Working Paper: CEPR ID: DP3411
Authors: Masako Ueda
Abstract: Why do some start-up firms raise funds from banks and others from venture capitalists? To answer 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. The implications of the model are consistent with empirical regularities of start-up financing. The model implies that the characteristics of a firm financing from venture capitalists are low collateral, high growth, high risk, and high profitability. The model also suggests that tighter protection of intellectual property rights has contributed to the recent dramatic growth of the US venture capital industry.
Keywords: Bank; Intellectual Property Rights; Venture Capital
JEL Codes: G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asymmetric information (D82) | Financing choice (G32) |
| Threat of expropriation (H13) | Decision to seek VC funding (G24) |
| Tighter IPR (O34) | VC funding attractiveness (G24) |
| High growth, high risk, low collateral (O16) | Preference for VC financing (G24) |
| High returns, high risk (G17) | Financing by VCs (G24) |