Paper #522

Title:

Bank versus venture capital

Author:

Masako Ueda

Date:

November 2000

Abstract:

Why do some start-up firms raise funds from banks and others from venture capitalists? To answer this question, I develop a model of start-up financing when intellectual property rights are not well protected. The upside of VC financing is that the VC understands the business better than a bank. The downside, however, is that the VC may steal the idea and use it himself. The results of the model are consistent with empirical regularities on start-up financing. The model implies that the characteristics of the firms financing from venture capitalists are low-collateral, high-growth and high-profitability. The model also suggests that the tighter protection of intellectual property rights contributes to the recent dramatic growth of the US venture capital industry.

Keywords:

Collateral, intellectual-property, venture-capital

JEL codes:

G21, G24, K11

Area of Research:

Finance and Accounting

Published in:

Journal of Finance 59(2), 601-621, 2004
With the title:
Banks versus Venture Capital: Project Evaluation, Screening, and Expropiation

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