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Debt is coming to the tech industry

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Re: Debt is coming to the tech industry

#131

Post by nightski »

marcosdumay wrote: post #96
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…

> 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...

Close, but loans have a fixed return where vc money has much more opportunity making it potentially with the higher risk.

Re: Debt is coming to the tech industry

#132

Post by ci5er »

bobbyi_settv wrote: post #119
Grimm1 wrote: post #81

Earlier quoted context omitted.

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.

A lot of that is sour grapes. The majority of people who loudly explain that they wouldn't want a large VC round are people who aren't in a position to raise a large VC round.

Maybe. I'm not in that geo these days, so I have no way to gauge relative percentages. Do you think that is right?

I've raised large rounds in the past, both corporate and VC, and I've learned to be wary about misaligned incentives.

Now - I don't go around saying: "Don't raise VC ever!", but I'm a little more attuned to the trade-offs than I used to be.

Re: Debt is coming to the tech industry

#133

Post by pjc50 »

jklein11 wrote: post #93
pjc50 wrote: 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.

Maplin apparently had operating profits but accounting losses in the few years before it failed: http://www.coppolacomment.com/2018/03/the-sad-story-of-mapli...

As you can see, 15% interest rates will do that. But this is one of those weird PE setups where the left hand is lending to the right hand.

Re: Debt is coming to the tech industry

#134

Post by neltnerb »

lumost wrote: post #113
Grimm1 wrote: post #81

Earlier quoted context omitted.

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.

The same is true in Boston, most founders look to bootstrap through the seed rounds.

I agree completely, but it's worth pointing out that a big reason for this is that Cambridge and Boston have vastly fewer and worse connected VCs than the bay area. I did try to pursue VC funding for a hard-tech startup (thin film deposition for making solar panel conductive pastes), but there was really only one VC group that was relevant so there wasn't exactly a surplus of opportunity money-wise just waiting for a good use.

Personally I think bootstrapping is way better for startups that intend to be acquired or don't mind growing slowly (or don't mind never really growing much at all). Nothing wrong with "lifestyle businesses".

After a few tries, now I have a consulting company that helps people develop their weird scientific equipment and commercial prototypes. I don't really care about funding with that model, and my salary went up 3-fold in one year versus a job at a startup in Oakland.

I'll probably create a product soon, I have a prototype about done and I'll definitely try to make a business out of it -- but because most of my income is consulting I can also afford to move slower, do it right, and not have to hire anyone to help with it unless I actually find traction and need help with manufacturing them.

Short plug: I'm making color changing strobe light art pieces that use the ganzfeld effect to cause vivid geometric illusions -- not novel in the concept, but the implementation is really good after a decade of casually improving it over time. If this sounds awesome to you do feel free to send a note so that I can let you know when they're ready =)

http://neltnerlabs.com is the website, I haven't mentioned the art piece on it yet since it's not done but here's a youtube video of the basic hardware before being put into a frame.

https://www.youtube.com/watch?v=eFte1ggIVjM

Re: Debt is coming to the tech industry

#135

Post by wbl »

spyckie2 wrote: post #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 tr…

Equity has unlimited upside for investors while debt has capped upside. Most companies use both for good reason.

Re: Debt is coming to the tech industry

#136

Post by wbl »

paulgerhardt wrote: post #123
aguyfromnb wrote: post #117

Earlier quoted context omitted.

> 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. How is this different than the "next round" of a venture raise vaporizing and being left with no money?

Time horizon. Capital gives you 18 months. Your debt instrument can be pulled overnight.

Depends on the instrument.

Re: Debt is coming to the tech industry

#138

Post by looping__lui »

looping__lui wrote: post #61
himaraya wrote: post #36

Earlier quoted context omitted.

Ditto for equity

?

Guys, take an Accounting 101 class before starting to downvote my questionmark.

I’ll take your equity any time. Your debt not so much.

Burning through other people’s cash on false promises IS NOT the same as having a more equity heavy financing. Either you fund your companies operations through equity or you fund it through debt. So how on earth are you going to fund a company if you don’t want to do equity or debt?

I’m an equity guy. Funded all my shit with my own money and enjoyed the upside. So you’ll get an exclamation mark you can downvote in addition in this post:

!

Re: Debt is coming to the tech industry

#139

Post by looping__lui »

samsonradu wrote: post #120
caspper69 wrote: post #64

Earlier quoted context omitted.

You can't maintain anything for free; everything has a carrying cost-- even cash in the form of depreciation. Use it or lose it as they say.

Not everything depreciates over time, does it? Looking at housing in many hot markets or at collectible watches fe.

You have something called opportunity costs.

Equity is the most expensive financing - especially for startups.

The opportunity costs for funding a “high risk of failure startup” that even just has your money sitting on a bank account is fairly high. When S&P500 markets return 20% p.a. - I’d wanna see 100+% return p.a. on my risky startup (it is of course less of a normal distribution kind of thing, more a “lose many and maybe win one”).

So actually due to inflation and the opportunity costs associated with the risks you have - stuff may or may not depreciate unknowingly.

Watches are only gonna be worth what a seller gives you when the need of selling it arises. Correlation breakdown between asset classes etc etc has made many people not so happy about the decisions they made with more exotic investments and the believe that “not everything depreciates”.

A more fundamental and underlying problem may be: we print too much money and inflation is probably hitting insane levels but “hidden well beneath the improvements in society’s productivity”.

In a Knightean’s risk sense, we may actually be constantly facing “uncertainty” but believe we are dealing with a more predictable concept of “risk” in our lives. Taleb has written a few good books on it.

Re: Debt is coming to the tech industry

#140

Post by looping__lui »

corford wrote: post #63
looping__lui wrote: post #61

Earlier quoted context omitted.

?

Sky high valuations that limit your options/exits, potentially pushing your company down a path it shouldn't take.

... based on false and unrealistic promises?

When did the discussion about “financing structure” become a discussion on ethics? Or are you already taking the “bullshit business hockeystick promises” as a “given in the industry”?

Why are fraudulent business practices the first thing that come to your mind?

If you told me about WACC and how equity is like actually really expensive way of financing: ok, I get it, some cool discussion on a provocative questionmark.

Kind a telling on the industry in a sense :-D

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