The prominent role of technology-based small firms (TBSFs) in economic growth is prevalent in the literature. However, access to appropriate financial resources is a critical success factor for TBSFs. Venture capital (VC) funds are the key player in financing TBSFs. But, in developing countries, such as Iran, VC industry is inmature and underdeveloped. One of the main obstacle ahead of this industry is the challenges that exist in transactions between two parties (i.e. venture capitalists and TBSFs). So, the current study has executed to explore such challenges during the various stages of VC process. To do this, 29 in-depth interviews were conducted and the datas were analized applying grounded theory method. Also, the institutional theory was adapted in this study, because the institutions provide the frameworks in which the incentives and relation among all actors, including VC fund and TBSFs, are determined. The research finding (that was concluded using the Williamson institutional model) suggest that institutions such as information disclosure standards, tax regulations, intellectual property rights, protection of shareholders rights, law enforcement, government supportive policies, financial market institutions and several other socio-cultural such as collective action culture are critically important in setting up the relationship between the venture capitalists and TBSFs. So, it is recommended that policy makers reform institutions instead of direct intervention to develop the VC industry.