Banks Versus Venture Capital When the Venture Capitalist Values Private Benefits of Control
July 27, 2010
If control of their firms allows entrepreneurs to derive private benefits, it also allows other controlling parties. Private benefits are especially relevant for venture capitalists, who typically get considerable control in their portfolio firms, but not for banks, which are passive loan providers. We incorporate this difference between banks and venture capital and analyze entrepreneurs' financing strategy between the two. We find that, in all strict Nash Equilibria, entrepreneurs who value private benefits more choose banks while the rest choose venture capital. Thus, bank-financed entrepreneurs allocate more resources to tasks that yield private benefits while VC-backed entrepreneurs have higher profitability.
Number of Pages in PDF File: 42
Keywords: bank, control, entrepreneurship, private benefit, venture capital
JEL Classification: G21, G24, G32, L26, M13
Date posted: October 2, 2010
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