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Follow-on financing of venture capital backed companies: the choice between debt, equity, existing and new investors

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  • Baeyens,K.
  • Manigart,S.

    ()
    (Vlerick Leuven Gent Management School)

Abstract

We study the financing strategies of 191 start-ups after they have received venture capital (VC) and thereby contribute to the staging literature. The VC backed start-ups have raised financing on 345 occasions over a five-year period after the initial VC investment. Surprisingly, bank debt is the most important source of funding for these young and growth-oriented companies, supporting the view that VC investors have a certifying role in their portfolio companies. Bank debt is available to firms with a lower demand for money, lower levels of risk and of information asymmetries, implying that staging of equity funding is less important for these firms. A firm only raises equity when it’s debt capacity is exhausted, hinting that equity investors are investors of last resort. New equity is provided by the existing shareholders in 70% of the equity issues, supporting earlier findings that staged financing is important in venture capital financing. New shareholders invest when large amounts of funding are required and when risk and information asymmetries are high. We interpret these findings as support for the extended pecking order theory. In line with syndication arguments, new investors thus provide risk sharing opportunities and skills to screen and monitor and thereby reduce information asymmetries. New equity investors face adverse selection problems, however, in that only the most risky investments are syndicated.

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Bibliographic Info

Paper provided by Vlerick Leuven Gent Management School in its series Vlerick Leuven Gent Management School Working Paper Series with number 2006-05.

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Length: 51 pages
Date of creation: 27 Mar 2006
Date of revision:
Handle: RePEc:vlg:vlgwps:2006-05

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Keywords: financing strategy; venture capital; bank debt; external shareholders;

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References

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Cited by:
  1. C. Beuselinck & S. Manigart, 2005. "Financial Reporting Quality in Private Equity Backed Companies: The Impact of Ownership Concentration," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/343, Ghent University, Faculty of Economics and Business Administration.

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