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Kickstarter is Debt

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Re: Kickstarter is Debt

#61

Post by sukulaku »

bhouston wrote: post #4

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…

> One Nobel winning economic theory leads to an optimal capital structure of 100% debt

Too bad the theory is complete nonsense.

>> The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.

In short, the theorem states that in conditions that will never exist in the real world, the value of a firm is unaffected by how it's financed.

>> the value of the company increases in proportion to the amount of debt used

First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "financing" then the theory contradicts itself, at least as described by Wikipedia.

This is where I rambled about some other related stuff, but decided to just leave it out because fuck everything about mainstream economics.

Re: Kickstarter is Debt

#62

Post by FussyZeus »

rplnt wrote: post #50
FussyZeus wrote: post #15

I've kickstarted a few things, but only with tiny amounts ($24 and $12) and only for things that I couldn't find in the open market. I think Kickstarter has great potential and has brought about numerous things, but just like any tool it's got people who know how to use it and do well, and people who don't and blow their foot off. This goes both ways: A lot of the large kickstarters that make the news usually have go…

> I think Kickstarter has great potential I think it had a great potential. But they ruined their brand with allowing basically anything on it. I'd say it's similar to Ebay in a way. Of course it's better for them ($$$)... but the "potential" is not there anymore.

I would disagree, but again this depends greatly on the Kickstarter in question and specifically the leaders of the campaign. I think KS would be wise to implement a little more vetting, and maybe require a prototype or something, but truth be told this is something the KS community also needs to get right. On the campaigns I follow I still notice a large amount of people complaining about the waiting which tells me they fundamentally don't understand how this is different than say, Amazon.

Re: Kickstarter is Debt

#63

Post by yummyfajitas »

sukulaku wrote: post #61
bhouston wrote: post #4

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…

> One Nobel winning economic theory leads to an optimal capital structure of 100% debt Too bad the theory is complete nonsense. >> The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. In short, the th…

In short, the theorem states that in conditions that will never exist in the real world,...

If only Modigliani and Miller weren't total idiots. Then they might have repeated their calculations with these assumptions relaxed.

First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "financing" then the theory contradicts itself, at least as described by Wikipedia.

If you bothered to read the article, you'd recognize that Modigliani-Miller actually did the exact calculation you previously criticized them for not doing. Similarly, if you read it, you'd recognize that the claims you think are contradictory actually apply to different circumstances (taxes vs no taxes).

What next, medicine is contradictory because "if you don't eat cyanide, you probably won't drop dead, but if you do eat cyanide you will"?

Re: Kickstarter is Debt

#64

Post by MagnumOpus »

sportanova wrote: post #22
Dwolb wrote: post #17

Earlier quoted context omitted.

Right, but MM's "optimal capital structure" isn't taking into account if your company can't raise debt on the public markets while maintaining cash flow. Debt is essentially selling a put option on your assets, but early stage companies don't have substantial assets. That's why convertible debt exist and why early stage financers demand equity.

i always enjoy the "x is essentially a ". I feel like it's moderately common in startup thought leader type posts

No need to be dismissive - simple financial instruments are only obscure to those who willfully remain ignorant.

Your parent post's statement is a reference one of the basic financial models in asset pricing literature, the "Merton model" (Merton RC. 1974. "On the pricing of corporate debt: the risk structure of interest rates." J. Finance 29:449–70)

Re: Kickstarter is Debt

#65

Post by sukulaku »

yummyfajitas wrote: post #63
sukulaku wrote: post #61

Earlier quoted context omitted.

> One Nobel winning economic theory leads to an optimal capital structure of 100% debt Too bad the theory is complete nonsense. >> The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. In short, the th…

In short, the theorem states that in conditions that will never exist in the real world,... If only Modigliani and Miller weren't total idiots. Then they might have repeated their calculations with these assumptions relaxed. First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "fina…

It doesn't matter what and how they calculated, because your preferences and valuations are not externally determinable.

For example, there's no way to calculate how much you'll be willing to pay for a can of cola tomorrow at 17:56, but your decision to buy one (or not) will factor into the economy as a whole.

If you buy a cola at noon, that results in a different state for the whole economy than would have resulted from you buying it at 17:56, and so on.

An economy is an aggregate of all the individual choices that factor into it, and all of those choices are based on people's individual preferences and therefore incalculable.

This is why all of mainstream economics is at best misguided nonsense and academic mental masturbation.

In reality, of course, its real purpose is to serve justifications for government intervention in our lives - it's not like Austrian Economics is some arcane knowledge that's only available to a handful of insiders somewhere. You can go to http://mises.org and learn to understand how economics really works.

Re: Kickstarter is Debt

#66

Post by aries1980 »

azernik wrote: post #43
robzyb wrote: post #25

Earlier quoted context omitted.

> 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.

The big difference is that startups generally can't get bank loans on the scale they need, because the risk is so high that it's bad for the lender . If I could replace an investor with a 10% staake with a bank that I have to pay back at 8% interest, I'd take it in a heartbeat.

When the company has no liquid asset or property, the bank will use your personal assets (e.g. your house) as a security. These loans has to be continued at the year end or be paid back within a year (over-year loans have different regulations). This is what happened to me. After two years the bank didn't continue the loan because we couldn't show up 10% profit increase or 10 times of the loan in revenue, so I had 8 days to a) pay it back b) find an other bank to finance, but because the loan was in my books, and my personal assets were also the securities, it was very-very difficult to solve this situation.
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