Entrepreneurs now have more financial choices than ever before, thanks to the abundance of liquidity in the markets. Each venture bank, venture debt fund, and venture capitalist are competing to show how his or her money is more environmentally friendly.
Nonetheless, each has a set of limits that govern their actions. While a venture investor may try to hit the ball out of the park with each investment in order to generate large profits, one home run can compensate for nine strikeouts.
Most banks, on the other hand, are employing Billy Beane’s Moneyball strategy, in which they attempt to get the whole lineup on base while making as few outs as possible.
Consider capital availability as a spectrum, with low-risk, low-return venture banks on one end and high-risk, high-return venture capital on the other, and venture debt funds in the center.
It is easier to see how venture banks earn money by taking deposits from one consumer and lending them to another. Most banks presently charge a 4% interest rate on loans while paying less than 1% interest to depositors, resulting in a 3 percent profit. If we consider that a bank must cover 2% of its costs, such as staff salary and rent, it must collect at least $0.99 of every $1.00 borrowed in order to make a profit.
Despite a few bad players’ unethical activity (see the Great Recession), the banking industry has a significant beneficial influence on overall economic productivity.
More economic productivity implies more taxes, so the federal and state governments have a strong interest in smoothing the way, which is why institutions like the Federal Deposit Insurance Corporation (FDIC) established to assist safeguard depositors and supervise banks.
The FDIC guarantees that each bank under its regulatory supervision has a good lending policy in place and follows it. However, every rule has an exception, and borrower behavior that may be judged “too hazardous” under strict underwriting criteria may, in fact, be typical (or even desirable) in some circumstances.
For example, boosting sales and marketing or research and development spending to leverage or establish a long-term competitive edge (even if this means forsaking profit and raising burn in the short term). Rigid loan criteria, small margins, and low-risk tolerances, all in the name of safeguarding depositors, can pose problems for borrowers operating in dynamic and sometimes turbulent markets, leading to unfavorable consequences.