Why don’t more tech companies take on debt instead of venture capital?
The correct answer is “They cannot.”. Banks do not lend to high-risk ventures. Startups have 80% failure rates, and making a few points on interest will never cover the losses of 80% of loans. Simple—Maybe my shortest answer/post ever.
Their interest rates cannot support the 80% failure rate the venture capitalists get in selecting companies.
Any bank that did this would be out of business very quickly.
Banks lend to companies that have proven cash flow to pay the interest and principal monthly or assets to back up the loan only. It is just the math. Generally, six-quarters of positive cash flow and financial statements are required.
VCs have a similar success rate to throwing darts, or random selection, BTW, even after a $5M infusion of capital. The dirty little secret of the VC industry is their 80% failure rate. Another 10% becomes “the living dead,” surviving but may never be able to repay the capital or any profit for the VC. The final 10% generates HUGE returns with 25X, 100X, and even 1,000X returns. Which means the best entrepreneurs effectively sponsor the failed 80% by giving the VCs 40%+ RI/IRR.
See my post on raising capital here.
And our 12 video series on scaling here.
Bob Norton is a long-time serial entrepreneur, CEO, and investor who founded six companies with four exits that returned over $1 billion to investors for a 25X ROI. Two others are still in development. He has trained, consulted, and advised thousands of entrepreneurs, CEOs, and boards since 2002. Mr. Norton works with companies to 2X to 10X growth rates and valuation using AirTight ManagementTM, the world’s most comprehensive leadership operating system. He also helps companies raise capital to fund growth. He is also the founder of The CEO Boot CampTM and Entrepreneurship UUniversityTM for early-stage companies that have not reached product-market fit and $1M ARR.
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