Using a detailed German data set on venture capital contracts, the authors document that contracts between venture capitalists (VC) and their portfolio firms specify more complete conditions for future financing for firms that do have no suitable outside financing option and therefore lower ex post bargaining power. The authors’ result is consistent with theories of holdup, where complete contracts protect the entrepreneur from expropriation by the financier. Moreover, there is evidence of learning by VCs. Other possible explanations for observed contracts, such as multitasking or coordination costs, instead have little explanation power.

We aim to extend the sparse knowledge on the financing dynamics of newly founded firms by investigating 2456 French manufacturing firms that were founded between 2004 and 2006. Our data comes from their legally required and reported financial statements. We observe significant heterogeneity in the financing decisions at foundation and analyze whether these differences widen or converge by using different convergence concepts. We consistently find β-convergence that indicates the initial financing decisions have a negative effect on the accumulation of this source of financing. After investigating the development of variation in financing patterns across firms over time (σ-convergence), we find mixed results. While differences in debt composition (e.g. role of trade credit, bank loans as well as relation between short and long-term debt) vanish over time the opposite is true for debt-equity mixes.