Specializing Financial Intermediation: Evidence from venture capital

While many parts of the financial systems are becoming increasingly commoditized, there is a concurrent trend towards greater specialization of financial intermediaries, especially in information-intensive market segments. This paper examines the impact of this specialization, focusing on venture capital. We use a unique hand-collected dataset on European venture capital deals that includes detail on the services provided by venture capital firms. We find that the willingness to invest in information-intensive deals, and the extent to which investor provide services (from corporate governance to additional financing) to their companies, critically depends on how specialized investors are. This applies not only to the organizational structure of the venture capital firm, but also to the human capital of its venture partners. PRELIMINARY DRAFT, PLEASE DO NOT QUOTE ∗We are grateful to all the venture capital firms which provided us with data. We than Per Strömberg and participants at the first RICAFE Conference (LSE, October 2003) for useful comments. We also thank Roberto Bonfatti, Matteo Ercole, and Francesca Revelli for long hours of dedicated research assistance. Our colleague Pietro Terna made the online data collection possible. Financial support from the European Investment Fund and the European Commission (grant HPSE-CT-2002-00140) is gratefully acknowledged. All errors remain our own.