Product Market Competition and the Financing of New Ventures

This paper examines the link between product market competition and entrepreneurs'choice between bank …nancing and VC …nancing. We argue that this link is bi-directional: On the one hand, the …nancing choice aects the competitive behavior of the …rm and of its rival. On the other hand, product market competition, measured as the degree of substitutability between products, also has an impact on the …nancing choice itself: it favors bank …nancing over VC …nancing. We derive the industry equilibrium and show that as the degree of competition increases, …rms tend to switch from VC …nancing to bank …nancing. We discuss the empirical implications of the model and their connection with the empirical literature.