Based on a series of interviews in Malaysia and the United Arab Emirates, we conduct a comprehensive exploratory study of Islamic Venture Capital focusing on the distinguishing features of its financial rights and securities and the context which affect their design. We use a qualitative methodology, the Grounded Theory approach, to generate new theory.\ud
We find that while Islamic contractual rights and securities may have formal differences with their conventional  counterparts, they are very close in economic substance. This form-substance dichotomy is a central characteristic of Islamic Venture Capital. Market demand for an Islamic brand of venture capital based on ideals of fairness and solidarity clashes with the reality of an array of agency issues and claims venture capitalists need to address. The capacity of Islamic venture capitalists to address these conflicting forces increases with their experience. Their ability is, however, constrained by their fiscal and legal environments. In form, commitment to Islamic ideals is therefore signaled through an investment policy excluding a small number of industries and through the use of Islamic financial instruments with little economic difference, if any, with their conventional counterparts. Minor economic inefficiencies can result, although overall, they are insignificant. In substance, Islamic Venture Capital is thus operationally and economically a near-equivalent to conventional venture capital. \ud
Following our analysis of the interviews, we position our theoretical contribution within related literature through an extensive survey. To further support our theory of form-substance dichotomy, that is the process by which the difference in form is maintained, but not in economic substance, we demonstrate the near-equivalence of Islamic financial instruments’ economic substance with their conventional counterparts’ through a systematic comparison of economic payouts for the entire Islamic venture capital asset class.\ud
This research is unique in that it is the first to our knowledge to address the topic of financial contracting in Islamic venture capital. Previous research in Islamic finance is heavily normative, and there is generally a dearth of research publications dealing with either Islamic financial contracting or Islamic venture capital.\u