Venture Capital Investment Motivations

Abstract

Venture capital investment has been of particular interest to researchers in the last decades. However, our current understanding on venture capitalists’ behavior in investing in unprofitable late-stage ventures is limited. To address the existing gap in literature, this study asks the following questions: - Why do venture capital firms invest in late-stage companies that do not have a clear path to profitability? - What motivates a venture capitalist to make an investment into a venture that has issues with profitability? - If venture capital firms place more value on the business idea of the venture and not the profitability of the business, how do they exit this investment? To answer these research questions, a multiple case study was conducted with six semi-structured interviews with venture capitalists in Finland. The qualitative research data was analyzed with a thematic analysis, complemented with a literature review on venture capital decision-making. The findings of this research indicate that venture capitalists invest in late-stage unprofitable companies because VCs value growth over profitability, they have a strategy that requires them to make investments into a certain industry or technology, and that in certain industries, companies require a lot of capital in order to be able to compete on their market. Thus, VCs are willing to invest significant amounts of money to them to these ventures if the VC has a stake in them. In addition, having a large fund, which is often the case in the United States, enables the VC to pour money into numerous companies, and through sheer statistical force enables the VC to find one or two extremely successful ventures. Moreover, VC exit strategies, characteristics of the entrepreneur or the management team of a venture, intuition, and the way VCs source and assess new venture proposals were not important factors in explaining this behavior.