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Bank as a Venture Capitalist

Author

Listed:
  • Rishabh, Kumar

    (University of Basel)

Abstract
Banks all over the world show interest in acting as venture capitalists. In this paper, I argue that banks offer venture capital (VC) financing along with traditional (collateralized) loans in response to the natural constraints of the hidden information that they face. Innovative entrepreneurs pursue new technology that promises high return but runs a high risk of failure. The more innovative entrepreneurs also have higher reservation utility. This interaction between type-dependent returns and reservation utility creates a situation where collateral alone is not sufficient to screen entrepreneurs, and the uninformed bank needs an additional screening device. VC fulfils that role.

Suggested Citation

  • Rishabh, Kumar, 2021. "Bank as a Venture Capitalist," Working papers 2021/09, Faculty of Business and Economics - University of Basel.
    • Handle: RePEc:bsl:wpaper:2021/09
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    File URL: https://edoc.unibas.ch/84377/1/20210901172805_612f9c05a4673.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank; Venture Capital; Collateral; Debt; Screening;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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