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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

#181

Post by virgilp »

spyckie2 wrote: post #180
virgilp wrote: post #114

Earlier quoted context omitted.

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…

A repeat of the mortgage crisis is possible - even likely - if such an instrument is successful. But you need to have some level of success first (for both sides). We're not there yet.

Re: Debt is coming to the tech industry

#182

Post by lotsofpulp »

woah wrote: post #75
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…

The 2008 financial crisis was largely created by the perception that the government would take any downside. As long as we don’t have multiple generations of politicians campaigning on a platform of “every family deserves their own SaaS business” and buying up the debt, we’ll be fine.

> The 2008 financial crisis was largely created by the perception that the government would take any downside.

The government didn’t take the downside for each home loan borrower, but when it came to asset prices, they sure as hell stepped in to save all the equity owners. It just depends how much political power the bailout needers have. Just a few months ago, coal miners in West Virginia got a bailout of their pensions when others have been told to pound sand.

Re: Debt is coming to the tech industry

#183

Post by iam-TJ »

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.”

"start-up" as a euphemism for "still loss-making" maybe?

Re: Debt is coming to the tech industry

#184

Post by kevingadd »

ghastmaster wrote: post #170
kevingadd wrote: post #8

Earlier quoted context omitted.

How do you propose solving problems like "buy a house" and "buy a car" without debt? The average person who needs to drive to work has no way to buy a car in cash, at least not early on. If you drop all your savings on a new car and suddenly end up with a hospital bill, that car isn't going to pay for it. I say this as someone who had enough saved to buy a car in cash: Buying it via a loan was the right choice. It bo…

Look up the word "savings". It is possible to rent a cheap apartment, buy a used car, and wait until you can afford better things. Obviously some people are going to run into financial difficulties if they have unexpected extraordinary bills. The vast majority of things in life are however, expected. Nothing is new under the sun. The overwhelming debt of the world increases costs. Additionally, debt temporarily trick…

How do I rent a cheap apartment and buy a used car without a job? The job I need a car to drive to? What am I supposed to save, exactly? The allowance I get from my presumably rich parents?

In my case, my first job (at 14) required getting a ride to from a coworker with a car. Getting to university for my job working in the computer lab + my courses required either a car ride from a neighbor or 3 hours on the bus. After I moved away for my first salaried job, I needed a loan (thankfully a personal one and not from a bank - both of which are things many people don't have access to!) to cover my first month of expenses so I could move and actually start getting paid and building measurable savings, since the move already exhausted the savings I had left over after uni.

Money doesn't come out of thin air. Not everyone starts their working life with access to enough money to just buy a car (even used!) and rent an apartment.

Re: Debt is coming to the tech industry

#185

Post by smabie »

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…

Why does debt need to be paid off? There’s nothing wrong with running debt forever and never paying it off. Debt, and other stuff like selling options or shorting or futures, is just a way to obtain more money than you have (leverage). If you can use that money efficiently while managing your risk there’s no problem. Without leverage, many business opportunities simply cannot be exploited, such as retail and investment banking. Capital reserve requirements make it impossible to lever up forever, but even so, these institutions are running at like 20x leverage. In particular, quantitative funds like RenTec or AQR could not exist without leverage since the unlevered returns of their strategies are much too low to be attracrive. In its essence, debt promotes the efficient exploitation of market mispricing and business opportunities.

Moreover, it often makes sense to not pay down debt even if you can afford it. Like if I can get a fixed 30yr 3.5% mortgage, why would I even want to pay it off? I can do a ton of different things to make more than a 3.5% return per year. Of course, I’ll have exposure to some risk, but that’s not necessarily a bad thing.

Looking at places like Japan who eschew debt as much as possible, the affects are not positive. Businesses are moribound and hampered by their irrational aversion to debt.

Mathematically, debt scales future expected return and risk by the same amount. Without debt, investors wouldn’t be able to implement their risk preferences, which surely would make the economy worse for everyone, especially those with little capital.

Re: Debt is coming to the tech industry

#186

Post by Grimm1 »

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.

I had thought of that but the people I'm talking about are people who had raised VC and later realized that if they want a sustainable business instead of a unicorn they may have missed the boat by working with VCs.

I think like everything VC money has it's place but I think you need to be really sure about what potential end states you are happy with for your company before taking a VC investment.

Re: Debt is coming to the tech industry

#187

Post by marcosdumay »

nightski wrote: post #131
marcosdumay wrote: post #96

Earlier quoted context omitted.

> 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.

The largest difference should be that VCs are transparent about their risks. I don't think any investor expects not to lose nearly all their investment in the case of a bubble popping, what is different from people buying home loans.

But it was a description of VCs.

Re: Debt is coming to the tech industry

#188

Post by nemothekid »

ec109685 wrote: post #173
nemothekid wrote: post #97

Earlier quoted context omitted.

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.

Right, but if you were profitable and, I’m assuming the reason you needed the money was sound; you’d have to be incredibly unlucky if the only outside capital you could raise was a down round.

You usually only hear downrounds from companies that are struggling to keep the lights on

Re: Debt is coming to the tech industry

#189

Post by bobthepanda »

fragmede wrote: post #174
csomar wrote: post #154

Earlier quoted context omitted.

> 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 tha…

The major issue is that these days modern R&D and manufacturing tooling now requires a ridiculous amount of money. Away makes luggage and had to raise $50M in a series C. Look at the multitude of failed product Kickstarters.

It’s why across industry sectors, you are seeing consolidation of companies to reduce costs. In air transport, Embraer sold out to Boeing and Bombardier sold out to Airbus (and due to its fiascoes may cause the death of the business).

Re: Debt is coming to the tech industry

#190

Post by pmart123 »

eru wrote: post #163
ThrowAwayGlen wrote: post #153

Earlier quoted context omitted.

Thank you. I read this article twice, thought I was completely missing something. No, it's a pretty obvious statement wrapped around pseudo-intellectual ideas of Carlota Perez and presented in an Emperor's New Clothes style where if you disagree with it you're an idiot ("Maybe not all investors get this, but the smart ones do"). Alex was previously at Social Capital, a fund with amazing PR and huge egos combined with…

The article seemed pretty straightforward. Perhaps a bit too excited. But the fundamental thesis that the predominance of equity financing in tech is an aberration and will likely come to an end, seems rather plausible.

This is not new though. Robert Smith pioneered the idea that while software companies didn’t have tangible assets, they had stable cash flows.

In the public markets, data providers like IHS Markit, MSCI, etc. have used some debt to rise the returns on equity.

At the end of the day, it’s more about where you define “tech” as cutting edge, or as a software or data business.

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