Small and Medium-Sized Enterprises, Bank Relationship Strength, and the Use of Venture Capital


  • We are greatly indebted to Bob DeYoung (Editor), and two anonymous referees whose comments helped significantly improve and reshape the paper. We also thank Elu von Thadden, Thomas Hellmann, Manju Puri, Josh Lerner, Lamont Black, Ben Craig, Douglas Cumming, Scott Shane, Tim Dunne, Marco Da Rin, Fabiana Penas, Phil Molyneux, Alexander Popov, Christoph Zott, Riccardo Fini, Enrico Onali, and conference participants at the Financial Intermediation Research Society Meeting, Prague; at the workshop on Entrepreneurial Finance at the Kauffman Foundation, Kansas City; at the Kauffman Foundation and Federal Reserve Bank of Cleveland conference on Entrepreneurial Finance; at the 3rd RICAFE2 conference in Amsterdam; at the 11th ECB-CFS conference “The Market for Retail Financial Services: Development, Integration, and Economic Effects” in Prague; at the 2010 Royal Economic Society Conference in Surrey; and seminar participants at the Deutsche Bundesbank for valuable comments and suggestions. Anna Bullock from the Center for Business Research at the University of Cambridge offered helpful insights into the data.


We investigate the nexus between small and medium-sized enterprises’ (SMEs’) use of venture capital and bank financing relationships using a unique data set with detailed information on SME finance in Italy, Germany, and the UK. The empirical regularities we uncover show that that entrepreneurial firms substitute venture capital for multiple banking relationships. This substitution effect is primarily driven by expertise substitution, and there is also some suggestive, yet inconclusive, indication in the data that SMEs turn to providers of venture capital to avoid rent-extracting behavior by the firm's main bank. Our results do not support the view that firms obtain venture capital in instances when bank financing is difficult to obtain. Instead, venture capital funds are used if bank funding is deemed not appropriate, and firms do seem to be aware of which type of financing is more appropriate for them.