5 Chapter II Literature Review 2.1 Introduction To review the literature on the determinants of startup and SME factors in the VC and investor context a systematic search was conducted. The focus of this literature review is on English-language journal articles because such journal articles are regarded as established knowledge and have the greatest influence on the academic discourse. In searching literature, involved the Scopus, Research Gate, Science Direct, and Google Scholar databases for the words “start-up*”, “startup*”, “new venture*”, “venture capital*”, venture-backed” and “venture backed” in combination with the terms “valuation*”, “valuing*”, “market* value*”, “firm* value*”, “company* value*”, “enterprise* value*”, “investor*”, “angel* investor*”, “business* angel* ”, “business* value*”, “factor* determinant*”, “factor* influencing*”, “analytical* hierarchy* process*”, and “decision* making*” in an article’s title, abstract, or keywords. Assigning a valuation to a startup in the VC context is remarkably challenging because startup investments are characterized by high risk, high cash burn rates, and asymmetric information (Sahlman 1990; Sievers et al. 2013). In view of this, it is all the more important to understand the different determinants that impact startup valuations. Hence, a structured literature review of the determinants of startup valuation in the VC context was performed to ensure the findings are systematic, transparent, and replicable (Tranfield et al. 2003). It should be noted that rigorously conducted structured literature reviews are a powerful means to provide a systematic overview of research on a particular subject (Rousseau and McCarthy 2007). 2.2 Past Studies on Venture Capital and Angel Investor Funding In recent decades, venture capital (VC) and angel investing have emerged as vital sources of funding for innovative startups and high-growth ventures. This chapter delves into the extensive body of past studies that have explored the characteristics, 6 dynamics, and impact of venture capital and angel investment in the entrepreneurial ecosystem. By examining these studies, we gain valuable insights into the motivations, strategies, and outcomes of these investment models, allowing us to better understand their role in fostering innovation and economic growth. 2.2.1 Key Conceptions 1. Venture Capital Financing for new businesses. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential (Lerner, 2000). This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.  Venture Capitalists An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding.  Venture Capital funds An investment fund that manages money from investors seeking private equity stakes in startup and small- and medium-size enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. 2. Types of Investors Investors can be categorized into various types based on their investment goals, strategies, and risk tolerance (Ma et al, 2020; Choi, 2018). Some common types of investors are:  Retail Investors: Retail investors are individual investors who buy and sell securities for personal investment purposes. They typically invest smaller amounts of money and may not have access to the same level of information and research as institutional investors.  Institutional Investors: Institutional investors are large organizations such as banks, insurance companies, pension funds, and mutual funds that manage large amounts of money on behalf of others. They often have 7 professional investment managers who have access to more resources and information than individual investors.  Accredited Investors: Accredited investors are individuals or institutions that meet certain financial criteria, such as having a high net worth or a certain level of annual income. They are allowed to invest in certain types of securities that are not available to retail investors.  Angel Investors: Angel investors are wealthy individuals who invest their own money in start-up companies in exchange for equity. They often provide funding to early-stage companies that are not yet able to secure traditional forms of financing.  Venture Capitalists: Venture capitalists are investors who provide funding to start-up companies that have high growth potential. They typically invest larger amounts of money than angel investors and may also provide strategic guidance and support to the companies they invest in.  Hedge Fund Investors: Hedge fund investors are typically high net worth individuals or institutions that invest in hedge funds, which are pools of investment capital managed by professional investment managers. Hedge funds typically use more complex investment strategies than traditional mutual funds.  Private Equity Investors: Private equity investors invest in private companies or take public companies private. They typically invest larger amounts of money and may also provide strategic guidance and support to the companies they invest in.  Sovereign Wealth Funds: Sovereign wealth funds are investment funds owned by governments or government entities. They typically invest in a wide range of assets, including stocks, bonds, and real estate, and may also provide financing to government projects. These are just a few examples of the many different types of investors. Each type of investor has its own unique characteristics and investment strategies, and investors often choose the type that best aligns with their goals and risk tolerance. In this research we will be more focused on two types or categories which is Angel Investors and Venture Capitals. 8 3. Startup and Small Medium Enterprise Startup usually refers to a newly established company or venture that aims to develop and bring innovative products, services, or technologies to market (Ehsan, 2021). Startups typically operate in dynamic and rapidly evolving sectors, such as technology, biotechnology, or digital platforms, with the goal of achieving significant growth and scalability. On the other hand, SMEs are generally more mature and traditional businesses that have reached a certain level of stability and sustainability, both have respective and different challenge to face. 2.2.2 State of the Art Literature Review The ever-evolving landscape of research and technological advancements necessitates a thorough understanding of the state-of-the-art (SOTA) in any given field. To achieve this, researchers often conduct comprehensive literature reviews that critically analyze and synthesize the latest studies, methodologies, and breakthroughs in their area of interest. A SOTA literature review serves as a foundation for researchers, providing them with a comprehensive overview of the current knowledge, trends, and gaps within their field of study. The purpose of this literature review is to present a comprehensive analysis of the SOTA in factors influencing investment decisions. By synthesizing and evaluating a wide range of scholarly articles, research papers, and other relevant sources, this review aims to identify the most significant developments, emerging trends, and critical insights that shape the current understanding of the field.