Entrepreneurship, Competitiveness and Local Development
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Entrepreneurship, Competitiveness and Local Development

Frontiers in European Entrepreneurship Research

Edited by Luca Iandoli, Hans Landström and Mario Raffa

This book draws together leading academics to provide a state-of-the-art overview of the key challenges to entrepreneurship in Europe.
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Chapter 1: Venture Capital Financing and the Growth of New Technology-based Firms: What Comes First?

Fabio Bertoni, Massimo G. Colombo and Luca Grilli


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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