Do Banks or VCs Spur Small Firm Growth?

Abstract

It is well accepted that access to entrepreneurial finance encourages entrepreneurship and growth. Empirical studies on topic, however, segregate the effect of entrepreneurial finance on entrepreneurship by the source of capital. In this paper, we compare the effect of two main sources of entrepreneurial finance on small firm formation and growth: banks versus venture capital (VC). Based on U.S. data spanning 1995–2011, and regardless of controls for endogeneity, we find the effect of VC to be both economically and statistically significant in stimulating new firms, new establishments, new employment, and new payroll. We do not find similar evidence for banks.