1 VENTURE CAPITAL FINANCING AND THE GROWTH OF NEW TECHNOLOGY-BASED FIRMS: A LONGITUDINAL ANALYSIS Fabio Bertoni, Massimo G. Colombo * and Luca Grilli Department of Management, Economics and Production Engineering, Politecnico di Milano Abstract The financial literature emphasizes that access to venture capital (VC) financing should spur the growth of new-technology based firms. First, due to superior scouting capabilities, VC investors are able to identify firms with great hidden value and provide them with the financing they need, thus relaxing the financial constraints from which they otherwise would suffer. Second, in addition to financing, they provide monitoring and coaching services to invested companies. Third, VC financing has a “certification” effect, making it easier for invested firms to obtain support from third parties. Nevertheless, the extent to which these functions are performed, and so the benefits of VC financing, are likely to depend on the identity of the investor. In this paper we distinguish venture capital financing provided by specialised financial intermediaries (SVC) and that provided by other firms (i.e. corporate venture capital, CVC). The aim of the paper is to test i) whether VC financing has a positive effect on the subsequent growth of invested companies and ii) whether the extent of this effect differs according to the identity of the investor (i.e. SVC vs. CVC). For this purpose, we consider a unique longitudinal dataset composed of 537 Italian new technology-based firms. Sample firms were established in 1980 or later, survived as independent firms up to December 2003, and are observed from 1993. Most of them are privately held. The sample includes both VC-backed and non VC-backed firms. in order to capture the effect of VC financing on the subsequent growth of firms, we estimate an augmented Gibrat law panel data model with distributed lags. We resort to GMM estimation so as to control for the potentially endogenous nature of venture capital financing. The results strongly support the view that VC financing spurs firm’s growth. Moreover, even though both SVC and CVC financing positively affect firm’s growth, the benefits of the former source of financing considerably exceed those of the latter. JEL codes: D92, G24, L21 February 2005 Support from the Venture Fun project sponsored by the EU PRIME Network of Excellence is gratefully acknowledged. * Corresponding author: Politecnico di Milano, Department of Management, Economics and Industrial Engineering, Piazza Leonardo da Vinci, 32, 20133, Milan, Italy. ph: +39-02-2399-2748; fax: +39-2399- 2710. E-mail address: massimo.colombo@polimi.it .