Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets

Posted: 17 Nov 2009

See all articles by Bernard S. Black

Bernard S. Black

Northwestern University

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI); Stanford Law School

Multiple version iconThere are 2 versions of this paper

Date Written: 1998


Explores the strong link between the venture capital (VC) market and the stock market-centered capital market. Contrasts this with the bank centered capital markets of such countries as Germany and Japan, which allot more firm control to banks. The United States has a strong venture capital industry focused on early-stage financing of high-technology companies while in Germany, e.g., the venture capital industry is almost nonexistent, and exit strategies for venture capitalists differ in that country, with its lesser emphasis on the stock market. In the United States, VC fund managers have developed strategies in which they efficiently exit their investments, and the analysis herein considers the initial public offering (IPO) to be the point at which venture capitalists will exit. It is assumed that the entrepreneur places strong importance on control of his or her company. Often though, this control cannot be retained at the time of financing by an inexperienced entrepreneur. These entrepreneurs can regain control if the company is successful through an IPO exit of the venture capitalists. Regaining control is usually through an implicit contract over control between the entrepreneur and the venture capitalist that results from the entrepreneur's success. The implication of this framework is that the success of early stage venture capital financing is linked to the availability of VC exit and return of control to the entrepreneur. The venture capital market will be impaired in countries where the only option for exit is by acquisition, thus leaving the entrepreneur without the preferred control. Analyses of the VC markets in Japan, the United Kingdom, Canada, and Israel are also presented, with explanations for venture capital market variations by country. (SRD)

Keywords: Banks, Stock markets, Firm governance, Initial public offerings (IPO), Firm control, Early stage financing, Exit strategies, Early stage capital, Venture capital, Financial markets

Suggested Citation

Black, Bernard S. and Gilson, Ronald J., Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets (1998). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN:

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