Debt is coming to the tech industry
alexdanco.com
alexdanco.com
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 the burden of continuous economic growth, always beholden to the irksome shareholder. My little company is about 20 years old now. We have never been in debt apart from a mortgage that we could pay off tomorrow (probably, cough ... ish) We will never set the world on light and you will never hear of us. We have 20 odd employees now and in five years time probably 20-40.
A few years back the UK decided to cede the union with Europe (c'est la vie.) The pound slid south about 30% rather quickly and IT stuff became 30% more expensive nearly overnight. We import nearly everything IT here in the UK. I can't say that my company noticed any downturn in trade, actually we have just hit £1M t/o two months early this year.
I hate this sort of article. Maybe in the US all companies are multi billion t/o setups. Here in the UK we are all simply "shop keepers" (Emperor Napolean said so) and fucking proud of it.
Alex was previously at Social Capital, a fund with amazing PR and huge egos combined with very mediocre financial results and awful morals. It would not surprise me at all to see him get back into the game by starting a fund using drivel like this post to sucker LPs into writing him checks.
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.
And the elephant in the room is differing tax treatments for returns on equity vs returns on fixed income. Most jurisdiction allow you to pay interest with pre-tax income but profits are taxed and then used to pay dividends or buy back stock.
(Which is pretty silly and self-contradicting, if you combine it with regulation _against_ leverage. Government, please make up your mind which capital structure if any you want to prefer.)
Care to elaborate?
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 phone company that makes its phone hardware and software today and expect to make enough to keep the lights on)
At this pace, the world will be a few very big conglomerates and many very specialized shops.
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?
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).
Recommend reading the whole article if you're curious about the nuance in this. It flies above the current milieu.
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.
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" with people working seriously on them, full time, not leisurely on the beach in Thailand.
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.
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.
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.
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.
Making massive win/lose bets only makes sense if you’re diversifying across a portfolio.
I don't follow how that's a trick VC's played. Founders really are investing in companies. In one of the most extreme cases, see Adam Neumann going around talking crazy for years making all kinds of big bets that all blew up spectacularly, and after this all erupted as a scandal that tanked the company he was given a cool 1.7 billion dollars to walk away.
If there's any trick being pulled, it's that each founder gets several times more equity than the size of the entire option pool (i.e. than all the employees they will ever hire put together), and are able to do things like take millions of dollars in cash off the table when they raise new rounds of funding.
In successful companies the founders really are much more on the financial than production side.
If you don’t believe that, then see other comments that describe how founders in almost all other places other than Bay Area (Boston, NYC) prefer bootstrapping you VC.
Though one way I’m not convinced by the article, in my view what keeps the tension low and manageable in the Bay Area is the amount of money and small number of major firms, which makes treating founders well a key long term strategy, otherwise they’d get less deals (supply vs demand) rather than the power law distributions of this “phase” of tech firms. This long term strategy hasn’t evolved in Boston, NYC, Atlanta, etc, so VCs don’t play up their former founder roles, and the tension between VC and startup is easier to see.
Anyway, it’s not a bad thing, I would question the deal making abilities of founders who don’t see it, and just recognizing these tensions and finding win-win ways to resolve them is a woefully unrecognized part of growing a business.
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 that the government would step in to take the downside, then you could just get the upside in the time between now and when the downturn comes.
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...
>>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 it which would allow to bring all those sweet pension fund money into play. "financers/banks/rating agencies colluding " - it like saying violin and piano players colluding in Metropolitan Opera performance.
Why not go straight to securitizing senior tranches of your recurring revenue, and moving it off your balance sheet?
... (one paragraph later) ...
On the other side, imagine how much investor interest you could get in a diverse basket of recurring revenue from, say, 10 different startups that’ve all raised from Tier 1 VCs. People talk about how great it would be to invest in a unicorn basket; this would probably be even better.
It still wouldn't get to the level of the housing crisis until those securities were packaged into much larger CDOs and refinanced based on the fraudulent risk ratings.
I imagine that's sarcastic, because that looks a lot like the description of a VC...
But it was a description of VCs.
Massive boring banks won’t get swept up like they did with MBS products otherwise.
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.
So will all of the equity. I'm against debt in general as a means of funding and financing because it dissasociates the interest of the debtor with the creditor. But having debt as an option functions as a great competitor to equity based funding, which means that it gives founders more leverage to get better deals in either system.
Note that people out there are parking money in negative interest rate bonds today: wouldn't that money be better served in low yield-AAA debt on tech companies that have the business model to back it?
Plenty of people properly modelled sub-prime mortgages, and made bets accordingly. Corporations are pretty good at modelling cash-flow, too.
I think you're conflating "an inability to do so" with "caring about the results".
They can model individual risk pretty well I imagine. But can they model systemic risk?
Let's say you had a subscription user base and the retention / LTV data to convince finance people to treat it as a security. That usually is the sign of a successful startup, and you'd also likely have access to venture capital as well.
As a founder, is it worth your time to come up with a new financial product and convince people to buy it? In my opinion, you're probably better off doing a round because it will close much quicker and you'll know what to expect, and you can focus on growing your business instead of convincing everyone of your non-standardized, not well understood financial product offering. Good luck closing a group of institutional investors with that.
Now, why do finance people create new financial products? One reason is to investment larger amounts of money all at once - so create asset classes and then buy them in bulk because you have a $5b dollar fund and can only afford to look at $500m deals or more.
This is probably the only reason why you'd want to create a subscription backed debt - collect them up and allow people to participate in returns on startups without becoming a VC. But this is much more likely to be a repeat of the mortgage crisis rather than being actually beneficial to the economy.
OTOH I’m not sure I understood it well :D
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.
If you have revenue, convincing a revenue loan provider is a simple diligence process whereby they analyze your SaaS metrics. The future doesn’t factor into things much. They just want to know that things have been solid for a decent while, suggesting continued smooth sailing.
- someone said this to me early in my career and it has stuck with me.
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
Use it or lose it as they say.
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.
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:
!
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.
It just seems to me that if a company is doing something profitably, that would be the company I would want to lend money to.
When getting a mortgage, one of the things the companies will look at is your income to debt ratio. For a company it's no different. Yes, there have been companies that have gone under for too much debt. There have also been plenty of companies that have done well even with debt.
When you hear people say "OPM", aka "Other People's Money", what they typically mean is taking on debt and paying it down over time.
And for the poster who stated you don't have to service equity... that's completely bullcrap. We've all heard stories of VC's shuttering a profitable company because they weren't profitable ENOUGH. There's a cost to everything, that equity isn't free.
[1] https://media.gm.com/media/us/en/gm/news.detail.html/content...
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.
What will your lender do? Are they going to throw a lock on the door and sell the chairs? It’s not necessarily the end of the world to default on secured debt. As a founder, you may he just fine after a lender-induces a recap.
But don’t leave that all to chance. Understand the downside risk before you draw down on debt and be comfortable with it.
The issue was always that bankers don't want to lend for, basically, cultural reasons. When it actually starts becoming possible and there start being standard diligence scripts, etc., it will be much more favorable than equity financing for basically anyone who can get it.
The more likely risk to a bond holder is that the company fails to generate a healthy business, pays most of the loan out in salary while trying, and now the lenders own the company which is a couple of two year old laptops and a few thousand per year in ARR that cannot be profitably served.
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 usually only hear downrounds from companies that are struggling to keep the lights on
With debt, you promise a fixed rate of return instead, so the benefits are capped for the purchaser.
My experience in software companies is that there are often a few key developers with full platform and domain knowledge, and they are your bottleneck for onboarding and they are the columns that keep your platform going. Should they leave when the business goes into receivership, and why shouldn't they, there is little guarantee the software will keep running long enough to keep users happy enough, to continue to service that debt.
Not to mention a software business that runs on recurring revenue from users is likely failing because the recurring revenue isn't enough to cover costs, keep the business running and it just makes more debt. I just wouldn't consider it a reasonable assumption that recurring revenue will continue to recur. It's not even a good assumption for a well running business.
No where in there is a method to retain users or shift them to benefit the VC backers or lenders and recover debt. Maybe via user data that can be sold or pitched as useful to a competitor? Maybe by standing up a competitor and advocating users shift there an can migrate their accounts?
I understand your frustration and, largely, agree with it. You are correct that these are two different things and shouldn't be conflated.
Until they should be.
The two "types" of debt you are drawing a distinction between (or the familiar discussion of national debts vs. household debts, usually in the context of federal spending vs. austerity, etc.) do indeed behave differently under normal circumstances.
In extreme cases, however, these heuristics that you find so primitive and annoying are relevant and actionable. Ignore them at your peril.
VCs don't want to lend to startups because you can't make 100x return on debt.
"Here is a widely believed cause-and-effect relationship I bet you’ve never thought to invert before: because most startups fail, therefore equity is the best way to finance them. Have you ever considered: because equity is how we finance startups, therefore most startups fail?"
At the very least, this lines up perfectly with my startup experiences and many other case studies I've seen - investors simply are not willing to accept reasonable growth or reasonable returns, they want massive scaling and massive growth. Sometimes that approach works out but very often you get expensive bets that never deliver on the level they need to and the startup flames out or ends up stuck constantly trying to clean up the mess left by the last big bet while trying to execute on a new one. A revolving door of new executives and new business strategies.
The venture debt industry depends on tight relationships with VCs to ensure reasonable repayment rates. In some cases they reduce risk by reselling part of the debt. In all cases, they're themselves leveraged, lending money from limited partners and not just themselves.
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 sell it as widely and at as high a price as possible, no matter whether it is the right medicine for the condition at hand.
When used responsibly debt can be a net positive. When allowed to run amok it is a burden upon society. Maybe debt, like medicine, should only be allowed to be taken with a prescription?
The CEO/CFO should have the freedom to self-prescribe, IMO. In that regard, debt might be more like food. Some businesses have a chronic need for debt and can live quite fine with a lifetime of healthy debt usage.
Isn't it though, really?
The bankers determine your "need" and price it according to the risk of you defaulting -- which would seem to put a kink in TFA's argument since most startups fail, the interest rate would be astronomical if true risks were priced in.
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.
Debt issued to established companies is an essential mechanism to bridge working capital needs - like GM procuring millions of pounds of sheet metal before selling thousands of cars. This is not controversial.
Venture debt issued to startups by bankers, especially by the kind of bank who fancy themselves as a Bank for Silicon Valley, and the types of bankers who, after a few too many cocktail parties with VCs, fancy themselves venture capitalists. It’s just these pseudo-venture capitalists have the risk tolerance of...bankers.
If you pioneer a new space, particularly in consumer electronics with high working capital needs and you are initially successful you will be offered venture debt. If you take it, you will be more successful and you will have copy cats. Some of those copy cats will be FAANG companies.
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.
Woe to you if you were banking on that to make this years Black Friday/Christmas demand.
Alex’s post highlights a need in the space. Don’t confuse it with the services currently offered.
How is this different than the "next round" of a venture raise vaporizing and being left with no money?
The unicorn phenomenon is easier to explain this way - if you are already a company that can consume huge amounts of debt (you have a business model, product and route to market and just need to replicate) then you used to have one choice - take on debt. Now, where the returns on money as debt is so low, the money may choose to be VC just to gets return.
As such the only likely way "debt is coming" is if interest rates climb, giving money an alternative to VC.
However what drives global interest rates as very little to do with tech sector (I think).
So - yes huge tech plays are going to become more and more common because software is eating the world and we are basically going to replace all our business has governmental processes with new software ones.
Those will need huge investment - but whether that is debt or VCor something inbetween (looking at you government bonds) - is more likely to be a function of interest rates than anything else.
My prediction - the next YCombinator will take VC sized money and deploy it at bank level scale - small and medium sized companies at non-unicorn stages, because with good software and models it will be feasible to deploy at smaller levels.
Debt may not be coming so soon
Surely that's backwards: a lot of money really wants to be invested in debt, and is only doing VC because the returns to debt investing are so bad. Offer those investors a better alternative - comparable returns to a second-tier VC fund (which is not actually that hard), with something they can pretend is a security backed by something (they want to believe, you don't have to give them much), and they'll beat a path to your door. Much easier to offer market-beating "startup user bonds" while interest rates are low than when (if) some decent bond investing opportunities come back.
Yes I absolutely think there will be shake ups in VC market meaning smaller more frequent and earlier investment (taking the place of what used to be bank business loans). And I think a lot of money will want to do that.
But both of these are not debt - and until savings rates globally change then there will be plenty of supply of money and interest rates will remain low.
Given that savings rates generally correlate to countries growing in wealth then SEAsia and Africa suggest there will be a long while before interest rates tip up structurally
> Yes I absolutely think there will be shake ups in VC market meaning smaller more frequent and earlier investment (taking the place of what used to be bank business loans). And I think a lot of money will want to do that.
> But both of these are not debt - and until savings rates globally change then there will be plenty of supply of money and interest rates will remain low.
Low interest rates on normal debt are exactly what creates an opportunity for a novel kind of debt, which is what the article is talking about. Right now there's a lot of money in VC equity that would rather be in any kind of decent-yield debt - even novel debt backed by unconventional collateral. As and when interest rates rise, all that money will go back into conventional debt and the opportunity will go away.
It's exactly the same as Chase lending an individual Google engineer $5k for free for the month on his Visa card despite the engineer having $50k in his savings account already.
They make money on the interchange.
I just don't think for the most part this will happen in any meaningful way, because high growth companies that need the money just don't have the track record to really underpin the value of said revenue streams.
As for more established tech companies ... surely they must have been doing or at least trying to do this already?
I can imagine debt being a potential gap filler but only in established markets where lenders have points of comparison. This article skews on the side of pushing VC money out of the post-revenue slow-burn SaaS space. To be honest, if I was a founder running a healthy SaaS business wishing to grow then I would probably prefer debt compared to handing out equity.
But if I am starting from complete scratch and my goal is to build a slow-burn SaaS business (maybe even of a lifestyle business scale) I don't know I would jump onto debt as my first choice for funding. The only viable options I see other than personal savings are friends/family, government entrepreneurial grants and potentially crowd sourcing.
https://www.whythings.net/Images/Inflation_chart.jpg
https://beta.theglobeandmail.com/legacy/static/folio/mortgag...
Technology; like money, can't change physics. Just like when you hit a ball; what goes up must come down.
While looking at the graphs, consider that the personal computer and the internet were invented in the 70s. We went to the moon then too.
Virtually nothing in technology has changed since the 80s.
In a mature business investors and founders are likely to be more aligned anyway because the founder's model has been working and has some length of history and predictability with regards to forecasting further growth and outcomes. To put it plainly while you can get screwed in the later stages you're much more likely to get screwed in the early stages of running a company.
With that in mind, one of the main benefits, as stated in the article that the debt investment is not dilutive, is still nice at the later stages but I wouldn't say people should exclusively decide to go with debt based on that reason alone because the largest dilution (and by consequence chance to be screwed) typically happens in the earlier rounds (unless you're getting bailed out) anyway.
"Apple received its first big investment, a guaranteed bank loan of $250,000 from Mike Markkula in 1977 (the equivalent of over $1.1 million)" https://www.cnbc.com/2020/02/06/steve-wozniak-on-steve-jobs-...
also vc covenants etc?
The sums are pretty small right now, but the basic model is there.
This is so intellectually dishonest. He even goes on to equate recurring revenue with cash flow. Not the same! So often companies point to ARR as success without acknowledging other structural cost issues in their businesses.
"It's basically AAA debt. Now give me a 30x revenue multiple." -SaaS investor who wants it both ways
SaaS is just one of many recurring/contractual revenue categories, but VCs talk about it like its a revolutionary business model that should yield some extra reward from the capital markets. Recurring revenue has been around forever in more traditional industries.
Yes, reliable recurring revenue (with +FCF) can support leverage, but claiming that it looks and acts like debt is either ignorant or deceptive. It is 100% equity risk and that kind of magical thinking is just vulture bait.
In other words, why should we expect this now, if it hasn't happened already? If we suddenly saw debt markets becoming attracted to startups, I'd put just as much weight upon it as a cultural norm shifting than fundamental analysis showing a change to the risk profile. And you know what that means: if it's a cultural change, not justified by new evidence, it's either a late realization (safe, and regrettable) or irrational (incredibly dangerous.)
The author suggests to backup of the debt with a revenue stream, but those :
1) depend on the churn rate. 2) Are stable only for mature companies. Post product-market fit.
This type of financial instrument is different from a traditional venture / bank debt instrument in a couple ways:
1. it can be more favorable to startups by making payments a % of revenue instead of a fixed amount (ala ISA's)
2. the lender can earn higher interest by "securitizing" (e.g. pooling together) multiple loans and selling them. this allows the lender to move some debt off the balance sheet and in turn deploy the cash for higher yield
3. over time, the lender could provide more favorable terms by creating more accurate risk models by ingesting data from sources like Stripe and Shopify across companies and then building proprietary data sets to manage default risk. I believe Clearbanc does something similar today.
One potential downside of this model is the interest the company receiving the load would have to pay as stated here - [http://www.adventurista.com/2009/01/true-cost-of-venture-deb...
Would love to see this model work though.
At that point, cryptocurrency prices will start rising fast as fiat currencies start hyperinflating; free money is worthless money.
People will dump the old fiat currencies and start buying up cryptocurrencies with their free debt-fueled fiat.
Companies will no longer need debt; to raise capital, they will be able to create a new cryptocurrency and list it on Decentralized Exchanges; then they will use the profits from their business operation to buy-back coins from investors at a predetermined rate. Companies could even use open source code to operate their own decentralized exchanges so that there would be no intermediaries between a company and its investors.
To take the example further, would said startup now be unable to sell the book of business to someone else before going broke?
One of said vultures above raises debt from group of funds, buys a SaaS company, installs managers who understand cost optimization with no concept of growth, and hollow it out. Their nut is paying the interest back to their pension fund creditors, and their yield (after fees, naturally) is the delta between what they can squeeze out of cost reductions and making that nut.
I won't name the companies I think will be those targets, but speculating about privately held security companies as an example, it sounds like there is a clear exit sized at 10-15x revenues for anyone with traction, an API, and an office that has free snacks and a climbing wall.
https://www.fca.org.uk/consumers/mini-bonds
These havent been getting good press recently due to a number of failures.
The irony is many traditional businesses that use debt (retail?) really should be equity financed.
call JG wentworth if you need cash now
Your overall point appears to be that a repeat of 2008 is immanent and this point can be better made without the "Debt is dumb" first sentence.
This attitude is dumb.
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 boosted my credit rating and more importantly when emergencies came up I had that cash on hand.
Either rich enough where it doesnt matter, or poor enough where it doesn't matter.
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.
You answered your question with the second paragraph...?
>In my case, my first job (at 14) required getting a ride to from a coworker with a car...
You chose to go to university in lieu of financial stability. That is how savings is not acquired. Save the money, then go to school. Buy things you can afford, including school.
>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.
Babies are born without jobs or means to clothe and shelter themselves, but we have what are called families, communities, and society. Each melds together to form a fabric of civilization that provides in one way or another the necessities of life. Start working as young as possible, save up, spend thrift.
I have no idea why people __LOVE__ making these statements. 2008 was something that affected mostly the US and while it affected the rest of the world to a certain degree, overall very little changed.
Before jumping on my throat, hear me out: There have been several significant financial events since then: the European debt crisis, then Portugal(which is relatively small on a global scale), same with Ukraine and Venezuela, Russia(still going 5 years later), Brazil and those are just off the top of my head. What I'm trying to say is that financial crisis occur almost every year. Keeping your finances tidy is a good life advise but prophecies shouldn't be the motivation for it.
US is back on top. How's Italy, Greece, Spain etc doing?
Spain's growth rate has been what, 0%? Greece is totally screwed, and there's a strong set of evidence to say Brexit was a direct result of the 2008 crisis (because they pushed back so hard on austerity.)
Nah. The only selling point on the referendum was immigration. The only one people really cared about anyway.
Italy and Spain are recovering - new businesses are emerging, unemployment in Spain is down by 12% from 26%, Italy is at ~9.5% unemployment.
Comparing several small countries to the US is completely pointless given the difference in population, area, industry , resources and so on...
Regardless, nobody can tell the future - there are simply too many unknowns to consider. We will certainly have more good times and bad times. As to when they come, predict all you want, but historically analyst predictions have an awful track record (historically, expert predictions are wrong most of the time https://www.cxoadvisory.com/gurus/ ). The occasional person who guessed right previously (there will always be some) are then raised up as oracles.
There will be a downturn, sooner or later. Predict it every year and eventually you go down as the person who predicted the downturn.
That’s the story; hard to say how well it describes reality but there’s surely a modicum of truth in there at least.
So, unless you believe you can time the market, it doesn't appear like there is much to do except to make sure you have a rainy day fund.
All my other money goes into the system.
This only makes sense if you are making a sharp distinction between the 2008 US crisis and the European debt crisis, which is probably not what the parent meant. That's why people would strongly disagree with you.
Eventually, so much debt will be accumulated that companies will not be able to pay off the interest and the bubble pops. If everyone is always in debt, there will always be a periodic crash.
You may want to see the following illustration by Ray Dalio about how debt complements the economy:
They are barely related to the point they should probably even be called different things.
Business debt is to buy equipment to make stuff to sell at a profit.
Personal debt to buy a nice boat.