DP3411 Banks versus Venture Capital

Author(s):	Masako Ueda
Publication Date:	June 2002
Keyword(s):	bank, intellectual property rights, venture capital
JEL(s):	G24
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=3411

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.