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

Masako Ueda*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

217 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)601-621
Number of pages21
JournalJournal of Finance
Volume59
Issue number2
DOIs
StatePublished - Apr 2004

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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