Bridge Loans
avc.com
avc.com
> A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. […] I like somewhere between 2x and 3x depending on the circumstances.
Slippery slope; Fred just gave ammunition to a whole bunch of firms to start negotiating liquidation preferences on term sheets, for which the “standard” has been 1x for years.
For a bridge loan it's different. The 2x/3x is not a liquidation preference really, because since the loan doesn't convert to equity in a sale, that's the maximum the bridge loan creditor can receive in a sale.
uh, citation needed? Investors aren't meant to be there to bring 'ideas and experiences', and adding new ones to a company that isn't doing well feels like it would just add more tension and disagreement when what is probably needed is a laser vision that hopefully the founding team should be providing..
What they want and what they are is not necessarily the same.
Plenty of VCs are just dumb pipes for money. There are exceptions.
It’d be like you asking for a citation when Michael Jordan makes a comment about the game of basketball :)
I'd rather hear from the people that took the investment, especially the ones that crashed and burned.
Fred is explicitly stating that it's good for a business to get new investors, and to not just keep taking money from the existing investors. That's the exact opposite of what a typical VC would tell you. When new investors come into a company, the existing VC gets diluted.
How is this advice not in the founders interest?
If a VC went from owning 20% of a company to now own 10% - how is that good for the VC?
Because that's not all that happens. The company also has a bunch more cash which means it's worth more.
You own less of a bigger pie but the actual value of your slice shouldn't change.
If you have 10 out of 100 shares of a company and it has a $10m pre-money valuation, your share of the company is worth $1m.
Now the company raises $2m. The new investors get somewhere between 16 and 20 (newly issued, dilutive shares). Now you have 10 out of 116 - 120 shares. 8.3% - 8.5% of a company worth $12m ($10m + the $2m in cash). Which puts the value of your shares right around your original $1m.
Except now the company has all this cash as well, so you're probably better off.
However, there's an obvious bias there, and thinking that you're pot committed when you're not is a pretty common mistake with inexperienced poker players (and investors).
(We currently have a large rotating LOC with a bank, but this is not always practical when you're a startup/small business getting going)
Paying tons of cash out the door to buy inventory to meet demand over X days while it sits in your warehouse is very often less efficient than paying even ridiculously high APRs on bridge loans. Cash flow is a consideration just as raw ROI / profit margins are, especially for smaller businesses.
Yes, many bridge loan issuers are preying on uninformed / underbanked people. I won't deny that. But in the small commercial space, bridge loans are used effectively, responsibly, and regularly without abuse - especially for those carrying hard inventory.
But what Fred is describing is financing to bridge to either a liquidation event or another around of funding.
Functions pretty similarly, except one is a reputable business (banks... well, kinda reputable) and the bridge loan shops tend to be pretty maligned (and often reasonably so).
I know individuals that have made a killing offering loans to distressed publicly traded companies. They typically convert to MASSIVELY larger amounts of equity and dump that. Resulting in a death spiral for the company (unless the company's laughable prospects actually panned out), or result in a lien on assets that are also far greater in value than the loan, which is the same in actual bankruptcy, or they get paid back at a nice premium.
Despite there being a bunch of silicon valley companies afraid to go public, there are still hundreds and thousands of pink sheets and bulletin board stocks publicly traded just waiting for a boutique financier, and thats just in the US. UK has the AIM market, and other economies have stuff too.
As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it.
You finance a startup with a mix of VC and debt. As the business becomes less speculative ($MMs in revenue) debt becomes more available, and is generally preferable to equity deals for a number of reasons including dilution, board control, etc.
Unclear to me if VC financing availability is disconnected from debt financing, as the blog author seems to imply: when the world tightens, I think it tightens.
source: 30 years of this nonsense spanning multiple booms and recessions.
Autodesk did. Initial investment was $60K by the founders, and the company was profitable early on.[1] No VCs were involved. There were discussions with some VCs, and they were very funny. "In addition, the overall flavour of the deal seemed to us totally inappropriate for a company which was, at the time of these negotiations, generating sales equal to the size of the deal every month and generating after-tax profits close to the size of the deal every quarter." The VCs assumed they had a stronger bargaining position than they did.
The VC involved turned down a deal to invest about $500K for 10% of the company. Autodesk's market cap today is $47 billion.
Autodesk isn't really interesting here, though. They IPO'd almost 40 years ago at a tiny fraction of their current value, and that tiny fraction is the only number that matters. Anyone could've jumped on at the IPO and still realized 99% of that $47 billion. The investors missed out, but it wasn't some big whiff. The IPO was mediocre by today's standards.
Untrue.
Sell enough annual SaaS plans and you get cash before your future costs - perhaps enough to self-fund growth depending on specifics for your SaaS. Skip to 14 minutes in of https://m.youtube.com/watch?v=otbnC2zE2rw for explanation.
Jason’s explaination for his own business: income from signups is structured so they get more money per month per user than their Customer Acquisition Cost “literally operate with an infinite marketing budget” - i.e. constraint isn’t marketing growth costs but their other business constraints. See from 15:45 to 16:30 of the video where he is talking about some figures for the business he owned at the time.
That might be true if you only need to pay for the operational costs, but someone has to develop that service first, don’t they?
How do you sell annual SaaS plans without spending a huge chunk on development first?
From my own experience, I helped cofound a now-successful small business that we retain 100% ownership of. Founders used <1> the “sweat equity” of our own time (even with kids and mortgages), and <2> one person did some consultancy work, and <3> we had one initial large-business customer (although nowhere enough to pay our usual wages, it helped a little).
There is a lot of “bootstrapping-pr0n” videos and websites with a variety of techniques to build a business without extreme inception costs (e.g. techniques to avoid requiring paid staff when starting - staffing being the main cost for most software startups). The fabulously good video I linked alludes to some of that, and you can find other videos from those conferences.
If you do want to get initial funding, I think that ycombinator is an astonishingly valuable deal. Even applying should get you back more value than the time it costs you: https://www.ycombinator.com/apply/
Edit: I strongly recommend you avoid the “go big or not at all” culture/mentality: most founders fail and the median payoff for founders is quite negative. Venture capital and startup-pr0n encourages you to aim for billions: VCs can spread their bets; VCs have asymmetric information and payoffs; VCs only invest in less than 1% of the potential businesses they see; VCs get paid a base rate by their limited partners; VCs get preferential shares. For an individual it is more like a lottery because an individual’s risk profile is absolutely different from a VCs.
It doesn't sound like the fire sale was where it went wrong.
In the end, I got nothing back. Zero.
Many did not. And a loan has baggage that equity doesn't.
Edit: Bridge loans were also really popular to stretch home buying power in 2006,2007. Hmmm.
Usually you want to close on your purchase of a new home a bit earlier then you close on the sale your existing home so that you (1) Have a place to live (2) can do a single move instead of a double move.
The down side is that you can't transfer the equity of your current home to your new home. Bridge loans get you over this gap with small risk so the price isn't to much. You basically get a separate loan for your current house's equity that is paid off at closing.
The issue would be if the sale of you current home fell through for some reason, hence the issues in 2008 when there were so many unsold homes on the market.
The case you describe also happens, I'm just talking about a different case.
One of the best skills to learn is when to stop throwing good resources after bad. Sure, maybe you need just a little more to get over the finish line, but more than likely you are just investing more resources into delaying failure.
People often bring up Elon Musk and Tesla as a positive example of perseverance, where he was apparently sinking personal money to keep the company alive. It did pay off in retrospect, but there was a very large chance it didn't - and we're just celebrating survivor bias.
> Edit: Bridge loans were also really popular to stretch home buying power in 2006,2007. Hmmm.
You wait, this bubble is about to pop. Not a great time to have large financial obligations. I suspect this will make 2008 look like nothing (people weren't struggling to fuel their cars or eat then).
The people buying these houses have good financial means, when I bought in 2021 the bank looked through all my finances in depth, and they were super conservative about everything.
For example, I own an existing townhome, before agreeing to give me a new mortgage, the bank made me show a signed contract with a tenant for my townhome to demonstrate the townhome wouldn't be a financial burden.
At least in the city I live in, Seattle, the housing supply is so obscenely constrained that only people who can go above and beyond to show they can pay, are even being granted approvals by the banks.
I, for one, am truly perplexed. Some things look awful and some things look great. If there is a crash, perhaps it will provide clarity so we can look back and say "it wasn't any different this time".
A lot of tech stocks had a huge explosion in value and I've seen a lot of people locally sell off and just pay the whole house off at once. They aren't cash flow rich but $800k down on a 1.5 million house puts their mortgage payments at a reasonable level for a couple earning 300k+ a year.
I live in a state with all public records and it's very easy to just take a look at house sales and find out who bought them. Basically people who work at companies that had large increases in stock value.
While I agree that a bubble is about to pop - I disagree with comparisons to 2008.
My personal take is that the current recession and impending pop will be for reasons different from 2008 - we have been making different mistakes. I also believe that 2008 was really big and I'm not certain the impending pop will be really big - just kind of big.
A handful of people made a big bet that during the credit crunch we’d see massive inflation and took big bets against the dollar and cheap oil and lost their shirt
Not necessarily. For deflation to occur, especially in staple goods (for which demand is sticky) in addition to stable or contracting money supply (M2) you need significant supply side growth. Neither is certain. I personally doubt that politicians will hold the purse closed at a time when lower and middle income voters are stretched thin. Deflation-causing policies also tend to lower tax revenues.
My bet instead is that crisis or not we will likely see debt deflation via below inflation interest rates. Just a personal position, I do not have a crystal ball.
These are cause and effect, though. Average gas shot up to $4 in 2008, too.
Building on a hunch won't cut it
https://www.urbandictionary.com/define.php?term=bridge%20and...
Which I suspect this is a riff on.