“Debt helps you grow faster; debt helps you die faster.” - someone said this to me early in my career and it has stuck with me.
Ditto for equity
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Debt is coming to the tech industry
61–70 of 204 posts
Re: Debt is coming to the tech industry
#62Earlier quoted context omitted.
I don't think it's only cultural, software businesses also have very few assets that could be liquidated. Volkswagen might finance 2/3 of everything it does with debt, but if it just stopped tomorrow and sold all production facilities then lenders would get more than half their money back. If a typical software startup stops operating and sells off all its assets it gets a bit of spare change and the lenders leave wi…
I'm really not sure if that's the case. With some stuff (eg: car fleets) which are pretty liquid they may get a return. But on some super specialised machinery for VW which only makes VW specific parts they are going to really struggle to get any money for it.
Industrial machinery is usually more fungible/configurable than that. No one (except the secondary parts makers) has much use for the dies to stamp out Tiguan fenders, but lots of sheet metal fabs (inc other auto makers) can use the stamping presses. It might be 30¢ on the dollar, but that’s likely better than the office chair and laptop that a software startup will leave behind.
Re: Debt is coming to the tech industry
#63Re: Debt is coming to the tech industry
#64Re: Debt is coming to the tech industry
#65Debt is like medicine: useful to cure certain conditions but nothing to be burdened with your entire life. Once the condition is cured the medicine is no longer needed. It is also like medicine in that it has a tendency of ending up being worse than the condition it was meant to cure when taken irresponsibly or in too large a dose. There's another way in which debt resembles medicine: those who sell it are wont to se…
I agree with everything except the last line (and I suspect that’s where your downvotes are coming from).
The CEO/CFO should have the freedom to self-prescribe, IMO. In that regard, debt might be more like food. Some businesses have a chronic need for debt and can live quite fine with a lifetime of healthy debt usage.
Re: Debt is coming to the tech industry
#66“Debt helps you grow faster; debt helps you die faster.” - someone said this to me early in my career and it has stuck with me.
Ditto for equity
No - equity doesn't require servicing. Plenty of businesses have collapsed despite having positive margin and operating cash flow, but outstanding debt. It's almost a feature of the "private equity looting" model that killed Toys R Us and Maplin, among others.
Re: Debt is coming to the tech industry
#67"Any one customer may be unknowable, but cohorts of customers can be modelled and understood decently well." Just substitute "mortgage" in this sentence, think back on events of the last decade, and you can see what is horribly wrong with this article. Lots of debt, all given to tech startups, which will almost all go bust with the first recession. Let's see, what does that remind me of? Of course, if you believe tha…
Yeah but unlike a mortgage (secured against one static asset i.e. a house), the article assumes most of this debt will be issued against the strength and quality of a company's various recurring revenue streams (even speculating that different components of this could be financed separately to try and account for the varied risk).
Just need to make sure you don't end up with financers/banks/rating agencies colluding to bundle multiple companies together and sell tranches of the debt (all with a phony A+ rating) to investors/funds...
Re: Debt is coming to the tech industry
#68Earlier quoted context omitted.
I don't think it's only cultural, software businesses also have very few assets that could be liquidated. Volkswagen might finance 2/3 of everything it does with debt, but if it just stopped tomorrow and sold all production facilities then lenders would get more than half their money back. If a typical software startup stops operating and sells off all its assets it gets a bit of spare change and the lenders leave wi…
The users paying each month are the assets in this article’s thesis. As long as when a company shuts down, they transition their users to a new entity (since they are valuable reoccurring revenue), the lenders will get paid.
If I were lending, there is no way I would consider recurring revenue to be a reasonable asset. Depending on the business it could go away in a heartbeat at the mention of the company going into administration/receivership. If the software is at all important to the users and it has alternatives, they will jump ship as fast as possible.
My experience in software companies is that there are often a few key developers with full platform and domain knowledge, and they are your bottleneck for onboarding and they are the columns that keep your platform going. Should they leave when the business goes into receivership, and why shouldn't they, there is little guarantee the software will keep running long enough to keep users happy enough, to continue to service that debt.
Not to mention a software business that runs on recurring revenue from users is likely failing because the recurring revenue isn't enough to cover costs, keep the business running and it just makes more debt. I just wouldn't consider it a reasonable assumption that recurring revenue will continue to recur. It's not even a good assumption for a well running business.
Re: Debt is coming to the tech industry
#69Debt financing would be wonderful (note to non-business-savvy readers: this is not even remotely the same kind of thing as personal credit card debt or whatever other completely unrelated thing is making you sanctimoniously kneejerk that "debt is bad". Can we please have an informed discussion of debt as a part of a business capital structure?) for software businesses, which have very predictable capex costs. The iss…
What are these cultural reasons that make bankers not want to lend?
They usually make less money on the deal. It’s also more tedious work in ways (legal). Debt is sterotyped as more boring work on average.
Re: Debt is coming to the tech industry
#70Aside from the other conclusions and assertions in this long article, this particular bit resonates with me: "Here is a widely believed cause-and-effect relationship I bet you’ve never thought to invert before: because most startups fail, therefore equity is the best way to finance them. Have you ever considered: because equity is how we finance startups, therefore most startups fail?" At the very least, this lines u…
Meh, straight debt (not convertible) isn't available to risky startups.
The venture debt industry depends on tight relationships with VCs to ensure reasonable repayment rates. In some cases they reduce risk by reselling part of the debt. In all cases, they're themselves leveraged, lending money from limited partners and not just themselves.