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Debt is coming to the tech industry

alexdanco.com

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Re: Debt is coming to the tech industry

#81

Post by Grimm1 »

pcmaffey wrote: post #54

> Furthermore, in the Bay Area Founder-VC scene, FK/PK tension simply isn’t perceived as a problem. Founders increasingly think of themselves as capital allocators who think in bets, and the angel investing scene has brought founders and VCs together as social peers. There’s no FK/PK tension between investors and founders. They all want the same thing, and they all hang out at the same parties. The tension has simply…

I can say in the New York scene the opinion seems to be quite the opposite. There is a non-trivial amount of wariness when it comes to VC money.

Re: Debt is coming to the tech industry

#82

Post by mathattack »

Interesting article. The reality is places like Silicon Valley bank do provide debt financing. If your SAAS cash flows look like fixed income, that’s a better way to finance them. There is downside to this too.

The irony is many traditional businesses that use debt (retail?) really should be equity financed.

Re: Debt is coming to the tech industry

#83

Post by icedchai »

pjc50 wrote: post #66
himaraya wrote: post #36

Earlier quoted context omitted.

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.

Don't forget about the dividends / interest usually associated with preferred shares. Those are constantly accruing and need to be paid out before any "gains" make their way to common shareholders.

Re: Debt is coming to the tech industry

#84

Post by skybrian »

corford wrote: post #67
rossdavidh wrote: post #55

"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…

The question I have is how you know the customers won't cancel their subscriptions when the recession hits, or because a competitor provides the same service for less, or has better service?

Re: Debt is coming to the tech industry

#85

Post by paulgerhardt »

Less any bright eyed startup founder take this post too seriously, I’ll spell it out: venture debt is bad.

Debt issued to established companies is an essential mechanism to bridge working capital needs - like GM procuring millions of pounds of sheet metal before selling thousands of cars. This is not controversial.

Venture debt issued to startups by bankers, especially by the kind of bank who fancy themselves as a Bank for Silicon Valley, and the types of bankers who, after a few too many cocktail parties with VCs, fancy themselves venture capitalists. It’s just these pseudo-venture capitalists have the risk tolerance of...bankers.

If you pioneer a new space, particularly in consumer electronics with high working capital needs and you are initially successful you will be offered venture debt. If you take it, you will be more successful and you will have copy cats. Some of those copy cats will be FAANG companies.

When this happens the bankers will freak out and pull your working capital. Or exercise a clause that forces a premature sale. Or...or..or.

Woe to you if you were banking on that to make this years Black Friday/Christmas demand.

Alex’s post highlights a need in the space. Don’t confuse it with the services currently offered.

Re: Debt is coming to the tech industry

#86

Post by tchaffee »

Yetanfou wrote: post #11

Debt 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 don't love this analogy because a healthy person doesn't need medicine. If you can make something for $1 and sell for $2, it's very healthy for a business to take on debt in order to make more of those things. Which is why debt is a normal part of many healthy businesses.

Re: Debt is coming to the tech industry

#87

Post by _marlowe_ »

"When you acquire some customers and they start yielding revenue that behavior sounds an awful lot like buying a fixed income instrument..."

This is so intellectually dishonest. He even goes on to equate recurring revenue with cash flow. Not the same! So often companies point to ARR as success without acknowledging other structural cost issues in their businesses.

"It's basically AAA debt. Now give me a 30x revenue multiple." -SaaS investor who wants it both ways

SaaS is just one of many recurring/contractual revenue categories, but VCs talk about it like its a revolutionary business model that should yield some extra reward from the capital markets. Recurring revenue has been around forever in more traditional industries.

Yes, reliable recurring revenue (with +FCF) can support leverage, but claiming that it looks and acts like debt is either ignorant or deceptive. It is 100% equity risk and that kind of magical thinking is just vulture bait.

Re: Debt is coming to the tech industry

#88

Post by kevinventullo »

corford wrote: post #67
rossdavidh wrote: post #55

"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…

The article seems to advocate for exactly what you’re warning about:

Why not go straight to securitizing senior tranches of your recurring revenue, and moving it off your balance sheet?

... (one paragraph later) ...

On the other side, imagine how much investor interest you could get in a diverse basket of recurring revenue from, say, 10 different startups that’ve all raised from Tier 1 VCs. People talk about how great it would be to invest in a unicorn basket; this would probably be even better.

Re: Debt is coming to the tech industry

#90

Post by trhway »

skybrian wrote: post #84
corford wrote: post #67

Earlier quoted context omitted.

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…

The question I have is how you know the customers won't cancel their subscriptions when the recession hits, or because a competitor provides the same service for less, or has better service?

you can use CDS to insure performance of your high quality A+ "recurring revenue" bonds. It is pretty cheap for high quality A+ bonds.

>>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...

but that is exactly the point of the securitization and high skill in doing it which would allow to bring all those sweet pension fund money into play. "financers/banks/rating agencies colluding " - it like saying violin and piano players colluding in Metropolitan Opera performance.

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