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Bank versus venture capital

Author

Listed:
  • Masako Ueda

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.

Suggested Citation

  • Masako Ueda, 2000. "Bank versus venture capital," Economics Working Papers 522, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:522
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law

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