How useful is the stage model theory in explaining the capital structure of venture capital-backed and non-venture capital-backed firms?

Policymakers have long supported the development of venture capital markets on the basis that venture capital fills a perceived gap in the availability of early stage seed capital funding for new technology-based firms (NTBFs).1 Support from policymakers, however, has not been matched by academic research on NTBF financing. This is a major concern because NTBF financing is not well understood. The theoretical focus of this chapter is the life cycle or stage model of financing, which has proved the dominate paradigm in the analysis of financing in NTBFs. It is particularly relevant to this study, as the stage model is explicitly endorsed by venture capitalists who structure deals in phases in order to effectively monitor the investee firm's progress (Sahlman, 1990).