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Building Relationships Early: Banks in Venture Capital

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  • Thomas Hellman
  • Laura Lindsey
  • Manju Puri

Abstract

The importance of an investor's organizational structure is increasingly recognized in modern finance. This paper examines the role of banks in the US venture capital market. Theory suggests that unlike independent venture capital firms, banks can seek complementarities between their venture capital and lending activities. Our empirical analysis suggests that banks use their venture capital investments to build relationships for their lending activities. Banks target their venture investments to companies that are more likely to subsequently raise loans, and having made an investment as a venture capitalist increases a bank's likelihood of providing a loan. Companies may benefit from these relationships through more favorable loan pricing. The analysis suggests that banks are strategic investors in the venture capital market with investment patterns distinct from independent venture capitalists. It also provides a cautionary note for relying on banks for the development of a venture capital industry.

Suggested Citation

  • Thomas Hellman & Laura Lindsey & Manju Puri, 2004. "Building Relationships Early: Banks in Venture Capital," NBER Working Papers 10535, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10535
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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