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Small and medium-sized enterprises, bank relationship strength, and the use of venture capital

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>1/03/2011
<mark>Journal</mark>Journal of Money, Credit and Banking
Issue number2-3
Volume43
Number of pages29
Pages (from-to)461-490
Publication statusPublished
Early online date2/09/10
Original languageEnglish

Abstract

We investigate the nexus between small and medium-sized enterprises’ (SMEs’) use of venture capital and bank financing relationships using a unique data set with detailed information on SME finance in Italy, Germany, and the UK. The empirical regularities we uncover show that that entrepreneurial firms substitute venture capital for multiple banking relationships. This substitution effect is primarily driven by expertise substitution, and there is also some suggestive, yet inconclusive, indication in the data that SMEs turn to providers of venture capital to avoid rent-extracting behavior by the firm's main bank. Our results do not support the view that firms obtain venture capital in instances when bank financing is difficult to obtain. Instead, venture capital funds are used if bank funding is deemed not appropriate, and firms do seem to be aware of which type of financing is more appropriate for them.