Reminded me of the supposed quote by Trump to his daughter upon seeing a homeless guy...it went something like "Technically, he is richer than I am."
Unfunded? Unless your credit is totally in the toilet, you can probably get a business credit line to launch on your own
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Re: Unfunded? Unless your credit is totally in the toilet, you can probably get a business credit line to launch on your own
#12Unlikely, unless you have some idea that makes sense to a business loan manager. You're relying on a non-tech person to see that your idea is a really solid idea, which may or may not fly.
The other thing is that even if your credit isn't in the toilet, banks might also want to take a lien on something valuable of yours, e.g., your car or your house, since you essentially have no assets in your company when you start. This is not always in your best interest, especially if your company goes belly up. Liquidating a house or a car that might normally be protected by bankruptcy is probably not going to be fun for you.
Re: Unfunded? Unless your credit is totally in the toilet, you can probably get a business credit line to launch on your own
#13Earlier quoted context omitted.
It's a bad idea for a typical Web 2.0 startup but it's a great idea if you have a clear path to profitability.
Debt is only reasonable if you already have enough positive cash flow (not positive revenues.. more money in than money out) to finance that debt. But even if you have positive cashflow, it generally makes sense for young companies to reinvest those earnings instead of taking debt investment. If your business fails, then you still need to pay off the loan. So that's what you get for not giving up your equity.
"But even if you have positive cashflow, it generally makes sense for young companies to reinvest those earnings instead of taking debt investment."
Not necessarily - or rather, it's often rational to do both.
It's rational for a business to take out a loan if the interest rate of the loan is less than their expected return on capital. Interest rates for business loans are what, 6-8%? It's not uncommon for a well-run, growing business with a strong franchise to earn a ROC of about 25%.
Debt lets them grow faster, sooner, and then they can pay off the debt from future earnings. It's often far more capital-efficient than floating an equity offering, where the investors would get a share of all those additional profits.
It doesn't work for web startups because web startups often have far lumpier earnings. It's not uncommon for a web startup to be bought for multi-millions before they earn a dime of profit. That's because their real "customers" are big companies, who are paranoid about losing their market to an upstart. A web startups users are effectively an advertising expense: spend a few thousand on bandwidth to show that if you wanted, you could take over the world, and then get a big company to buy you to prevent that from happening.
There are some web startups that employ debt financing very effectively. For example, Akamai floated close to $300M of convertible bonds to fund its expansion. As a result, it effectively acquired a lock on the content-delivery business, which has allowed it to grow by leaps and bounds over the past 5 years. Without that debt financing, they'd either have to forgo their thousands of datacenters in strategically-placed locations, or they'd have diluted their equity so much that it wouldn't be worth it for them.