Follow-On Financing of Venture Capital Backed Companies

HANDBOOK OF ENTREPRENEURIAL FINANCE, Douglas J. Cumming, ed., Oxford University Press, 2011

39 Pages Posted: 9 Jan 2011 Last revised: 17 Mar 2016

See all articles by Tom R. Vanacker

Tom R. Vanacker

Ghent University; University of Exeter Business School

Arnout Seghers

Ghent University - Faculty of Economics and Business Administration

Sophie Manigart

Vlerick Business School; Ghent University

Date Written: January 8, 2011

Abstract

High growth entrepreneurial companies need external financial resources as their internally generated cash flows are typically smaller than their investment opportunities, but they may be faced with finance constraints due to market imperfections, such as asymmetric information and transaction costs. We empirically investigate the different sources of finance raised by young companies after they received their first round of venture capital finance (as an indicator of high growth ambitions). We employ a longitudinal dataset of finance events within 136 Belgian venture capital backed companies over the five-year period after the initial venture capital investment. We show that the most commonly used finance sources are financial and operational debt. Yet, external equity issues are important as they allow companies to raise larger amounts of finance compared to the other finance options, especially when asymmetric information, agency costs and bankruptcy risk are high. This is consistent with the venture capital staging literature. The importance of internal funds, although small, increases steadily over time.

Keywords: Financing Policy, Entrepreneurial Firm, High Growth Orientation, Venture Capital, Bank Debt, Operational Debt, Internal Funds

JEL Classification: G24, G32, M13

Suggested Citation

Vanacker, Tom R. and Seghers, Arnout and Manigart, Sophie, Follow-On Financing of Venture Capital Backed Companies (January 8, 2011). HANDBOOK OF ENTREPRENEURIAL FINANCE, Douglas J. Cumming, ed., Oxford University Press, 2011. Available at SSRN: https://ssrn.com/abstract=1736981

Tom R. Vanacker (Contact Author)

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

University of Exeter Business School ( email )

Streatham Court
Exeter, EX4 4JH
United Kingdom

Arnout Seghers

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Sophie Manigart

Vlerick Business School ( email )

Reep 1
Ghent, BE-9000
Belgium

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

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