred, 2018. "Signaling by early stage startups: US government research grants and venture capital funding," Journal of Business Venturing, Elsevier, vol. 33(1), pages 35-51.
    2. repec:bla:jfinan:v:59:y:2004:i:4:p:1805-1844 is not listed on IDEAS
    3. Oliver Alexy & Joern Block & Philipp Sandner & Anne Ter Wal, 2012. "Social capital of venture capitalists and start-up funding," Small Business Economics, Springer, vol. 39(4), pages 835-851, November.
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    More about this item

    JEL classification:

    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G3 - Financial Economics - - Corporate Finance and Governance

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