Venture Capital, Private Firms, and the Capital Acquisition Process

This paper presents an empirical examination of the incentives motivating venture capitalists and sample of growth option intensive private firms with acute capital requirements to interact, the gains each group achieves through this association, the types of private firms successfully attracting venture capital, and mechanisms used in this funding process. Results show that venture capital backed firms achieve growth rates (1) greater than expected, and (2) greater than a matched sample of non-venture capital backed firms. This paper also finds that low collateral asset values, low profitability, and younger firm age to be significant determinants in which firms obtain venture capital funding. Finally, this paper shows that the use of the convertible preferred stock to be positively related to increasing firm risk, and that venture capital backed firms use convertible preferred stock more frequently than do non-venture capital backed firms.