Are VCs funded by debt? I thought the funds would largely have come from existing cash or equities and were only down 15% from ATH on SPY.
Is this just people being risk averse right now?
Is this just people being risk averse right now?
And so the banker is like, but of course Mr Rich Dude here's a line of credit for that 50M at a low low rate of 2% since we have so much money to lend and you can keep making the now 8% interest profits by having your cake and eating it too. And if you're 200M account starts to dip too low that you might be at risk of not being able to pay us back you can always line up some more collateral or we'll margin call and collect that 50M you owe us.
Now sorry I got a bit long winded but that's really the gist of what happens, so yes indirectly VCs are largely funded by debt. And in times like these a lot of that collateral is losing value which is increasing the risk of the debt being collected, this is coupled with rising interest rates which then in turn reduces the potential reward for leveraging yourself up so much. It all becomes a vicious cycle.
Ray Dalios series on the topic of capitalism being funded by debt is quite approachable.
If anyone would like to follow that lead, start here https://fermatslibrary.com/s/shelling-out-the-origins-of-mon...
The tl;dr is that humanity has at least an 80,000 year history of goods which are fungible, collectible, portable, scarce, and made to an exact standard, traded between people who may not speak the same language for any other sort of trade good. The familiar example is wampum, but the practice predates the colonization of the Americas by many multiples.
Debt is where state money comes from. But shell and hunk money is where states got it from, and the systems coexisted into the late 19th century.
In the U.S at least, holding cash is considered the worst thing to do if you have wealth. Which then leads people to use debt
The government and banks will rip you off through inflation.
You can use debt to benefit from inflation, but it also carry its risks.
VC historically yielded 12 to 18% [1]. There is a lot of variance in those figures, with the crypto + Clubhouse guys coming in below ten, savvier funds still posting 30%+ and SoftBank + Tiger losing money.
So when a bond is yielding 5 pts [2] above the 10-Treasury’s 2.75% [3], more people will chose 7 or 8% with the guarantee of the issuer’s assets over maybe twenty maybe zilch.
[1] https://www.nexitventures.com/site2015/wp-content/uploads/20...
[2] https://fred.stlouisfed.org/series/BAMLH0A0HYM2
[3] https://home.treasury.gov/resource-center/data-chart-center/...
That doesn’t mean necessarily that they are “funded by debt”. It could just mean that getting into some temporary debt is part of how they work.
I would be somewhat careful with such claims.
As an investor who has money available, you have two options (in this example) where none involve borrowing money:
a) invest in some startups
b) lend this money to other entities
Increased market interest rates mean that b) becomes more attractive. In other words: the startups that you invest in for a) have to be much more promising than in a market environment with lower interest rates. This means less investing in startups.
This means that VC have to become more selective with respect to the startups that they invest in, as I described.