Follow-On Financing of Venture Capital Backed Companies

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