How and When Venture Capital Affects the Investment of Portfolio Firms
33 Pages Posted: 21 Sep 2012
Date Written: September 20, 2012
Abstract
This work studies how and when venture capital (VC) affects the investment of its portfolio firms. We estimate an Error Correction Model that takes into account the non-linearity of the investment curve on a sample of 361 young high-tech firms in 6 European countries. The direct effect of VC on firm's investment is positive and significant only when internal financial constrains are limited. The indirect effect of VC determines a structural change in the investment curve through the reduction of external financial constraints. This effect is particularly significant when firms receive follow-on rounds.
Keywords: investment curve, young high-tech companies, financial constraints, venture capital
JEL Classification: G32, D92, G24
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