Working Paper: NBER ID: w10535
Authors: Thomas Hellmann; Laura Lindsey; Manju Puri
Abstract: The importance of an investor's organizational structure is increasingly recognized in modern finance. This paper examines the role of banks in the US venture capital market. Theory suggests that unlike independent venture capital firms, banks can seek complementarities between their venture capital and lending activities. Our empirical analysis suggests that banks use their venture capital investments to build relationships for their lending activities. Banks target their venture investments to companies that are more likely to subsequently raise loans, and having made an investment as a venture capitalist increases a bank's likelihood of providing a loan. Companies may benefit from these relationships through more favorable loan pricing. The analysis suggests that banks are strategic investors in the venture capital market with investment patterns distinct from independent venture capitalists. It also provides a cautionary note for relying on banks for the development of a venture capital industry.
Keywords: Venture Capital; Banks; Lending Relationships; Investment Strategies
JEL Codes: G2; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| venture capital investment (G24) | loan acquisition (G51) |
| venture capital investment (G24) | relationship with banks (G21) |
| relationship with banks (G21) | loan acquisition (G51) |
| venture capital investment (G24) | strategic behavior of banks (G21) |
| relationship loans (G51) | lower yield spreads (G12) |