A Model of Venture Capital Investing with Subscription Lines

We introduce a model of venture capital investing in the presence of a subscription line, which we highlight as a critical component of the entrepreneurial growth engine of an economy. If an investment opportunity arises early, the fund can choose to draw the subscription line rather than calling capital from its investors. The subscription line is costly. But, in several calibrations, we find that the fund often prefers to use the subscription line over calling capital as the capital call distorts the performance metrics of the fund. In equilibrium, the bank internalizes that the fund has implicit market power because it can choose not to make an investment. This yields an inverted risk-reward relationship in the subscription line market. We find that the availability of subscription lines boosts the payoff for venture capital investors. It also magnifies the economic impact of venture capitalism by increasing the probability that startups get funded