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Debt is coming to the tech industry

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Re: Debt is coming to the tech industry

#171

Post by adele11 »

quotemstr wrote: post #92
trhway wrote: post #90

Earlier quoted context omitted.

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?

To push that point further, we had it easy in 2008 because governments used QE to push more money into the economy and prop up banks, but what if they can't grab that free lunch next time?

Re: Debt is coming to the tech industry

#172

Post by adele11 »

kortilla wrote: post #161
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…

Well mortgages actually can be modeled well if people are willing to look at the actual risk. MBS markets are still existent today and work just fine now that banks got bitten and are still paying attention.

I'm not sure it is possible, how does the model predict if there will be a recession in 2025, for example?

They can model individual risk pretty well I imagine. But can they model systemic risk?

Re: Debt is coming to the tech industry

#173

Post by ec109685 »

nemothekid wrote: post #97
stanleydrew wrote: post #72

Earlier quoted context omitted.

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

You need the money to scale sales operations to the level of revenue.

Re: Debt is coming to the tech industry

#174

Post by fragmede »

csomar wrote: post #154
gerdesj wrote: post #148

> Debt is going to finally come to the tech industry Bear in mind that the tech industry exists in all countries with a population greater than 10. Also consider that this: > When people in tech want to sound smart, one name you can drop is Carlota Perez. ... is probably nonsense or at best pointing out another point of view. Not all companies work the way you think they do. Not all companies want to be yoked with th…

> Not all companies want to be yoked with the burden of continuous economic growth, always beholden to the irksome shareholder. Then I don't think this whole thing is about you (that is the SM enterprise). Although, you can make a point that the commoditization of IT (like Amazon or more standard ERP systems) can make lots of these small companies obsolete and unable to compete. (you practically can't start a mobile…

> you practically can't start a mobile phone company that makes its phone hardware and software today and expect to make enough to keep the lights on

That's fascinating. I agree with you, but I'm wondering - how would the world have to change to make that possible? Or maybe, what's possible in today's world?

Starting an MVNO (aka pay T-mobile/others to use their towers) is capital intensive, but still far cheaper than trying to setup a nation-wide network for towers, or launch your own satelite constellation.

The two failures of Windows Mobile and Research In Motion (Blackberry) seem less relevant here given the mass-market appeal they're going for. If the goal were, instead, to operate a semi-private vertically integrated stack, say for a "private spy agency" company (I've been watching too much Archer lately), with semi-custom hardware on an existing network, with custom software, what would the economics be?

Could this be done for a few million? Tens of millions?

Re: Debt is coming to the tech industry

#175

Post by neltnerb »

bisRepetita wrote: post #141
neltnerb wrote: post #134

Earlier quoted context omitted.

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…

>don't mind growing slowly (or don't mind never really growing much at all). Nothing wrong with "lifestyle businesses". Are we ever gonna stop saying "lifestyle businesses" for business that don't want to grow 10% per month, and finally call them "businesses" like they are? If you want to make a difference, call them "non-startup". Most businesses don't grow 10% per month, and they're still full fledge "businesses" w…

Yeah, that's why I put it in quotes ;-) I also dislike it, by that definition the people running the corner market are running a "lifestyle business". I run a business. I am not trying to get a $10M exit. Maybe that disqualifies me from being called a "startup", but indeed I am still... starting it up...

So in the context of the hackernews crowd at least, it's useful to make a distinction between business with a goal of growing rapidly, or providing a service as an independent entrepreneur that may grow in a natural way but which is not really desirable to force things with.

Personally I just think of myself as running a consulting business.

Edit: On contemplation, I think really the issue is that "lifestyle business" is treated as a derogatory. I've gotten over that, I'd happily agree that I'm running a lifestyle business. It's a business designed to be a good fit for my lifestyle, to let me make money doing what I love to do. Like an independent plumber or something. That's also a lifestyle business in very reasonable interpretation. She sets her own hours, finds her own clients, does the work herself, for a living. Lifestyle.

So maybe the issue you're picking up on is that "lifestyle" is being used as a derogatory, whereas I (and my current mentors) think it's just a decision for how you want to live. I want a business that lets me do what I want to do with my life, I am not ashamed of wanting a lifestyle business. I can also see why you'd want to avoid it... at least in the bay area. Because of ancillary impacts on people's perceptions.

If I get so much work that I can't handle it, I'll encourage someone I think is really great to be an independent businesses by guaranteeing their first non-exclusive contract so that they can get a running start. Sure, it's a "gig economy", but very limited in scope and at least they're truly independent and able to use that baseline income as a springboard to do their own great thing.

Re: Debt is coming to the tech industry

#176

Post by neltnerb »

pmiller2 wrote: post #165
bisRepetita wrote: post #141

Earlier quoted context omitted.

>don't mind growing slowly (or don't mind never really growing much at all). Nothing wrong with "lifestyle businesses". Are we ever gonna stop saying "lifestyle businesses" for business that don't want to grow 10% per month, and finally call them "businesses" like they are? If you want to make a difference, call them "non-startup". Most businesses don't grow 10% per month, and they're still full fledge "businesses" w…

Even the word “startup” has become pretty meaningless these days, when you see 10 year old businesses calling themselves “startups.”

Yeah... once you are no longer a small business interest as defined by the government, you are at least at the tail end of the period you should be able to call yourself a startup.

It's just a buzzword if the company is more mature than that. Maybe it helps them get job applicants or something to market that way. Or get a bigger multiplier on their valuation relative to actual profits.

Re: Debt is coming to the tech industry

#177

Post by neltnerb »

mirimir wrote: post #142
neltnerb wrote: post #134

Earlier quoted context omitted.

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…

Trippy. But not if you're epileptic.

Thanks! It is way trippier in person. But yes, I put up so many strobe warnings that I think it'll be alright ;-) Hope so anyway! I actually enclose the whole thing in a pop up tent so it's impossible to see without reading the signs first, seems to be a good way to show the piece.

Re: Debt is coming to the tech industry

#178

Post by rdlecler1 »

I frankly didn’t understand this article. First there’s already VC debt, and Silicon Valley Bank is also a big lender. There are lots of shops out there that will loan against revenue streams (often we see this tied to hardware). Also the idea that a basket of debt is going to have some enormous payoff Is just painful to listen to. Your upside is capped and you can have ruin. Who wants to invest in ultra junk bonds. The reason equity financing works for startups is the promise of an enormous outsized outcome That pays back all of your losses.

Re: Debt is coming to the tech industry

#179

Post by lucas_membrane »

Odd that the article mentions startups 14 times and hedge funds zero. If a significant percentage of a profitable tech company with established customers and a revenue stream derived from long-term contracts with customers is owned by hedge funds, the hedge funds will flex their muscles a little and convince the company to start borrowing money so that it can buy back some of its stock and pay higher dividends. If such a company does not have a significant constituency of shareholders among its shareholders and has little or no debt, its managers will realize that their company is one that hedge funds are likely to want to own and influence, and that the best way to discourage the hedge funds is to take on debt to buy back stock and raise dividends. Q. E. D.

Re: Debt is coming to the tech industry

#180

Post by spyckie2 »

virgilp wrote: post #114
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…

I read it the other way around. If BigCash, co. advertises “we securitize your growth - get free money to grow based on your business metrics!’, and you’re a startup founder - would you be interested, or would you say “nah, I think I’ll just do another round”? OTOH I’m not sure I understood it well :D

Good point - there are a ton of SMBs that have good business metrics, usually as a result of being around for a long time. I would think that these companies would be the primary audience for this - they would use the flexibility that a securitized revenue stream allows them to smooth out any cash flow problems they had.

The majority of startups use investment to get to profitability / stability. This is why I think debt is a poor choice in general for the startup and tech market. I'd hope BigCash, co. models out default rates, not just SaaS metrics, and the adage, 9 out of 10 startups fail, while a bit harsh on revenue generating startups, doesn't bode well.

If offered, I can see a very well positioned startup who has access to VC preferring to raise debt to avoid the hyper growth push of VCs and grow at their own pace.

But also if offered, I can see a lot of high default risk companies use it to get cash because other options are not available, and the riskiness is why I didn't even think of an institution offering it in the first place - or just a repeat of the mortgage crisis.

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