
Debt is coming to the tech industry - jger15
https://alexdanco.com/2020/02/07/debt-is-coming/
======
gerdesj
> Debt is going to finally come to the tech industry

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.

~~~
ThrowAwayGlen
Thank you. I read this article twice, thought I was completely missing
something. No, it's a pretty obvious statement wrapped around pseudo-
intellectual ideas of Carlota Perez and presented in an Emperor's New Clothes
style where if you disagree with it you're an idiot ("Maybe not all investors
get this, but the smart ones do").

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.

~~~
eru
The article seemed pretty straightforward. Perhaps a bit too excited. But the
fundamental thesis that the predominance of equity financing in tech is an
aberration and will likely come to an end, seems rather plausible.

~~~
pmart123
This is not new though. Robert Smith pioneered the idea that while software
companies didn’t have tangible assets, they had stable cash flows.

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.

~~~
eru
Yes.

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.)

------
pcmaffey
> Furthermore, in the Bay Area Founder-VC scene, FK/PK tension simply isn’t
> perceived as a problem. Founders increasingly think of themselves as capital
> allocators who think in bets, and the angel investing scene has brought
> founders and VCs together as social peers. There’s no FK/PK tension between
> investors and founders. They all want the same thing, and they all hang out
> at the same parties. The tension has simply been redistributed, largely onto
> employees. The greatest trick VCs ever pulled was convincing founders,
> “you’re just like us.”

Recommend reading the whole article if you're curious about the nuance in
this. It flies above the current milieu.

~~~
Grimm1
I can say in the New York scene the opinion seems to be quite the opposite.
There is a non-trivial amount of wariness when it comes to VC money.

~~~
bobbyi_settv
A lot of that is sour grapes. The majority of people who loudly explain that
they wouldn't want a large VC round are people who aren't in a position to
raise a large VC round.

~~~
ci5er
Maybe. I'm not in that geo these days, so I have no way to gauge relative
percentages. Do you think that is right?

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.

------
rossdavidh
"Any one customer may be unknowable, but cohorts of customers can be modelled
and understood decently well."

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.

~~~
corford
Yeah but unlike a mortgage (secured against one static asset i.e. a house),
the article assumes most of this debt will be issued against the strength and
quality of a company's various recurring revenue streams (even speculating
that different components of this could be financed separately to try and
account for the varied risk).

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...

~~~
kevinventullo
The article seems to advocate for exactly what you’re warning about:

 _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._

~~~
omgwtfbyobbq
Except for the part about everyone colluding to get good risk ratings. If that
collusion did happen, then yes, these would be the equivalent to MBS'. That
can happen regardless of what is being securitized.

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.

------
spyckie2
The biggest problem with this idea is that it doesn't really have a good
market space. If your company revenue is too small, your subscription backed
debt is just an inferior financial product compared to equity, which handles
risk much better. If your company revenue is large enough, you have plenty of
financial tools to keep your company fiscally healthy. The only time I can see
it being useful is if you want to trick rich non-investors to give you money
by pretending that your startup has value when it doesn't (similar to an ICO).

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.

~~~
virgilp
I read it the other way around. If BigCash, co. advertises “we securitize your
growth - get free money to grow based on your business metrics!’, and you’re a
startup founder - would you be interested, or would you say “nah, I think I’ll
just do another round”?

OTOH I’m not sure I understood it well :D

~~~
spyckie2
Good point - there are a ton of SMBs that have good business metrics, usually
as a result of being around for a long time. I would think that these
companies would be the primary audience for this - they would use the
flexibility that a securitized revenue stream allows them to smooth out any
cash flow problems they had.

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.

~~~
virgilp
A repeat of the mortgage crisis is possible - even likely - if such an
instrument is successful. But you need to have some level of success first
(for both sides). We're not there yet.

------
pge
“Debt helps you grow faster; debt helps you die faster.”

\- someone said this to me early in my career and it has stuck with me.

~~~
himaraya
Ditto for equity

~~~
looping__lui
?

~~~
corford
Sky high valuations that limit your options/exits, potentially pushing your
company down a path it shouldn't take.

~~~
looping__lui
... based on false and unrealistic promises?

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

------
juped
Debt financing would be wonderful (note to non-business-savvy readers: this is
not even remotely the same kind of thing as personal credit card debt or
whatever other completely unrelated thing is making you sanctimoniously
kneejerk that "debt is bad". Can we please have an informed discussion of debt
as a part of a business capital structure?) for software businesses, which
have very predictable capex costs.

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.

~~~
wongarsu
I don't think it's _only_ cultural, software businesses also have very few
assets that could be liquidated. Volkswagen might finance 2/3 of everything it
does with debt, but if it just stopped tomorrow and sold all production
facilities then lenders would get more than half their money back. If a
typical software startup stops operating and sells off all its assets it gets
a bit of spare change and the lenders leave with close to nothing.

~~~
ec109685
The users paying each month are the assets in this article’s thesis. As long
as when a company shuts down, they transition their users to a new entity
(since they are valuable reoccurring revenue), the lenders will get paid.

~~~
sokoloff
Are you imagining a successful company with a large book of users generating a
healthy ARR? If that’s the situation, the lenders will get paid, because the
business will keep running.

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.

~~~
stanleydrew
The essay is explicitly talking about the former. Rather than sell a bunch of
dilutive equity at Series B, a company with decent recurring revenue could
collateralize that revenue stream and sell it.

~~~
nemothekid
In what situation would you opt for a dilutive series B where you had enough
revenue that a bank would collaterize it for you?

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

~~~
ec109685
You need the money to scale sales operations to the level of revenue.

~~~
nemothekid
Right, but if you were profitable and, I’m assuming the reason you needed the
money was sound; you’d have to be incredibly unlucky if the only outside
capital you could raise was a down round.

You usually only hear downrounds from companies that are struggling to keep
the lights on

~~~
ec109685
Selling equity dilutes, whether it is an up or down round. That sold equity is
potential appreciation that the firm selling won’t participate in.

With debt, you promise a fixed rate of return instead, so the benefits are
capped for the purchaser.

------
kevingadd
Aside from the other conclusions and assertions in this long article, this
particular bit resonates with me:

"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.

~~~
asah
Meh, straight debt (not convertible) isn't available to risky startups.

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.

------
Yetanfou
Debt is like medicine: useful to cure certain conditions but nothing to be
burdened with your entire life. Once the condition is cured the medicine is no
longer needed.

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?

~~~
UncleEntity
> Maybe debt, like medicine, should only be allowed to be taken with a
> prescription?

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.

~~~
Yetanfou
Bankers both 'prescribe' as well as sell debt, this is - in theory, at least -
different from medicine where the prescriber is not related to the seller.

------
paulgerhardt
Less any bright eyed startup founder take this post too seriously, I’ll spell
it out: venture debt is bad.

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.

~~~
aguyfromnb
> _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._

How is this different than the "next round" of a venture raise vaporizing and
being left with no money?

~~~
paulgerhardt
Time horizon. Capital gives you 18 months. Your debt instrument can be pulled
overnight.

~~~
wbl
Depends on the instrument.

------
lifeisstillgood
Debt and VC are just sides of the same (multi-sided) coin. The money has to
come _from_ somewhere - domestic savings, commercial profit or sovereign
wealth.

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

~~~
lmm
> As such the only likely way "debt is coming" is if interest rates climb,
> giving money an alternative to VC.

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.

~~~
hcknwscommenter
I'm not sure entering the bond market is possible. These "startup user bonds"
would be unrated, beyond junk, accessible only to accredited investors, etc.
The debt would probably take the form of some type of a CLO or ETN wrapper?
I'm just speculating here. Anyone with better insight?

~~~
jacques_chester
That's still an enormous potential pool of capital that's currently making
very little.

------
H8crilA
I'm really not sure what's the point of the article. The idea that there is no
debt yet in "tech" isn't even true. Uber, WeWork, and especially Tesla have
been raising capital via debt. Not to mention Brex which covers the tail end
of the startup market with "debt backed by revenue". I'm putting it in quotes
because it's a ridiculous idea.

~~~
CPLX
As far as I can tell Brex literally just “lends” money to people that already
have money. They lend based on cash in the bank and have the right to debit
cash straight from the bank account. It hasn’t been clear to me that they’re
even involved in any kind of actual issuance of debt in a meaningful sense at
all.

~~~
aianus
> As far as I can tell Brex literally just “lends” money to people that
> already have money. It hasn’t been clear to me that they’re even involved in
> any kind of actual issuance of debt in a meaningful sense at all.

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.

------
rdlecler1
I frankly didn’t understand this article. First there’s already VC debt, and
Silicon Valley Bank is also a big lender. There are lots of shops out there
that will loan against revenue streams (often we see this tied to hardware).
Also the idea that a basket of debt is going to have some enormous payoff Is
just painful to listen to. Your upside is capped and you can have ruin. Who
wants to invest in ultra junk bonds. The reason equity financing works for
startups is the promise of an enormous outsized outcome That pays back all of
your losses.

------
jariel
Great read, but I had a sneaky suspicion the entire time he was going to just
say 'securitise revenue streams', which he finally did.

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?

------
reggieband
I commented a few weeks ago on startup ideas saying there was a gap in SaaS
financing models. VCs have been abuzz about the opportunities in slow-burn
SaaS businesses that have generated predictable recurring revenue streams.
This created two classes of potential VC investment - pre-revenue moonshots
for billion dollar unicorns and post-revenue SaaS businesses with healthy
balance sheets. I lamented that left a gap for pre-revenue slow-burn SaaS
businesses in unproven markets.

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.

------
shreyshrey
Think of debt as a way to gain market leverage. Leverage is good if you are
reasonably certain of the outcome.

[https://news.ycombinator.com/item?id=20942950](https://news.ycombinator.com/item?id=20942950)

~~~
tshtf
Is there any reliable metric to know what reliable means here?

~~~
shreyshrey
not sure of one specific number. Say you have achieved product market fit and
the lifetime value of your customers (LTV) is less than three times the cost
of acquisition, you probably be better of getting leverage from debt and gain
marketshare. Depends on the market you operate though.

------
bullen
If you open graphs over inflation and interest rate since 1971 you will
understand why debt is not coming again in nominal terms until the dollar goes
away; that is in real value compared to something that you cannot borrow to
buy:

[https://www.whythings.net/Images/Inflation_chart.jpg](https://www.whythings.net/Images/Inflation_chart.jpg)

[https://beta.theglobeandmail.com/legacy/static/folio/mortgag...](https://beta.theglobeandmail.com/legacy/static/folio/mortgage/chart.jpg?token=1496685693)

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.

------
Grimm1
I think this article is trying to make something out to be more than it
actually is. Debt financing is a specific vehicle that can be used tactically
for a relatively mature business (Series A area +) with predictable revenue
for specific growth I do not see it as this magical solution to the current
issues of VC capital because alignment is often really out of wack in the
early-stages before established product-market fit with high dilution and
higher investor leverage.

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.

------
alecjaco
It's been here since the beginning?

"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-...](https://www.cnbc.com/2020/02/06/steve-wozniak-on-steve-jobs-
personality-shift-as-apple-co-founder.html)

also vc covenants etc?

------
corford
Can't find it now but I remember reading about a recently launched Seedcamp or
Point Nine portfolio company that is doing this for B2C SaaS companies I
think. You let them plug into your stripe metrics etc. and they then give you
debt based financing (using AI/algos to determine amount and rate based on
your numbers: churn, growth, recurring revenue etc.)

~~~
Androider
Stripe themselves are also doing it now
[https://stripe.com/capital](https://stripe.com/capital)

The sums are pretty small right now, but the basic model is there.

------
_marlowe_
"When you acquire some customers and they start yielding revenue that behavior
sounds an awful lot like buying a fixed income instrument..."

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.

------
gfodor
The post is predicated upon assumptions surrounding the risk to recurring
revenue cash flows from SaaS customers. I'm not sure why the author thinks
these cash flows can be well understood enough to securitize to support
lending -- it'd be good to understand what's changed recently (given that the
first SaaS companies are more than 20 years old) that lead one to believe debt
markets can now suddenly price risk on these revenue streams now.

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.)

------
streetcat1
debt and intellectual property do not mixup since by definition there is
nothing to back up the debt (unlike real estate or any other industry outside
of software).

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.

~~~
commandlinefan
Well, there is something to back up the debt - but not something that can be
seized.

------
ceohockey60
IIRC there is at least one Silicon Valley example of this already: Zappos pre
Amazon acquisition, debt from Wells Fargo. It was forced upon Zappos b/c VC
fundraising dried up, not a deliberate choice, but ended up working out well
b/c its GMV was both growing and becoming predictable.

~~~
patrickrivera
I believe this article is focused on a different type of debt - "recurring
revenue securitization" (focused on companies w/ a SaSS business model).

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...](http://www.adventurista.com/2009/01/true-cost-of-venture-
debt.html\]\(http://www.adventurista.com/2009/01/true-cost-of-venture-
debt.html\))

Would love to see this model work though.

------
lucas_membrane
Odd that the article mentions startups 14 times and hedge funds zero. If a
significant percentage of a profitable tech company with established customers
and a revenue stream derived from long-term contracts with customers is owned
by hedge funds, the hedge funds will flex their muscles a little and convince
the company to start borrowing money so that it can buy back some of its stock
and pay higher dividends. If such a company does not have a significant
constituency of shareholders among its shareholders and has little or no debt,
its managers will realize that their company is one that hedge funds are
likely to want to own and influence, and that the best way to discourage the
hedge funds is to take on debt to buy back stock and raise dividends. Q. E. D.

------
cryptica
>> And when founders really get a taste of that credit? That sweet, sweet
taste of dilution-free capital, flowing freely to and from a continuous growth
vehicle

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.

------
ahominid
My background in financial engineering is limited to trying to make sense of
articles like this so maybe someone more in-the-know would be kind enough to
help me understand. But when you securitize an asset, isn’t it typically an
asset that has intrinsic value, e.g. property of some sort that can be easily
liquidated? It seems to me that recurring revenue for a service only has value
as long as that service exists. So if some startup selling dog food
subscriptions stops providing that service, the subscriptions are worth
exactly zero.

To take the example further, would said startup now be unable to sell the book
of business to someone else before going broke?

~~~
swiley
I’d imagine that’s how you end up with companies like Verizon taking over
services like tumblr.

------
james_impliu
At the moment, way more VC money is going into later stage deals as companies
stay private longer... that is the chunk that if securitisation becomes
mainstream , where VCs will have competition. The impact of this could be
really fascinating - VCs would be forced to go even broader in their earlier
stage investments, or VC’s own funding will start to reduce as it won’t be
possible to deploy the capital at the same return. Maybe it’ll turn out that
funding more pre seed companies will be successful - why stop at YC’s 200
every six months. The switchover period would be an entertaining time to be a
founder, that’s for sure!

------
erlend_sh
Isn’t this essentially a different way of doing what Earnest Capital is
already doing?

[https://earnestcapital.com/](https://earnestcapital.com/)

------
binky
Debt is a liability to be served, having returns and margins winning over
growth, adding a not-so-silent participant to the mission. Welcome to the real
world.

------
motohagiography
Sort of thought the whole point of SaaS businesses with lots of employee
frills and perks was to eventually attract the activist investors, leveraged
buyouts, asset strippers, and other private equity managed debt, as a way to
deploy institutional and pension money. Maybe it was cynical, but the point is
to generate a long term trickle of ARR that is greater than the interest
payments on a debt financing of control of the company, which at a product
level is why you need sticky APIs that get baked into institutional customer
infrastructure that will yield 10-15 years of locked-in revenue.

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.

------
monkeydust
Whilst I broadly agree with the article it did remind me of mini bonds, a UK
centric concept perhaps.

[https://www.fca.org.uk/consumers/mini-
bonds](https://www.fca.org.uk/consumers/mini-bonds)

These havent been getting good press recently due to a number of failures.

------
mathattack
Interesting article. The reality is places like Silicon Valley bank do provide
debt financing. If your SAAS cash flows look like fixed income, that’s a
better way to finance them. There is downside to this too.

The irony is many traditional businesses that use debt (retail?) really should
be equity financed.

------
5cott0
“The VC model we’ve honed to perfection over decades”?

------
debt
I’m already here

~~~
selimthegrim
The call is coming from inside the vault

------
tempsy
Aren't SAFEs effectively debt?

~~~
iamwil
no. you're thinking of convertible notes.

~~~
tempsy
That’s “effectively debt” - it converts to equity upon a new round but if the
company fails or doesn’t raise then it’s more like debt than equity.

------
awinter-py
if you have structured settlements and you need cash now

call JG wentworth if you need cash now

------
leoplct
How to securitize SaaS cash-flow nowadays ?

------
jigglypuffs
Someone tldr it please

------
ghastmaster
Debt is dumb. The childish glee coming from this author should be ignored.
2008 is coming again soon and debt holders will suffer. Please get/keep your
financial house in order. Business debt is just as dangerous as personal debt.

~~~
kevingadd
How do you propose solving problems like "buy a house" and "buy a car" without
debt? The average person who needs to drive to work has no way to buy a car in
cash, at least not early on. If you drop all your savings on a new car and
suddenly end up with a hospital bill, that car isn't going to pay for it.

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.

~~~
ghastmaster
Look up the word "savings". It is possible to rent a cheap apartment, buy a
used car, and wait until you can afford better things. Obviously some people
are going to run into financial difficulties if they have unexpected
extraordinary bills. The vast majority of things in life are however,
expected. Nothing is new under the sun. The overwhelming debt of the world
increases costs. Additionally, debt temporarily tricks most people into
thinking they have more than they actually do. I think more people would be
interested in working harder for better jobs or opportunities if it wasn't so
easy to get whatever you want by signing a piece of paper.

~~~
kevingadd
How do I rent a cheap apartment and buy a used car without a job? The job I
need a car to drive to? What am I supposed to save, exactly? The allowance I
get from my presumably rich parents?

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.

~~~
ghastmaster
>How do I rent a cheap apartment and buy a used car >without a job?...

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.

