We analyze whether firms that receive venture capital (VC) at a later date face more financial constraints than a one-by-one matched sample of firms that did not receive VC funding (control group). The aim is to check whether their financial flexibility explains why they decide to seek external equity funding. In contrast with other papers, which focus on the sensitivity of investments to cash flow, we study this issue by applying a dynamic model to analyze the speed of adjustment to their target debt levels prior to receiving the first VC investment. We analyze a representative sample of 237 Spanish unlisted firms that received VC between 1995 and 2007 and its corresponding control group. We find that firms that receive VC funding show a significantly lower speed of adjustment than their matched peers before the initial VC round. It seems that the former are more concerned about funding the required investments than about adjusting the firm's debt ratio to a target level. Our results confirm the role of VC in filling the equity gap in constrained unlisted firms. From a capital structure perspective, VC may become a tool for these companies to balance their capital structure in a growth process.
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