Why do some start-up firms raise funds from banks and
others from venture capitalists? To answer this question,
I develop a model of start-up financing when intellectual
property rights are not well protected. The upside of VC
financing is that the VC understands the business better
than a bank. The downside, however, is that the VC may
steal the idea and use it himself. The results of the
model are consistent with empirical regularities on
start-up financing. The model implies that the
characteristics of the firms financing from venture
capitalists are low-collateral, high-growth and
high-profitability. The model also suggests that the
tighter protection of intellectual property rights
contributes to the recent dramatic growth of the US
venture capital industry.
Other authors
Universitat Pompeu Fabra. Departament d'Economia i Empresa
Description
Collection
Economics and Business Working Papers Series; 522
Alternative title
Banks versus Venture Capital: Project Evaluation, Screening, and Expropiation
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