Institutions, uncertainty, and venture capital staged investments in ICT start-ups

How do institutions influence the staging investment decisions of venture capitalists (VCs) in the face of uncertainty? This study disentangles this effect by examining the relationship between technological uncertainty and VCs' subsequent investment decisions in the context of an emerging economy. We argue that, in emerging economies, VCs typically view an increase in technological uncertainty as a decrease in the value of the growth option for subsequent investment and thus are less likely to continue investing in the portfolio companies in the subsequent financing round. Further, we propose that the degree of institutional development, which is reflected by the speed of pro-market reform and the density of government VCs, could revise the effect of technological uncertainty on VCs' subsequent investment. Our empirical analysis of VC investments in China's information and communication technology industry provides full support to our predictions.