Things to know about raising debt for startups
a16z.com
a16z.com
i have also tried to raise debt against considerable IP assets (not patents but actual implementations and products) and was never able to do that. this remains a huge opportunity to this day.
raising debt against real estate or other traditional assets is nothing new and no point in writing an article on that. i would personally never borrow against my home no matter how much i believe in my company as there is always the unexpected event that can f** up everything.
I mean isn't that the point? Banks loan money for low risk which is why they're able to offer those low rates.
Small usually means risky, not always, but definitely the default.
Garage sales typically bring in some value or at least the value of the goods is relatively easy to evaluate. Not so with IP.
The dirty secret the banks know and the startups don’t want to admit is that much IP is worthless.
If you offer them the IP for sale any decision-maker in the company that could approve paying for it will need to ask themselves: "How much would this help my career in this company personally? Or does it put me in risk of possible failure? Does it put me in competition with our other departments? How much would we need to invest our own time and efforts to integrate this IP into our product-line?".
people do buy and sell small businesses. why is a pizza place worth any money? because of the customer database? but that is IP too, so why does that have value? why do i need to pay 50K for that but the code i spent writing for 15 years has “no value”? even if a FAANG is doing something similar right now but their code sucks?
i have had actual products in the market incorporating IP and the banks still think it is worth zero.
For smaller filmmakers, debt instruments are generally relegated to gap financing: high-risk and expensive loans that cover relatively small percentages (10-20%) of the total budget, and are backed less by secured contracts and more by the track record of the team package (including sales agent) -- basically, think mezzanine financing.
A better use of public money is funding industries with high capital requirements for straight equity. I'd rather we build fabs for Intel and AMD in the Great Lakes region with federal money in exchange for stock where the returns can go to pensions.
and why the great lakes? pollute the beautiful nature in minnesota and surroundings?
also, VCs just follow trends and don’t understand many industries. no VC or angel funding does not mean anything.
There are multiple fabs in the US today making components for consumer electronics as well as multiple fabs under construction. Government incentives are a major factor in choosing sites for these projects, we know we need more of them domestically, and know we can make a buck off them for the taxpayer.
What are you comparing to?
If you've shopped around for interest rates you'll know a bank loan is the lowest of the generally accessible loans. More specifically mortgages are the easiest low rates because they're very predictable (compared to other assets).
I get that there are real world needs for things to be as complicated as they are, so that things can grow very quickly, with people aligned with incentives and committed to a common goal. But seriously, why does it feel like this level of complexity is the norm? And just one slip up and you've screwed all of your finances forever (among many other potential horrible outcomes).
I suspect it’s similar in VC funding. You are just a company that sorta fits a conventional loan. In the macro sense, just a few need to hit, but they could care less about your special little company. You are packaged to investors.
I imagine a world where the government buys startup backed securities to prop up the tech sector, in which case you’ll see even more startups. Right now it’s any Joe Schmo with money that act like the Fed.
That way everyone and their mother can grab a loan for a house and a company, it’s a macabre form of socialism, uniquely American - so long as you make the monthly payments. Truthfully If I was a lender I’d have all my startups go public within a year and start paying back the debt via cashing out their stock, because that’s way more predictable than hoping your company becomes profitable or useful.
If you have a business model that aligns itself well to some kind of financial multiplier, like generating lots of float, then you could hire a good CFO to handle the difficult thinking.
If you can generate healthy floats (ie insurance companies, where I prepay months or years before I file a claim), then you don’t even need loans, you’re getting access to capital at 0% interest
let’s say I have a stock portfolio with X amount, could I get a loan with my stock as collateral for a down payment on real estate? That way I don’t actually need to sell stock to afford a down payment?
Would a bank shy away from that non-conventional loan assuming my portfolio is larger than a down payment and I make a good wage? Any googling collateralized stock shows me articles on making trades on loans from the stock broker, but not for using that money for something else.
Random example: https://www.schwab.com/pledged-asset-line
What I expected, need to already have assets within Schwab
I believe wealthy people (so some founders) do this on better terms because they have a better negotiating position.
How would they know unless you told them?
Entering into a single startup's narrowly focused business DAO with its own coin/token model appropriately tied to the same business earning metrics discussed in the article has the possibility of restructuring the whole compensation for value added chain. Consider a sweat-for-debt agreement where the developer completes a scope of work for repayment terms defined and backed by the DAO. Apply this at scale and you may have a new branch of venture capital/debt.