Venture Capital Financing and the Growth of New Technology-Based Firms: Correcting for Sample Self-Selection

Abstract

The financial literature claims that venture capital (VC) financing spurs the growth of new technology-based firms (NTBFs). First, VC investors allegedly have superior scouting capabilities, so they provide great hidden value firms with the financing they would otherwise be unable to obtain. Second, they also provide monitoring and coaching services to portfolio companies. Third, VC financing has a “certification” effect, making easier for portfolio firms obtaining support from third parties. The aim of the paper is to test whether VC financing has a positive effect on the subsequent growth of sales and employment of portfolio companies by taking into account the actual willingness of the NTBF to receive equity financing. We consider a 10 year long longitudinal dataset composed of 215 Italian NTBFs, most of which are privately held. The sample includes both VC-backed and non VC-backed firms. In order to capture the effects of VC financing on the subsequent growth of firms, we estimate an augmented Gibrat-law type dynamic panel data model. We resort to GMM-system estimation to control for the potentially endogenous nature of VC financing. The results strongly support the view that VC financing spurs firm growth. Moreover once controlled for self-selection, the effect of VC on firm growth is even larger.