York research shows small businesses benefit more from venture capital funding over bank loans

New research out of York University, Florida Atlantic University and the University of Hong Kong indicates that venture capital funding is better than bank loans for the growth of startup businesses.

Douglas Cumming
Douglas Cumming

The study, published in the Journal of International Financial Markets, Institutions and Money, analyzed data on small businesses from 1995 and investigated changes in the number of small companies in all of the states in the U.S. Researchers used data compiled by the U.S. Census Bureau.

They also looked at growth in employment and payroll at the companies they studied, and found there was a strong causal link between venture-capital investment and the growth rate of startups.

“Venture capital is extremely important for enabling entrepreneurial growth,” said researcher Douglas Cumming, professor of finance and the Ontario Research Chair at York University’s Schulich School of Business.

Cumming, along with Rebel Cole, professor and Kaye Family Endowed Chair of Finance at FAU’s College of Business, and Dan Li, assistant professor at the University of Hong Kong’s School of Economics and Finance, compared the venture capital data with bank loan data for each state.

Their findings show that the 15 states with highest growth in startup formation received more venture capital investment over the 15 slowest growing states, and bank loans were associated with lower growth rates.

Researchers also note a decline in small business lending from banks beginning in 2008, and say the smaller businesses appear to receive minimal help from either bank lending or venture capital.