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.
