Determinants of Venture Capital Investments in India: A State Level Analysis

While India’s nascent startup industry has emerged to be amongst the top three startup industries globally, the grave challenge of lack of finance is thwarting the industry from reaching its potential. Insufficient funding is a major deterrent to startups’ growth which leads to death of startups at initial stages. Venture capital (VC) investments solve this problem of financial crunch and enable these startups to attain growth and scalability. Consequently, it becomes imperative to analyse and study factors that attract VC investments in a particular country. At present, there is limited literature on VC investments and their determinants pertaining to Asian countries. Specifically, no study has analysed the factors that impact VC investments in context of the Indian states. Building on the scanty literature, the present study has attempted to empirically determine the state level determinants that impact VC investments in startups in India. Using two-step System Generalised Method of Moments (GMM) on panel data for 15 states from 2008-2016, the study has analysed the impact of selected state-specific economic, infrastructural and institutional variables on VC investments. The results highlight that employment, teledensity, credit deposit ratio and state GDP positively affect the venture capital activity in a state. On the contrary, past venture capital investments and electricity available per capita negatively affect the venture capital activity in a state. The paper concludes with broad policy implications that will help policymakers create a conducive environment for fostering VC activity.