Hi folks,
I post this here because it is relevant to the underlying funding models of SaaS companies. Much as SaaS itself has completely changed the way we invest, this article proposes that it could also fundamentally change the way start-ups seek to fund their operations over the current equity model.
https://alexdanco.com/2020/02/07/debt-is-coming
If this is off-topic, I apologize, and please delete this post.
–
Paul
I post this here because it is relevant to the underlying funding models of SaaS companies. Much as SaaS itself has completely changed the way we invest, this article proposes that it could also fundamentally change the way start-ups seek to fund their operations over the current equity model.
I just read the article, not an easy read. The “new” proposed funding model is a very old funding model, debt instead of equity.
The wakeup call will be when founders collectively come to grips with the fact that the Financial Capital all-equity stack, as powerful as it is for creating something out of nothing, is and has always been at odds with the Production Capital mentality of a business builder and operator. There is nothing inherent to tech companies that requires that so many of them fail to live up to their aspirational valuations, aside from the way they’re funded.
The driver of the proposition is that founders would be better off – first bolded text – and it is built on a fallacy – second bolded text. Earlier he makes this statement:
There is nothing inherent to tech companies that requires that so many of them fail to live up to their aspirational valuations, aside from the way they’re funded.
Funding matters but it is not the main driver of failure even if all failed companies do run out of funding.
The author asks:
Why not go straight to securitizing senior tranches of your recurring revenue, and moving it off your balance sheet?
What’s the collateral? An uncertain future. With a mortgage you have a physical collateral, not so with the SaaS LTV. The interest rates on LTV backed bonds would be very high, well above investment grade.
Denny Schlesinger