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Venture capital financing and the growth of high-tech start-ups: Disentangling treatment from selection effects

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  • Bertoni, Fabio
  • Colombo, Massimo G.
  • Grilli, Luca

Abstract

The financial and innovation literature generally claims that venture capital (VC) investments spur the growth of new technology-based firms (NTBFs). However, it has proved difficult so far to separate the "treatment" effect of the VC investment from the "selection" effect attributable to the ability of the VC investor to screen high growth NTBFs. The aim of this work is to test whether VC investments have a positive treatment effect on the growth of employment and sales of NTBFs. For this purpose we consider a 10-year longitudinal data set for 538 Italian NTBFs, most of which are privately held. The sample includes both VC-backed and non-VC-backed firms. We estimate Gibrat-law-type dynamic panel-data models augmented with time-varying variables that capture the VC status of firms. To control for the endogeneity of VC investments we use several GMM estimators. The econometric results strongly support the view that VC investments positively influence firm growth. The treatment effect of VC investments is of large economic magnitude, especially on growth of employment. Most of it is obtained immediately after the first round of VC finance. Conversely, the selection effect of VC appears to be negligible in the Italian context.

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Bibliographic Info

Article provided by Elsevier in its journal Research Policy.

Volume (Year): 40 (2011)
Issue (Month): 7 (September)
Pages: 1028-1043

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Handle: RePEc:eee:respol:v:40:y:2011:i:7:p:1028-1043

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Keywords: Venture capital High-tech start-ups Firm growth Sorting and treatment effects;

References

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Cited by:
  1. Cumming, Douglas & Li, Dan, 2013. "Public policy, entrepreneurship, and venture capital in the United States," Journal of Corporate Finance, Elsevier, Elsevier, vol. 23(C), pages 345-367.
  2. David Devigne & Tom Vanacker & Sophie Manigart & Ine Paeleman, 2013. "The role of domestic and cross-border venture capital investors in the growth of portfolio companies," Small Business Economics, Springer, Springer, vol. 40(3), pages 553-573, April.
  3. Croce, Annalisa & Martí, José & Murtinu, Samuele, 2013. "The impact of venture capital on the productivity growth of European entrepreneurial firms: ‘Screening’ or ‘value added’ effect?," Journal of Business Venturing, Elsevier, vol. 28(4), pages 489-510.
  4. Faria, Ana Paula & Barbosa, Natália, 2014. "Does venture capital really foster innovation?," Economics Letters, Elsevier, vol. 122(2), pages 129-131.
  5. Dora Gicheva & Albert Link, 2013. "Leveraging entrepreneurship through private investments: does gender matter?," Small Business Economics, Springer, Springer, vol. 40(2), pages 199-210, February.
  6. Colombo, Massimo G. & Cumming, Douglas & Mohammadi, Ali & Rossi-Lamastra , Cristina & Wadhwa , Anu, 2014. "Open Business Models And Venture Capital Finance," Working Paper Series in Economics and Institutions of Innovation, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies 347, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  7. Fabio Bertoni & Massimo Colombo & Luca Grilli, 2013. "Venture capital investor type and the growth mode of new technology-based firms," Small Business Economics, Springer, Springer, vol. 40(3), pages 527-552, April.
  8. Dina Cunha & Sandra T. Silva & Aurora A.C. Teixeira, 2013. "Are Academic Spin-Offs necessarily New Technology-Based firms?," FEP Working Papers 482, Universidade do Porto, Faculdade de Economia do Porto.
  9. Blommestein, H.J. & Eijffinger, S.C.W. & Qian, Z., 2011. "Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk," Discussion Paper, Tilburg University, Center for Economic Research 2011-121, Tilburg University, Center for Economic Research.
  10. Fabio Bertoni & María Ferrer & José Martí, 2013. "The different roles played by venture capital and private equity investors on the investment activity of their portfolio firms," Small Business Economics, Springer, Springer, vol. 40(3), pages 607-633, April.
  11. Martí, José & Menéndez-Requejo, Susana & Rottke, Olaf M., 2013. "The impact of venture capital on family businesses: Evidence from Spain," Journal of World Business, Elsevier, Elsevier, vol. 48(3), pages 420-430.
  12. Colombo, Massimo G. & Croce, Annalisa & Guerini, Massimiliano, 2013. "The effect of public subsidies on firms’ investment–cash flow sensitivity: Transient or persistent?," Research Policy, Elsevier, Elsevier, vol. 42(9), pages 1605-1623.
  13. M. Knockaert & T. Vanacker, 2011. "The Association between Venture Capitalists’ Selection and Value Adding Behavior: Evidence from Early Stage High Tech Venture Capitalists," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 11/741, Ghent University, Faculty of Economics and Business Administration.
  14. Blommestein, Hans J. & Eijffinger, Sylvester C W & Qian, Zongxin, 2011. "A Dynamic General Equilibrium Analysis of Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8652, C.E.P.R. Discussion Papers.
  15. Valerio Vacca, 2013. "Financing innovation in Italy: an analysis of venture capital and private equity investments," Questioni di Economia e Finanza (Occasional Papers) 209, Bank of Italy, Economic Research and International Relations Area.
  16. Johann Peter Murmann & Jenny Korn & Hagen Worch, 2014. "How Fast Can Firms Grow?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 234(2-3), pages 210-233, April.

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