Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation


  • Masako Ueda

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    • University of Wisconsin-Madison. I would like to thank Franklin Allen, Gary Gorton, Boyan Jovanovic, Matthias Kahl, Joshua Lerner, and Frank Schmid for comments at an early stage of this paper. I also thank Giacinta Cestone, Matthew Ellman, Xavier Freixas, Thomas Hellmann, Holger Mueller, Javier Suarez, Lucy White, and seminar participants at Universitat Autonoma de Barcelona (IAE), Universitet van Amsterdam, Stockholm School of Economics, University of Wisconsin-Madison, and the 2000 CEPR/Studienzentrum Gerzensee European Summer Symposium of Financial Markets for valuable discussions. Last but not least, I am grateful to Richard Green and an anonymous referee for their time and effort to improve this paper.


Why do some start-up firms raise funds from banks and others from venture capitalists? To address this question, I study a model in which the venture capitalist can evaluate the entrepreneur's project more accurately than the bank but can also threaten to steal it from the entrepreneur. Consistent with evidence regarding venture capital finance, the model implies that the characteristics of a firm financing through venture capitalists are relatively little collateral, high growth, high risk, and high profitability. The model also suggests that tighter protection of intellectual property rights encourages entrepreneurs to finance through venture capitalists.