
Startups turning to a funding tactic used by oil and gas companies in the 1900s - endswapper
http://qz.com/769508/cash-strapped-startups-are-turning-to-a-funding-tactic-used-by-oil-and-gas-companies-in-the-1900s/
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JupiterMoon
This looks like a great funding model for bootstrapping businesses with an
actual viable product and some paying customers.

Not so good for the capture the market with a free product and work out how to
make it make money later type businesses.

~~~
cperciva
I'm not so sure about that. Tarsnap is a bootstrapped business with an actual
viable product and paying customers, but I'd never go for this. Even if I
needed a sudden burst of capital (which is unlikely, since costs tend to
change smoothly in SaaS companies), why not wait a few months and pay out of
the profits which accumulate in that time period? Or, for that matter, pay out
of _last year 's_ profits (which are now in my personal account, but I can
always invest them back into the company if needed)?

If I needed to make a one-time purchase of a million dollars of servers, this
would make sense; but nobody does that these days. Costs are overwhelmingly
recurring, and if you need to borrow money to pay your recurring costs, you're
not going to have the income stream lenders want to see to repay a loan.

~~~
3pt14159
I'll tell you why:

When I was at FreshBooks in 2008/2009 we figured out our Cost Per Acquisition
(CPA) and our per-customer Life Time Value (LTV) / Net Present Value (NPV). We
were making about 3x on marketing spend over a period of about 2.5 years.
Effectively a 55% compounding yearly ROI. Could we wait, sure, but why? Even
at credit card levels of interest we were still winning, and if we didn't our
competitors would soon figure out the game and they'd gain market share at our
expense.

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pyvpx
how does one calculate the LTV/NPV of a customer?

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skewart
The net present value (NPV) of a customer is just the value today of all of
all future revenue minus the cost today of all future expenses associated with
them. The key is that it factors in a "discount rate" to account for the fact
that cash in the future is worth less than cash today. So future cash is
discounted by some ℅, compounded annually.

If a customer will pay $100, and it costs $90 to acquire them, without taking
time into consideration it would look like $10 in profit. But if you have to
spend the $90 today, and you only get the $100 in five years, they might not
actually be a profitable customer. Conversely, if that same $100 revenue
customer cost $105 to acquire, but they paid today and you only spent $105 to
acquire them in five years they might actually be profitable (this scenario is
probably less likely, but maybe if you are acquiring them through some channel
where the costs are deferred for some reason).

Excel and a lot of other spreadsheets have a built in NPV function to make the
calculation easier. You can simply give it the series of expected costs and
revenue associated with the customer, and a discount rate (how much to
discount future cash by, compounded annually) and it will give you the NPV.

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gregpilling
Paypal Working Capital is another choice. Five minutes to get approved and the
funds into your account, then payback 10,15% or other of credit card receipts.
If you have a SaaS company then this will be very predictable.

I have personally got a PayPal WC loan for $75,000 in 5 minutes, which I used
to buy some small tools and machines, and some other warehouse infrastructure.
I didn't want to pay cash, and I didn't want to go through the process of
leasing the stuff (would take weeks), so this fit the bill quite well and was
paid off without really noticing.

~~~
dopamean
How long did you have to pay it back?

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JorgeGT
According to the website, "at least 10% of the total of the original loan
amount plus loan fee is due every 90 days, up to 540 days, or until the loan
is paid in full, whichever first occurs."

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JDDunn9
You also have accounts receivable financing and square capital
([https://squareup.com/capital](https://squareup.com/capital)) as alternatives
to asset-based loans if they fit your business model.

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hammock
This is basically what happens on Shark Tank a lot. "X% royalty until I am
paid back"

Or a book deal.

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jbhatab
Genuienly curious as a fairly young person, 26, of how common loans have been
in the startup community up to this point?

I can't imagine that business loans have been avoided up to this point. 100%
could be wrong though.

Also isn't debt equity fairly popular which has a lot less equity attachments
and is almost like a glorified loan? This one I'm much less sure about.

~~~
wpietri
I don't hear much in the way of loans. Why would anybody loan money to a
business that's losing lots of money and has no assets that could be resold?

Convertible debt is much more like equity than a loan. The easy way to think
of it is, "The investor will give us some money, but we'll figure out how much
of the company they're getting later." Just selling equity early on is a pain,
because the valuation is entirely made up. Being able to defer the question
until more data is in works out better for everybody.

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boulos
It's unclear how high the "repayment cap" (principal plus effective interest)
is set for the lender mentioned, but as folks have noted the article said
15-30% _higher_ than banks. The SBA apparently caps those between 5-8% so
we're likely talking between 6-10%.

I then wondered how they avoid the downside (lending an early-stage startup
money at even 10% sounds crazy) and see that they're trying to make a much
safer bet. From Lighter Capital's FAQ [0]:

> We’re currently offering RevenueLoans® ranging from $50k-$2M USD. You can
> qualify for a loan for up to 33% of your annualized revenue run-rate.

And

> We will look for a percentage of revenue (in the range of 1% to 10%) until
> the total repayment cap is reached.

These conditions make it much more like a small-business loan, and less like
the "get $1M for big expansion". Has anyone gone through this process with
this lender in particular? I'm curious if they take growth in revenue into
account (I would, it makes that 33% of ARR number much easier to bet on). Does
the PayPal Working Capital or Square Capital form ask that, or do they simply
infer it from your known-to-them receipts?

[0] [https://www.lightercapital.com/how-it-
works/faq/](https://www.lightercapital.com/how-it-works/faq/)

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antonioevans
Doesn't this kind of sound like payday loans
[https://en.wikipedia.org/wiki/Payday_loan](https://en.wikipedia.org/wiki/Payday_loan)
?

~~~
notahacker
Not really. Payday loans provide short term fixes to the desperately poor
consumers with no other options, typical APRs of 2000% and above, because
default rates are high and admin costs high relative to the loan size.

Revenue based finance offers businesses with attractive gross profit margins
the choice of obtaining growth capital without giving up any equity, and has a
moderately high APR because the lender shares a fair amount of risk and the
repayment terms are very flexible.

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zerop
Never ever get a loan with such a high interest rate.

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peterbsmith
sounds good to me!

