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Comment by ttul | Hacker News Reader

Let me illustrate with an example. A colleague operates a company doing about $10M in annual revenue. Due to stay at home orders, his business has completely failed. A very wealthy minority shareholder who lent the company some funding last year is now going to do a debtor-in-possession financing and will end up owning the whole thing. The founder, who is not wealthy, will lose everything. The rich man will gain everything.

Once the pandemic is over, the company will return to normal. The rich just got richer, folks.

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>Once the pandemic is over, the company will return to normal.

I wouldn't say that. Your employees who did the work and had tribal knowledge are now gone. If they didn't document something, it may not be found for a good while.

Point is, it might take a lot of work to get it back going. Or it's as easy as putting some equipment on firesale and shredding everything else.

It seems like you are trying to portray the lenders as the bad guys here. If that’s the case there is one thing I don’t understand.

I had no money to fund my enterprise venture. Found someone that believed in it enough to lend me money with the promise I would pay it back. I couldn’t pay it back so they “took” my company.

How are the lenders the bad guys? What are they supposed to do?

As a society, we want your enterprise to exist and be owned by you, an individual, not a lending company. We need a different system that can fund you and keep you funded as long as it’s a good business, which means even through events like this one. I’m not sure exactly what that looks like, but it’s not our current system.

It looks like the government depositing sufficient cash into your bank account to prevent defaulting on debts.

If it was easy, someone would have figured it by now, after hundreds of years of shareholder capitalism. At the end of the day, real world business is risky, and someone must be taking that risk. If lending companies are asked to both front the money and take the risk, there will be no lending companies and no financing.

In that case perhaps the solution involves no lending companies.

People love to talk about how lenders take a risk by lending, and that's why contemporary "capitalism" tends to limit the distribution of profits back to lenders/shareholders.

But you take a risk simply by deciding to "invest" your labor in a venture too. And if the venture fails, in almost all cases, those who chose to provide labor instead of capital find themselves much worse off, practically speaking, than those who can spread their investments around and amortize risk.

It's not that the lenders are bad guys, it's that they are participants in a bad system that provides preferential treatment to capital versus labor.

But lenders take a different risk. They don't share in the upside. I can borrow $100m against assets for next to nothing. You can't raise the same amount of equity for next to nothing -- equity investors are generally looking for much higher returns, for the risk they are taking.

The interest rate is itself a reflection of the broader equity situation. The price of a loan right now is ... very low. It will go up and down, though I agree that it rarely matches expected equity returns.

The thing is, lenders are free to decide on terms, and whether to issue a loan at all. Part of their actuarial calculation must include some rate of default, because otherwise there would now downside to lending anyone anything. We may end up in an unprecedented time thanks to the virus and our policy decisions about it, but that's all part of the risk lenders take, and they (are supposed to) factor that into the rates they offer. I will bad for them, I suppose, if there is mass scale defaulting, but I see no reason to preference them over anybody else who makes the choice to participate in a loan-driven venture.

I see this as an inevitable consequence of the fact that most small business owners assign a large value to the intangible of "being your own boss" not to mention the potential for wealth, and this drives everyone to have no margin for downturns.

I mean, think about restaurants. Who starts a restaurant because they think it's the easiest way to make a dollar? The very fact that many people want to do something for reasons other than sheer profit means that profit will be driven below normal which will cause pain over time.

What can the rich do to prevent this? Unless they got together and eliminated the ability of the non-rich to seek wealth. Sometimes, that's the conclusion elites reach about things; they do it to some extent. Like the way in the US you have to be a "qualified investor" with a certain amount of assets to invest in unregulated securities.

> The very fact that many people want to do something for reasons other than sheer profit means that profit will be driven below normal which will cause pain over time.

Cash on hand is a lot more nuanced that profit vs not profit. Airlines spend tons of money on stock buybacks due to the drive for "profit" which hurt their cash on hand significantly.

Cash on hand is either: unclaimed profit, capital or loans (Accounts payable that isn't fulfilled). So while having more profit can make it easier to have cash on hand it isn't the only way.

> What can the rich do to prevent this?

I don't understand where this question came from. Are you talking about banks reducing the chance of bad debt due to insufficient liquidity? Are you talking about the rich trying to stop small businesses from increasing competition and reduce their profits?

> Like the way in the US you have to be a "qualified investor" with a certain amount of assets to invest in unregulated securities.

Unregulated securities are often a synonym for "scams" that is why you have to be a qualified investor.

> Unregulated securities are often a synonym for "scams" that is why you have to be a qualified investor.

That's the point though, scams are scams whether they're run by a loan shark or Bernie Madoff. Anyone should be allowed to invest their capital in any legitimate venture they see fit, and anything that meets the legal definition of a scam should be shut down and barred from taking money from anyone.

It's quite patronizing that the government takes the stance of "If you don't have X amount of money, you're not wise enough to tell the difference between a scam, a foolish business venture, and a legitimately risky business venture. Better leave that to the experts (and their commissions)."

When there's an endless supply of "marks", it means that you, as a hypothetical sensible and intelligent entrepreneur are faced with competing with them in good times, and then none of you can deal with the bad times.

Free markets can't fix the effects of collective error or stupidity through some magical means. They can reinforce it.

I agree with you, but I disagree that the solution for it is "You can only invest in these ventures if you have X net worth". Having more money does not necessarily imply one is less foolish, and it disqualifies those who are capable of properly evaluating an opportunity but are not high net worth individuals.

If you don’t operate a restaurant on lean margins, you won’t have any customers because your prices will be too high. The competitive market forces low margins and thus low capital overhead.

Yes, my point is the equilibrium gets lowered further if people are willing to accept lower profits or losses due to intangible reasons and/or commitment to sunk costs, self-image, etc. This is more characteristic of small businesses than large ones, of whom people always slam "bean counters".

Saying "the competitive market forces" is not a proof or an argument that competition has to produce the outcomes we see. If people were different, less willing to take risks, then there would be less pain in a crisis.

I think it rather says that the more you leverage, the more risk you take, the less you can survive hard times.

Same story with the Private Equity Funds industry.

Does your colleague know that he can get up to a $10M loan from the Small Business Administration, and that any of the principal spent on payroll and rent will be forgiven?

This might be enough to keep him afloat until things start up again.

This isn’t always worth doing as they buyer typically can only dispose of the assets at fire sale prices.

This is why SV Bank’s collateral pledge always excludes the IP: they don’t know what to do with it while what’s left of the team has a better chance of selling it/getting aquihired.

That raises a good question: what proportion of small businesses (SBA definition or JPM's sample definition) have shareholders? Vs. being sole proprietorships or partnerships?

This is the core philosophy of capitalism: the one with more money wins. Otherwise why would people sacrifice other important things (health, time with family) for money?

The advance of modern technologies (agriculture, transportation) improves everyone’s life standards so we enjoyed quite some time feeling everything works fine. But now the tech advance slows down (largely due to the fact we haven’t had breakthroughs in fundamental physics) so we start to feel the old pain again but really it’s been there for thousands years.

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