Small and Medium-Sized Enterprises, Bank Relationship Strength, and the Use of Venture Capital

Allen N. Berger*, Klaus Schaeck

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)

32 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)461-490
Number of pages30
JournalJournal of Money, Credit and Banking
Volume43
Issue number2-3
DOIs
Publication statusPublished - Mar 2011

Keywords

  • Relationship banking
  • SME financing
  • Venture capital

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