Answer the following two questions regarding VC-funded startups: 1. Conventional bank lending also funds entrepreneurs, such...

Answer the following two questions regarding VC-funded startups: 1. Conventional bank lending also funds entrepreneurs, such as franchises and other small businesses. Why can’t the tech startups be funded by bank loans? 2. Three quarters of VC-funded startups fail eventually. How does VC profit from such a high failing rate?

Expert Solution

A. Conventional Bank lending such as bank loans cannot be used for funding of tech startup because there is a high risk related to default on the loan of the tech startup and there are no cash flows and assets for these startups to collateralize, Hence it will mean that the bank will be less willing to provide them with loan as they are more likely to default and from the tech perspey also, they are not able to generate a higher amount of cash flow regularly and hence bank will be having fixed payment in form of interest so there will be having a high likelihood of defaulting on the loan

B. Venture capitalists are able to profit because even though a large number of their investment fails, those investment which is successful is providing them with multifold returns and it is able to undo all such mistakes they have made by bad investment, so even if there is one investment working out of 4 investment they are making a very high rate of return because these companies who succeed are going to get them a very high premium which is much beyond the loss suffered on investment in other companies so venture capitalist are able to make money on the investment.

jeff jeffy answered 2 years ago

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