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Comment by cperciva | Hacker News Reader

I'm not so sure about that. Tarsnap is a bootstrapped business with an actual viable product and paying customers, but I'd never go for this. Even if I needed a sudden burst of capital (which is unlikely, since costs tend to change smoothly in SaaS companies), why not wait a few months and pay out of the profits which accumulate in that time period? Or, for that matter, pay out of last year's profits (which are now in my personal account, but I can always invest them back into the company if needed)?

If I needed to make a one-time purchase of a million dollars of servers, this would make sense; but nobody does that these days. Costs are overwhelmingly recurring, and if you need to borrow money to pay your recurring costs, you're not going to have the income stream lenders want to see to repay a loan.

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Ex-Revenue Based Financier here (but speaking only for myself, not Lighter Capital). For the case you're describing, you wouldn't need it, so end of story.

A better match would be where there are J-curve and/or "stairstep" investments necessary to grow.

A real case study was a company we looked at who produced technical informational videos with 3-D animations, sold into very specific use cases in industry. The videos cost 4-5 figures to produce, but once created could be resold several times on a subscription basis. Demand was easy to project by looking at the list of topics. Production cost was recaptured about 12 months in, then pure profit on the subscription.

Now, those folks wanted to go produce, say, the next 10 videos but needed $100k to do it. No bank would lend with some obscure technical videos as collateral.

Perfect fit for RBF though. Payback on the production cost goes from 12 months to maybe 13 months and a small % of the (basically 100%) gross margin goes to the lender for another couple years, but in exchange the company grows far faster than organically possibly on recycled profits.

There are anti-patterns too, so I'm not just cheerleading. But a good match typically has high gross margins and some discernible element of J-curve wait for ROI on internal projects.

I'll tell you why:

When I was at FreshBooks in 2008/2009 we figured out our Cost Per Acquisition (CPA) and our per-customer Life Time Value (LTV) / Net Present Value (NPV). We were making about 3x on marketing spend over a period of about 2.5 years. Effectively a 55% compounding yearly ROI. Could we wait, sure, but why? Even at credit card levels of interest we were still winning, and if we didn't our competitors would soon figure out the game and they'd gain market share at our expense.

how does one calculate the LTV/NPV of a customer?

The net present value (NPV) of a customer is just the value today of all of all future revenue minus the cost today of all future expenses associated with them. The key is that it factors in a "discount rate" to account for the fact that cash in the future is worth less than cash today. So future cash is discounted by some ℅, compounded annually.

If a customer will pay $100, and it costs $90 to acquire them, without taking time into consideration it would look like $10 in profit. But if you have to spend the $90 today, and you only get the $100 in five years, they might not actually be a profitable customer. Conversely, if that same $100 revenue customer cost $105 to acquire, but they paid today and you only spent $105 to acquire them in five years they might actually be profitable (this scenario is probably less likely, but maybe if you are acquiring them through some channel where the costs are deferred for some reason).

Excel and a lot of other spreadsheets have a built in NPV function to make the calculation easier. You can simply give it the series of expected costs and revenue associated with the customer, and a discount rate (how much to discount future cash by, compounded annually) and it will give you the NPV.

Churn rate gives you average customer lifetime. You know how much they pay over that period, you ought to know your customer acquisition costs & the cost to service your customer base already if you have any kind of business head on at all. From these numbers you can calculate the value of an additional customer to your business. How much of that you’re willing to spend on marketing costs is up to you and your risk tolerance :)

Ah, thanks for the example. I'm used to thinking of costs as development (fixed costs, spread over an extended period before revenue is generated) and maintenance (proportional costs over the same timespan as revenue), but I never thought of customer acquisition as something occupying the "proportional cost, paid up-front" segment.

Not really relevant to tarsnap (I've never found an efficient way to spend money to acquire customers in the short term; instead I focus on longer-term branding) but I can absolutely see that it fits some companies.

Just checked out Tarsnap. Seems like a very good idea.

>Not really relevant to tarsnap (I've never found an efficient way to spend money to acquire customers in the short term; instead I focus on longer-term branding) but I can absolutely see that it fits some companies.

Isn't backup a kind of sticky service? I mean once I have purchased your service, as long as I am not facing any issues I am unlikely to change the provider. So LTV calculations should be relatively more predictable to your business.

For example, I use Dropbox for personal online storage and backup purpose. It has worked well so far and haven't considered switching in years.

Anyways, not trying to tell you how to run your business. Just curious. Yours is really an intersting product. Best of luck.

Yes, I have plenty of LTV per customer; but tarsnap's users skew heavily to the more technical and aren't exactly easy to targets for advertising.

I think taking a loan could be better in terms of risk management and growth rate. Let's say you have a business with a steady, growing revenue, currently with $50k MRR, $10k profit, and you want to invest $100k for expansion over the next year (hire another dev, marketing, whatever). You can do this from your own revenues, but then you're at zero profit, and every decrease in revenue puts you into loss. Not a good place to go to. On the other hand, you take the $100k loan, and now you're operating with a financial cushion, have enough time to recover from a decrease in revenues, and in case of a disaster someone else takes part of the risk. You could of course start putting $10k/month a side, and start expanding in a year, but you'll lose a year of growth.

These loans aren't taken out to cover costs but to fund investment in new lines of business, or a 10-100x expansion of an existing one.

Since nobody in your industry buys millions of dollars worth of servers, you should consider doing it. You could create a new market which you own, or elevate yourself from someone who rents capacity to the company renting it out. It could be the business opportunity of your life.

Is this sarcastic?

Borrowing millions of dollars at 20-30% to compete with some cash rich companies who already dominate the market seems crazy - (borrowing at 5% could be another matter).

Depends on your target audience. I wouldn't want to compete with Amazon as a general proposition. But there may be some specific niche that isn't well served by Amazon. For example, there could be some piece of Tarsnap's infrastructure that is irritating/expensive to create but that other companies want to use.

Note, for example, that Dropbox gets "substantial economic value" from running their own hardware. [1] And Tarsnap is in the position to offer a backup-specific white label service that other entrepreneurs might rather pay to use than rebuild.

[1] http://www.wired.com/2016/03/epic-story-dropboxs-exodus-amaz...

Who said 30% interest rate? If banks are lending at 6%, than a 30% higher interest rate would be 7.8%.

Hmm, maybe you mean 2x-10x expansion.

The world of 10x-100x expansion is the world of venture capital.

The specialty lending world of Lighter Capital is about attractive, not explosive, growth -- but at much lower risk of total failure for both entrepreneur and investor.

You're right, 2-10x is a more realistic number!

I guess if there was an opportunity that had to be taken now you might consider it - but spend some serious time modelling the risk. 30% is too high for week to week cash flow issues though I agree.

I think it's valuable for companies much earlier in their lifecycle. If you've suddenly launched something and now have $30k in MRR, these guys will lend you upwards of $100k with a 5-year payback horizon at a "cost" of ~$10k.

For someone with maybe 10k in assets in the companies bank account, that $110k repayment loan sounds pretty good if say you'd love to bring on a second developer "right now". I agree that if you just wait four months, you're there already. But if you're at month two after launch, a $10k "over time" seems like a great exchange.

My straw man though seems unlikely: would someone really lend me $100k for just 10% interest, because I suddenly launched and went $0, $10k, $30k?

If you need a sudden burst of capital, then you can't always wait a few months.

Also, some of the companies who take out these loans (and presumably the ones paying closer to 30%) are not profitable. Their only alternative is selling equity, which obviously comes at great cost.

This seems to be the most appropriate use of this tactic - a short term burst leveraged against strategic action.

It's helpful to be aware of the variety of options available for funding, but they are not created equal, and this carries a disproportionate cost.

If most companies were doing this I would consider it a signal worth investigating.

"Cost" isn't a scalar where you can compare one source of capital against another of unlike structure (no matter what sophomore ec majors might say).

If you have a $1M term loan to Bank of Bankerton, and your payment this month is $100k, if you have a big miss in revenue (lose a couple major customers, switch billing models, big delay in onboarding new enterprise client) and can't make the payment, you're dead.

If you had the same $1M from a Revenue Based Finance deal, payable as, say, 10% of your monthly revenue (expected at $1M, so identical $100k payment due) but then had a huge revenue miss by say half -- well, you just pay 50k that month and stay alive to fight another day.

So -- to most small entrepreneurs without deep pocketed equity owners to fall back upon for a recap, the flexibility in a Revenue Loan can be an existential matter. What is the "cost" of that?

(Ps I'm partially being rhetorical and partially serious -- I've been working on a paper on this topic and would welcome a quant-y collaborator.)

First, I appreciate you qualifying the rhetorical nature of your post.

The costs and benefits are clear. It's more expensive than other options because is comes with additional risk. In the trenches you are forced to go beyond theory and compare apples to oranges.

Does it serve a practical function? Sure. I don't think that validates it as primary financing.

And what happened to organic growth and sacrifice?

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