Venture Capital and the Investment Curve of Young High-Tech Companies

Fabio Bertoni, Annalisa Croce and Massimiliano Guerini
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Annalisa Croce: POLIMI - Politecnico di Milano [Milan]
Massimiliano Guerini: POLIMI - Politecnico di Milano [Milan]

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Abstract: We explore how and when venture capital (VC) alleviates the financial constraints of portfolio companies. Using a sample comprising 128 VC-backed companies and 233 non-VC-backed companies identified by propensity score matching, we estimate an error-correction model by accounting for the fact that the investment curve may be U shaped because of capital market imperfections. Our findings show that VC leads the investment curve to flatten in portfolio companies, which indicates an alleviation of financial constraints. This effect, however, is economically and statistically significant only after companies receive a follow-on round of VC financing. Because follow-on rounds, on average, do not involve larger amounts invested but have stronger informative content than initial rounds of investment, we interpret this result to indicate the importance of VC certification for the alleviation of financial constraints in portfolio companies. Evidence regarding the access to credit by VC-backed companies confirms this interpretation of the results.

Keywords: Venture Capital; Investment curve; Young high-tech companies; Financial constraints; Staging; Certification (search for similar items in EconPapers)
Date: 2015-12-01
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Citations: View citations in EconPapers (12)

Published in Journal of Corporate Finance, 2015, 35, 159-176 p. ⟨10.1016/j.jcorpfin.2015.08.012⟩

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Journal Article: Venture capital and the investment curve of young high-tech companies (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02313325

DOI: 10.1016/j.jcorpfin.2015.08.012

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