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Banks versus Venture Capital

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Author Info
Ueda, Masako

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Abstract

Why do some start-up firms raise funds from banks and others from venture capitalists? To answer this question, I study a model in which the venture capitalist can evaluate the entrepreneur’s project more accurately than the bank but can also threaten to steal it from the entrepreneur. The implications of the model are consistent with empirical regularities of start-up financing. The model implies that the characteristics of a firm financing from venture capitalists are low collateral, high growth, high risk, and high profitability. The model also suggests that tighter protection of intellectual property rights has contributed to the recent dramatic growth of the US venture capital industry.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3411.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3411

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Related research
Keywords: bank; intellectual property rights; venture capital;

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Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Chan, Yuk-Shee, 1983. " On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, vol. 38(5), pages 1543-68, December. [Downloadable!] (restricted)
    Other versions:
  3. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August. [Downloadable!] (restricted)
    Other versions:
  4. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(1), pages 169-197, 02. [Downloadable!] (restricted)
    Other versions:
  5. HOLMSTRÖM, Bengt & TIROLE, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
    Other versions:
  6. Steven N. Kaplan & Per Stromberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Blackwell Publishing, vol. 70(2), pages 281-315, 04. [Downloadable!] (restricted)
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  7. Yosha Oved, 1995. "Information Disclosure Costs and the Choice of Financing Source," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 3-20, January. [Downloadable!] (restricted)
  8. Anton, James J & Yao, Dennis A, 1994. "Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights," American Economic Review, American Economic Association, vol. 84(1), pages 190-209, March. [Downloadable!] (restricted)
  9. Masako Ueda, 1997. "Expertise and Finance: Mergers Motivated by Technological Change," Economics Working Papers 253, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  10. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May. [Downloadable!] (restricted)
  11. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  13. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(4), pages 959-84.
  14. Roberta Dessí, 1999. "Financing Entrepreneurs: Optimal Contracts and the Role of Intermediaries," FMG Discussion Papers dp328, Financial Markets Group. [Downloadable!] (restricted)
  15. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October. [Downloadable!] (restricted)
  16. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Baeyens, K. & Manigart, S., 2006. "Who gets private equity? The role of debt capacity, growth and intangible assets," Vlerick Leuven Gent Management School Working Paper Series 2006-24, Vlerick Leuven Gent Management School. [Downloadable!]
    Other versions:
  2. Christian Keuschnigg & Soren Bo Nielsen, 2006. "Self-Selection and Advice in Venture Capital Finance," University of St. Gallen Department of Economics working paper series 2006 2006-06, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  3. Keuschnigg, Christian & Nielsen, Soren Bo, 2003. "Taxation and Venture Capital-Backed Entrepreneurship," CEPR Discussion Papers 4097, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Dorothea Schaefer & Dirk Schilder, 2007. "Smart capital in German start-ups - an empirical analysis," Jena Economic Research Papers in Economics 2007-015, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics, Thueringer Universitaets- und Landesbibliothek. [Downloadable!]
  5. Koskinen, Yrjo & Rebello, Michael J. & Wang, Jun, 2006. "Market Coditions and Venture Capitalist Experience in Start-Up Financing," SIFR Research Report Series 45, Institute for Financial Research. [Downloadable!]
  6. Robin Boadway & Jean-Francois Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Julia Hirsch & Uwe Walz, 2006. "Why Do Contracts Differ between VC Types? Market Segmentation versus Corporate Governance Varieties," CFS Working Paper Series 2006/12, Center for Financial Studies. [Downloadable!]
  8. Erik Lehmann, 2004. "Does Venture Capital Syndication Spur Employment Growth and Shareholder Value? : evidence from German IPO Data," Working Papers of the Research Group Heterogenous Labor 04-11, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim. [Downloadable!]
  9. K. Baeyens & S. Manigart, 2006. "Follow-on financing of venture capital backed companies: The choice between debt, equity, existing and new investors," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/362, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
    Other versions:
  10. CASAMATTA, Catherine & HARITCHABALET, Carole, 2007. "Competition Between Informed Venture Capitalists for the Financing of Entrepreneurs," IDEI Working Papers 444, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  11. Stefan ARPING, 2002. "Cannibalization & Incentives in Venture Financing," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.07, Université de Lausanne, Faculté des HEC, DEEP, revised May 2002. [Downloadable!]
  12. LESHCHINSKII, Dima, 2002. "Indulgent angels or stingy venture capitalists? The entrepreneurs' choice," Les Cahiers de Recherche 769, HEC Paris. [Downloadable!]
  13. Christian Keuschnigg & Soren Bo Nielsen, 2003. "Public Taxation and Venture Capital Backed Entrepreneurship," University of St. Gallen Department of Economics working paper series 2003 2003-17, Department of Economics, University of St. Gallen. [Downloadable!]
  14. Erik Lehmann, 2006. "Does Venture Capital Syndication Spur Employment Growth and Shareholder Value? Evidence from German IPO Data," Small Business Economics, Springer, vol. 26(5), pages 455-464, 06. [Downloadable!] (restricted)
  15. Koskinen, Yrjö & Rebello, Michael & Wang, Jun, 2006. "Venture Capital Financing: The Role of Bargaining Power and the Evolution of Informational Asymmetry," CEPR Discussion Papers 5806, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  16. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
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