The VC market overall is about 1% the size of the consumer credit market.
In consumer credit, those banks who compete to offer you car loan terms are relying on a big ecosystem.
There are credit bureaus to give you a FICO score. There are state laws about roads and traffic and licensure and insurance and repossession and collections to protect their downside. There is a governmental infrastructure of auto titles to prove your ownership claims. There is Kelly Blue Book or other sources to value your collateral, the nature of which changes slowly over the years. There is a dealer network (and e.g. Bankrate) to distribute your "product." There are millions of precedent transactions for use in modeling default rates, marking the collateral value over time, etc. And as a bank you are entirely passive, merely smoothing consumption of a depreciating asset over time.
In VC-land, the terms are almost the least of the problems. The ecosystem is absent (or radically less developed).
There is no "FICO score" or other agreed way to evaluate the entrepreneur.
There is no "Kelly Blue Book" to evaluate the collateral (underlying).
The collateral changes year by year, and (to stretch the car comparison) is often engineered to try and annihilate all of the prior collateral to which it was compared.
Nobody has a driver license. The roads aren't yet paved.
There are tens of thousands of precedent transactions, but the power-law distribution of outcomes means that they are basically incommensurable, since one out of 10,000 might end up being bigger returns than all the rest put together.
And most crucially, the VC cannot take a passive role: the default state of venture funded businesses is rapid change and need for continuous new and risky decisions about team, market, new financing, etc.
So. Maybe it would be better compared to lending money to demolition derby drivers who are expected to pay you back out of the prize money, which all goes to the winner of the derby.
(Source: 10 years in tech finance/investment roles. Self-serving biases acknowledged.)
In consumer credit, those banks who compete to offer you car loan terms are relying on a big ecosystem.
There are credit bureaus to give you a FICO score. There are state laws about roads and traffic and licensure and insurance and repossession and collections to protect their downside. There is a governmental infrastructure of auto titles to prove your ownership claims. There is Kelly Blue Book or other sources to value your collateral, the nature of which changes slowly over the years. There is a dealer network (and e.g. Bankrate) to distribute your "product." There are millions of precedent transactions for use in modeling default rates, marking the collateral value over time, etc. And as a bank you are entirely passive, merely smoothing consumption of a depreciating asset over time.
In VC-land, the terms are almost the least of the problems. The ecosystem is absent (or radically less developed).
There is no "FICO score" or other agreed way to evaluate the entrepreneur.
There is no "Kelly Blue Book" to evaluate the collateral (underlying).
The collateral changes year by year, and (to stretch the car comparison) is often engineered to try and annihilate all of the prior collateral to which it was compared.
Nobody has a driver license. The roads aren't yet paved.
There are tens of thousands of precedent transactions, but the power-law distribution of outcomes means that they are basically incommensurable, since one out of 10,000 might end up being bigger returns than all the rest put together.
And most crucially, the VC cannot take a passive role: the default state of venture funded businesses is rapid change and need for continuous new and risky decisions about team, market, new financing, etc.
So. Maybe it would be better compared to lending money to demolition derby drivers who are expected to pay you back out of the prize money, which all goes to the winner of the derby.
(Source: 10 years in tech finance/investment roles. Self-serving biases acknowledged.)