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RFS Advance Access originally published online on December 17, 2007
Review of Financial Studies 2008 21(2):513-541; doi:10.1093/rfs/hhm080
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Building Relationships Early: Banks in Venture Capital

Thomas Hellmann
University of British Columbia

Laura Lindsey
Arizona State University

Manju Puri
Duke University and NBER

Address correspondence to Manju Puri, Fuqua School of Business, Duke University, One Towerview Drive, Durham, NC 27708-0120; telephone: (919) 660-7657; fax: (919) 660-8038; e-mail: mpuri{at}duke.edu.

JEL Classification: G21, G24, G32


  Abstract

This paper examines bank behavior in venture capital. It considers the relation between a bank's venture capital investments and its subsequent lending, which can be thought of as intertemporal cross-selling. Theory suggests that unlike independent venture capital firms, banks may be strategic investors who seek complementarities between venture capital and lending activities. We find evidence that banks use venture capital investments to build lending relationships. Having a prior relationship with a company in the venture capital market increases a bank's chance of subsequently granting a loan to that company. Companies can benefit from these relationships through more favorable loan pricing.

We thank Bob McDonald (the editor), Serdar Dinc, Colin Mayer, Bill Megginson, and seminar participants in AFA meetings in San Diego, Chicago (Federal Reserve Conference), Duke, Frankfurt, Georgia Tech, Half Moon Bay (Stanford GSB and NYSE Conference on Entrepreneurial Finance and Initial Public Offerings), Kansas City (Wagnon Conference), LBS, Michigan, New York (Federal Reserve Bank), Notre Dame, Oslo, Oxford, Philadelphia (Federal Reserve Bank), Pittsburgh, Porto, Sydney, Toronto, University of Arizona, University of British Columbia, University of North Carolina, University of Texas at Austin, University of Wollongong, and Yale (First EVI Conference). We also thank Steven Drucker, Jun Ishii, and Shu Wu for excellent research assistance and the Center for Entrepreneurial Studies at the Stanford Graduate School of Business and the National Science Foundation for financial support. Puri thanks the Sloan Foundation for partial funding support. All errors are ours.


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