Building Relationships Early: Banks in Venture Capital

Banks routinely invest in the venture capital market. Why are they interested in venture capital, and how do their investments differ from independent venture capitalists? The banking literature suggests that banks may have some valuable expertise that they might want to leverage into venture capital. Alternatively, banks may want to build relationships in the venture market for their core lending activities. Examining US data from 1980-2000, the evidence does not support the hypothesis that banks leverage valuable expertise from the loan market into the venture capital market. However, the evidence supports the hypothesis that banks leverage their venture capital relationships for their core lending business. Having made an investment as a venture capitalist increases a bank’s likelihood of subsequently providing a loan. Banks also target their venture investments to companies that are more likely to subsequently raise loans. The analysis suggests a cautionary note for relying on banks for the development of a venture capital industry.  We thank Serdar Dinc, Colin Mayer, Bill Megginson, and seminar participants in Oslo, Oxford, Porto, Sydney, Toronto and Yale. We also thank Jun Ishii and Shu Wu for excellent research assistance, and the Center for Entrepreneurial Studies at the Stanford Graduate School of Business and the NSF for financial support. Puri thanks the Sloan Foundation for partial funding support. All errors are ours. Please address correspondence to Manju Puri, Graduate School of Business, Stanford University, Stanford, CA 94305-5015. Email: [email protected]. Tel: (650) 723-3402. Fax: (650) 725-6152