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Building Relationships Early: Banks in Venture Capital

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Author Info
Thomas Hellmann
Laura Lindsey
Manju Puri

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Abstract

This paper examines bank behavior in venture capital. It considers the relation between a bank's venture capital investments and its subsequent lending, which can be thought of as intertemporal cross-selling. Theory suggests that unlike independent venture capital firms, banks may be strategic investors who seek complementarities between venture capital and lending activities. We find evidence that banks use venture capital investments to build lending relationships. Having a prior relationship with a company in the venture capital market increases a bank's chance of subsequently granting a loan to that company. Companies can benefit from these relationships through more favorable loan pricing. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhm080
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 21 (2008)
Issue (Month): 2 (April)
Pages: 513-541
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Handle: RePEc:oup:rfinst:v:21:y:2008:i:2:p:513-541

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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. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December. [Downloadable!] (restricted)
  2. Hellmann, Thomas, 2002. "A theory of strategic venture investing," Journal of Financial Economics, Elsevier, vol. 64(2), pages 285-314, May. [Downloadable!] (restricted)
  3. Kaplan, Steven & Strömberg, Per Johan, 2002. "Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses," CEPR Discussion Papers 3243, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March. [Downloadable!] (restricted)
  5. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, vol. 23(3), Fall.
  6. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuran G. Rajan & Jeremy C. Stein, 2002. "Does function follow organizational form? evidence from the lending practices of large and small banks," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 383-400.
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  7. James A. Brander & Raphael Amit & Werner Antweiler, 2002. "Venture-Capital Syndication: Improved Venture Selection vs. The Value-Added Hypothesis," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 11(3), pages 423-452, 09. [Downloadable!] (restricted)
  8. 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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  9. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July. [Downloadable!] (restricted)
  10. Hamao, Yasushi & Packer, Frank & Ritter, Jay R., 2000. "Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 8(5), pages 529-558, October. [Downloadable!] (restricted)
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  11. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Blackwell Publishing, vol. 65(2), pages 261-94, April. [Downloadable!] (restricted)
  12. Paul A. Gompers & Josh Lerner, 1998. "The Determinants of Corporate Venture Capital Successes: Organizational Structure, Incentives, and Complementarities," NBER Working Papers 6725, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Blackwell Publishing, vol. 64(4), pages 605-54, October. [Downloadable!] (restricted)
  14. Steven Drucker & Manju Puri, 2004. "The Tying of Lending and Equity Underwriting," NBER Working Papers 10491, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March. [Downloadable!] (restricted)
  16. Paul A. Gompers, 2002. "Corporations and the financing of innovation: The corporate venturing experience," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 1-17. [Downloadable!]
  17. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Ralf Becker & Thomas Hellmann, 2003. "The Genesis of Venture Capital - Lessons from the German Experience," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  19. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June. [Downloadable!] (restricted)
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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. Oliver, Gottschalg & Ludovic, Phalippou, 2006. "The performance of private equity funds," Les Cahiers de Recherche 852, HEC Paris. [Downloadable!]
    Other versions:
  2. Christian Schröder, 2009. "Financial System and Innovations-Determinants of Early Stage Venture Capital in Europe," Schumpeter Discussion Papers sdp09004, Universitätsbibliothek Wuppertal, University Library. [Downloadable!]
  3. Tereza Tykvová, 2006. "How do investment patterns of independent and captive private equity funds differ? Evidence from Germany," Financial Markets and Portfolio Management, Springer, vol. 20(4), pages 399-418, December. [Downloadable!] (restricted)
  4. Kenneth Daniels & Gabriel Ramirez, 2008. "Information, Credit Risk, Lender Specialization and Loan Pricing: Evidence from the DIP Financing Market," Journal of Financial Services Research, Springer, vol. 34(1), pages 35-59, August. [Downloadable!] (restricted)
  5. Steven Drucker, 2005. "Information asymmetries and the effects of banking mergers of firm-bank relationships," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 140-147. [Downloadable!]
  6. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2008. "What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence," Discussion Paper 2008-014, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  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. Vanacker, T. & Manigart, S. & Meuleman, M., 2008. "Towards an evolutionary model of the entrepreneurial financing process: insights from biotechnology startups," Vlerick Leuven Gent Management School Working Paper Series 2008-09, Vlerick Leuven Gent Management School. [Downloadable!]
    Other versions:
  9. Baeyens,K. & Manigart,S., 2006. "Follow-on financing of venture capital backed companies: the choice between debt, equity, existing and new investors," Vlerick Leuven Gent Management School Working Paper Series 2006-05, Vlerick Leuven Gent Management School. [Downloadable!]
    Other versions:
  10. Tykvová, Tereza, 2004. "Who Are the True Venture Capitalists in Germany?," ZEW Discussion Papers 04-16, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  11. Laura Bottazzi & Marco Da Rin & Thomas Hellmann, 2004. "Active Financial Intermediation: Evidence on the Role of Organizational Specialization and Human Capital," Working Papers 266, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  12. Diana Marina Del COlle, & Paolo Finaldi Russo & Andrea Generale, 2006. "The Causes and Consequences of Venture Capital Financing. An Analysis based on a Sample of Italian Firms," Temi di discussione (Economic working papers) 584, Bank of Italy, Economic Research Department. [Downloadable!]
  13. Laura Bottazzi & Marco Da Rin & Thomas Hellmann, 2005. "What Role of Legal Systems in Financial Intermediation? Theory and Evidence," Working Papers 283, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  14. Iris Claus & Veronica Jacobsen & Brock Jera, 2004. "Financial Systems and Economic Growth: An Evaluation Framework for Policy," Treasury Working Paper Series 04/17, New Zealand Treasury. [Downloadable!]
  15. Josh Lerner & Antoinette Schoar & Wan Wong, 2005. "Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle," NBER Working Papers 11136, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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