A Dynamic View on External Financing Choices of Growth Oriented Ventures

Abstract

A critical question that growth oriented companies face is whether to raise new funding under the form of debt or equity from new or existing shareholders. We study the 345 new funding issues of a sample of 191 early stage growth oriented start-ups. We show that bank debt is available to firms with low demand for money, with low levels of risk and low levels of information asymmetries. When firms' debt capacity is exhausted, they are financed with equity, hinting that equity investors are investors of last resort. Funding is provided by new equity investors rather than by existing shareholders in only 30% of the equity issues. New shareholders invest when large amounts of funding are required and when risk and information asymmetries are very high. New investors thus provide risk sharing opportunities and skills to monitor and thereby reduce information asymmetries. Existing investors are sole investors for intermediate levels of risk and information asymmetries.