

An Alternative to Convertible Debt in Emerging Markets - egusa
http://techcrunch.com/2015/05/08/an-alternative-to-convertible-debt-in-emerging-markets/

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URSpider94
I think there's a lot of wishful thinking here. Pretty much nobody would
recommend putting a sizeable share of your personal wealth into a single
investment of any kind, whether that's a single S&P 500 stock or a loan to a
small business collateralized by an ownership stake in that business.

Also, the default case sounds like a real loser for the investor, the chef in
the story. If the owner defaults, there's a good chance that the business is
not performing to plan, so the chef gets a share in something that's not worth
as much. Also, the chef now owns part of a company with an owner who is not
planning to sell the business, and who has complete control over how it's
operated -- he's now got to try to sell that 15% on the secondary market,
where it will probably go for pennies on the dollar. If he holds onto it, the
founder has no obligation to share profits with him, so there's no ongoing
revenue, and he has no long-term assurance of it ever becoming liquid.

What a mess!

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egusa
author here: the Interest Investment is for specific startups that are cash-
flow positive (and deemed by an investor to be very likely to re-pay & that
would be a valuable asset regardless). I spend most of the year in Colombia,
and the challenge I've seen in LATAM is that there many profitable startups
that don't necessarily fit the VC model (Ex: they likely won't become $100M
companies, but they will be profitable). However, many of these companies do
need capital to grow quickly & yet they don't have the credit to do so via
traditional banks. The idea for is that investors interested in being involved
with the tech scene can invest and receive more predictable returns (that they
are used to, most emerging market investors aren't familiar at all with tech
investments) and cash-flow startups can find a new avenue to grow.

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URSpider94
It's a worthy problem to solve. I wonder if you could just attack it with
peer-to-peer unsecured loans, like what Lending Club does for consumers? In
that model, many different lenders fund each loan, and conversely lenders can
diversify over many borrowers. There's a similar service, I forget the name,
where lenders bid on the interest rate they are willing to offer.

My big concern is that "15% stake in a proprietor-owned business that has no
intention of going public and pays no dividends" is hardly better than no
collateral whatsoever. The time horizon to get one's money back is darned near
infinite, and there's no market for unloading it.

Another potential solution might be to offer up something more fungible as
collateral, like vehicles, factory equipment, accounts receivable or
intellectual property.

~~~
egusa
A solution like you mentioned would help (I believe there are some things
similar in LATAM today, but there needs to be more).

The thought with the Interest Investment is there exists a large market of
investors in LATAM (and emerging markets), however they avoid startups because
of a lack of traditional yearly returns, it's more unpredictable, there are
unfamiliar terms, etc. Many people have tried to solve this problem by
educating investors (to create new angel investors), but the success of this
has been questionable. I felt this new idea could bridge this very large gap.

About the 15% stake, you are right that it's not a very liquid market at all.
The thought was, if a person invested in a cash-flow profitable startup with
good growth rates, there is some value in that asset (this type of investment
wouldn't work for an unprofitable startup or a company with zero cash flow).
There is a smaller market for private companies, but an investor should put
money into an entrepreneur with a good reputation who stays true to his or her
word (just like they would with convertible debt).

