Frontiers in European Entrepreneurship Research
Edited by Luca Iandoli, Hans Landström and Mario Raffa
Chapter 1: Venture Capital Financing and the Growth of New Technology-based Firms: What Comes First?
1. Venture capital ﬁnancing and the growth of new technology-based ﬁrms: what comes ﬁrst? Fabio Bertoni, Massimo G. Colombo and Luca Grilli INTRODUCTION It is generally acknowledged by the economic literature that new ﬁrms, especially new technology-based ﬁrms (NTBFs), greatly contribute to the static and dynamic eﬃciency of the economic system (see, for instance, Audretsch, 1995). A conspicuous body of empirical studies has analysed the determinants of their post-entry performances (for a survey, see Colombo and Grilli, 2005). This literature generally shows that ﬁrms ﬁnanced by venture capital (VC) grow faster than their non-VC-backed counterparts. However, this evidence is compatible with two fundamentally diﬀerent arguments. On the one hand, the positive correlation between VC ﬁnancing and ﬁrm growth is generally interpreted as evidence that this type of ﬁnancing spurs growth. Studies in ﬁnancial economics argue that due to capital market imperfections, it is diﬃcult for NTBFs to obtain the external ﬁnancing they need. Even though this reasoning especially applies to debt ﬁnancing, the cost of external equity capital may also be very high for NTBFs. Hence, in accordance with the ‘ﬁnancing hierarchy’ hypothesis (Fazzari et al., 1988), NTBFs generally resort to personal capital to ﬁnance operations. In turn, lack of adequate funds may hinder a ﬁrm’s growth (Carpenter and Petersen, 2002a, 2002b). As a corollary, VC ﬁnancing may be instrumental in removing these binding ﬁnancial constraints. On the other hand, rapidly growing ﬁrms are also more likely both to demand and to obtain VC. In other words,...
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