31–40 of 66 posts
Just to be clear though debt is actually a preferred type of financing because it is one of the cheapest forms. A venture investor is expecting a 10x return on their investment. That means they are expected a much greater realized interest rate than debt - money that effective comes out of the pockets of the business owners. If you can get debt, if is often preferred if you can figure out how to manage the default ri…
I have a hobby business in a niche where I've seen a few small entrepreneurs take pre-orders (often 50% down payments), spend the money, go broke, and face a bunch of angry customers. They can't deliver product, and they can't refund the money. It's possible that those were cases where something like a family emergency pulled them under.
But watching those failures taught me the lesson -- similar to what the OP suggests -- that down payments are a loan from the customer. In my own case, I decided that it was preferable to risk my own money than somebody else's, and I kinda crawled out of the starting gates by doing all of my own production using small runs of parts. Thus my margins were lower, but my risk was commensurately lower too.
As it turns out, my business easily saturated its own world market quickly enough that I still sell a few units a week but am glad that I didn't try to scale up too soon. My only regret is that I have so far missed the chance to learn how to scale up a hardware business.
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> Just to be clear though debt is actually a preferred type of financing because it is one of the cheapest forms. Honestly? That statement seems a tad simplistic to me. Especially in the context of startups.
What makes a start up different than any other business?
This is pretty much spot on but not necessarily for long. I'm really saddened by how badly kickstarter is being abused. There was a time when they could've put in vetting into the process but it's really late now. I fear people have grown wise to the fact that from their perspective this is essentially a costly way to pre-order in the best case scenario and a costly mistake in the more common case.
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What makes a start up different than any other business?
The urge to aggressively, rapidly grow.
How does the urge to grow separate a startup from a business in the desire to obtain low cost debt?
Granted, not taking enough risk is probably one of the reasons why I'm not rich. (Another reason is that I haven't had any great ideas). But in my risk-averse world, I have always thought that the idea of taking pre-orders is more to secure customer commitment, rather than to fund production. I have a hobby business in a niche where I've seen a few small entrepreneurs take pre-orders (often 50% down payments), spend…
Yes, and then the Federal Trade Commission dumps on you for violating the 30 Day Rule, which covers refunds and delays.[1]
In the early days of the Internet, many little companies ran into this. They put up a web site and started taking orders on line. But in those days, the online ordering system was usually disconnected from inventory control and fulfillment. A successful product could suddenly generate far more paid orders than the seller could fill. Instead of the seller refunding the money after the 60 day limit like they're supposed to, they held onto it, hoping to catch up later. (After 30 days, you have to notify the customer they can get their money back, and refund them if they ask. After 60 days, you have to refund even if the customer doesn't ask.)
Kickstarter is sort of a gimmick to get around the 30-Day Rule, by explicitly dumping more risk on the buyer. That doesn't always work for the seller.[2]
[1] https://www.ftc.gov/tips-advice/business-center/guidance/bus... [2] http://arstechnica.com/tech-policy/2015/06/feds-take-first-a...
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So really, any form of financing a company would be considered debt.
No, raising capital will also finance a company and is not debt, you give the people that give you capital a portion of the future revenues and value created in return.
With equity financing, the company transfers partial ownership of the company in the form of shares so that they can gain the capital. Having shares in a company does not automatically give you future revenues. Unless you cash out your shares in the secondary market (if it's still a private company), you are not going to see those future revenues directly. If there's an exit (IPO/acquisition) or a share buyout, that would be the only other time you would see your shares turn into a liquid asset. The value of your shares will not increase unless those events occur or if the value of the company has objectively increased through a higher valuation which in the private market is through another financing round.
Compared to three years ago, there are fewer game Kickstarters that offer physical rewards, and that's a good thing. A lot of early campaigns wound up with a bunch of orders for physical goods (deluxe editions, t-shirts, figurines) that have a high marginal cost. Later (smarter) campaigns are offering digital art books and soundtracks instead, which have almost no marginal cost. In short, don't get into the T-shirt /…
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> Just to be clear though debt is actually a preferred type of financing because it is one of the cheapest forms. Honestly? That statement seems a tad simplistic to me. Especially in the context of startups.
What makes a start up different than any other business?
Lending to getScale is vastly different to lending to IBM.
Therefore the debt/equity argument and balance is vastly difference.