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Debt is coming to the tech industry

alexdanco.com

91–100 of 204 posts

Re: Debt is coming to the tech industry

#91
>> And when founders really get a taste of that credit? That sweet, sweet taste of dilution-free capital, flowing freely to and from a continuous growth vehicle

At that point, cryptocurrency prices will start rising fast as fiat currencies start hyperinflating; free money is worthless money.

People will dump the old fiat currencies and start buying up cryptocurrencies with their free debt-fueled fiat.

Companies will no longer need debt; to raise capital, they will be able to create a new cryptocurrency and list it on Decentralized Exchanges; then they will use the profits from their business operation to buy-back coins from investors at a predetermined rate. Companies could even use open source code to operate their own decentralized exchanges so that there would be no intermediaries between a company and its investors.

Re: Debt is coming to the tech industry

#92
post #90

Earlier quoted context omitted.

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 i…

No, that doesn't actually work, because decorrelated risks aren't. Did we learn nothing from 2008?

Re: Debt is coming to the tech industry

#93
post #66

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.

Do you have examples of companies with positive margin and operating cashflow that went belly up because of outstanding debt?

I would think the debt holders would rather cut a deal than let the company go belly up. $.50 on the dollar is better than zero cents on the dollar.

Re: Debt is coming to the tech industry

#94

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…

> Maybe debt, like medicine, should only be allowed to be taken with a prescription?

Isn't it though, really?

The bankers determine your "need" and price it according to the risk of you defaulting -- which would seem to put a kink in TFA's argument since most startups fail, the interest rate would be astronomical if true risks were priced in.

Re: Debt is coming to the tech industry

#95
post #16

Debt 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…

Banks don't want to lend to startups because they actually like their loans to be repaid.

VCs don't want to lend to startups because you can't make 100x return on debt.

Re: Debt is coming to the tech industry

#96
post #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…

> 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...

I imagine that's sarcastic, because that looks a lot like the description of a VC...

Re: Debt is coming to the tech industry

#97

Earlier quoted context omitted.

Are you imagining a successful company with a large book of users generating a healthy ARR? If that’s the situation, the lenders will get paid, because the business will keep running. The more likely risk to a bond holder is that the company fails to generate a healthy business, pays most of the loan out in salary while trying, and now the lenders own the company which is a couple of two year old laptops and a few th…

The essay is explicitly talking about the former. Rather than sell a bunch of dilutive equity at Series B, a company with decent recurring revenue could collateralize that revenue stream and sell it.

In what situation would you opt for a dilutive series B where you had enough revenue that a bank would collaterize it for you?

If you are profitable, then it’s probably wiser to not take the dilution round. If you aren’t, your revenue is likely worthless as I can’t imagine a bank would have the risk appetite to turn a money losing venture into a profitable one by taking it over

Re: Debt is coming to the tech industry

#98
I commented a few weeks ago on startup ideas saying there was a gap in SaaS financing models. VCs have been abuzz about the opportunities in slow-burn SaaS businesses that have generated predictable recurring revenue streams. This created two classes of potential VC investment - pre-revenue moonshots for billion dollar unicorns and post-revenue SaaS businesses with healthy balance sheets. I lamented that left a gap for pre-revenue slow-burn SaaS businesses in unproven markets.

I can imagine debt being a potential gap filler but only in established markets where lenders have points of comparison. This article skews on the side of pushing VC money out of the post-revenue slow-burn SaaS space. To be honest, if I was a founder running a healthy SaaS business wishing to grow then I would probably prefer debt compared to handing out equity.

But if I am starting from complete scratch and my goal is to build a slow-burn SaaS business (maybe even of a lifestyle business scale) I don't know I would jump onto debt as my first choice for funding. The only viable options I see other than personal savings are friends/family, government entrepreneurial grants and potentially crowd sourcing.

Re: Debt is coming to the tech industry

#99
post #66

Earlier quoted context omitted.

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.

Do you have examples of companies with positive margin and operating cashflow that went belly up because of outstanding debt? I would think the debt holders would rather cut a deal than let the company go belly up. $.50 on the dollar is better than zero cents on the dollar.

But aren't the debt holders typically the first ones to be paid in a bankruptcy?

Re: Debt is coming to the tech industry

#100
The biggest problem with this idea is that it doesn't really have a good market space. If your company revenue is too small, your subscription backed debt is just an inferior financial product compared to equity, which handles risk much better. If your company revenue is large enough, you have plenty of financial tools to keep your company fiscally healthy. The only time I can see it being useful is if you want to trick rich non-investors to give you money by pretending that your startup has value when it doesn't (similar to an ICO).

Let's say you had a subscription user base and the retention / LTV data to convince finance people to treat it as a security. That usually is the sign of a successful startup, and you'd also likely have access to venture capital as well.

As a founder, is it worth your time to come up with a new financial product and convince people to buy it? In my opinion, you're probably better off doing a round because it will close much quicker and you'll know what to expect, and you can focus on growing your business instead of convincing everyone of your non-standardized, not well understood financial product offering. Good luck closing a group of institutional investors with that.

Now, why do finance people create new financial products? One reason is to investment larger amounts of money all at once - so create asset classes and then buy them in bulk because you have a $5b dollar fund and can only afford to look at $500m deals or more.

This is probably the only reason why you'd want to create a subscription backed debt - collect them up and allow people to participate in returns on startups without becoming a VC. But this is much more likely to be a repeat of the mortgage crisis rather than being actually beneficial to the economy.

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