6 ms·

Startups turning to a funding tactic used by oil and gas companies in the 1900s

150 points by endswapper 10y ago

travisty 10y ago
Title is total click bait, it's talking about revenue based lending which happens every single day in every single industry in the world pretty much.
deleted 10y ago
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peterbsmith 10y ago
sounds good to me!
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JupiterMoon 10y ago
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.
- propogandist 10y ago
  the latter is not a business, it's an idea chasing money. Then they end up selling out to the advertising machine.
- cperciva 10y ago
  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.
  - dilemma 10y ago
    These loans aren't taken out to cover costs but to fund investment in new lines of business, or a 10-100x expansion of an existing one. Since nobody in your industry buys millions of dollars worth of servers, you should consider doing it. You could create a new market which you own, or elevate yourself from someone who rents capacity to the company renting it out. It could be the business opportunity of your life.
    - thrkw123456789 10y ago
      Is this sarcastic? Borrowing millions of dollars at 20-30% to compete with some cash rich companies who already dominate the market seems crazy - (borrowing at 5% could be another matter).
      - wpietri 10y ago
        Depends on your target audience. I wouldn't want to compete with Amazon as a general proposition. But there may be some specific niche that isn't well served by Amazon. For example, there could be some piece of Tarsnap's infrastructure that is irritating/expensive to create but that other companies want to use. Note, for example, that Dropbox gets "substantial economic value" from running their own hardware. [1] And Tarsnap is in the position to offer a backup-specific white label service that other entrepreneurs might rather pay to use than rebuild. [1] http://www.wired.com/2016/03/epic-story-dropboxs-exodus-amazon-cloud-empire/ http://www.wired.com/2016/03/epic-story-dropboxs-exodus-amaz...
      - JDDunn9 10y ago
        Who said 30% interest rate? If banks are lending at 6%, than a 30% higher interest rate would be 7.8%.
    - rlucas 10y ago
      Hmm, maybe you mean 2x-10x expansion. The world of 10x-100x expansion is the world of venture capital. The specialty lending world of Lighter Capital is about attractive, not explosive, growth -- but at much lower risk of total failure for both entrepreneur and investor.
jbhatab 10y ago
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.
- epa 10y ago
  Any debt is typically done early on for seed level amounts and has convertible features - converting at the next funding round. We are seeing more leveraged buy outs recently.
- wpietri 10y ago
  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.
zerop 10y ago
Never ever get a loan with such a high interest rate.
antonioevans 10y ago
Doesn't this kind of sound like payday loans https://en.wikipedia.org/wiki/Payday_loan https://en.wikipedia.org/wiki/Payday_loan ?
- ryporter 10y ago
  In some sense, but there is a key difference. "Companies can typically repay the loan as a percentage of cash flow so payments naturally adjust to revenue."
- notahacker 10y ago
  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.
hammock 10y ago
This is basically what happens on Shark Tank a lot. "X% royalty until I am paid back" Or a book deal.
JDDunn9 10y ago
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.
gregpilling 10y ago
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 10y ago
  How long did you have to pay it back?
  - JorgeGT 10y ago
    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."
boulos 10y ago
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/

150 points by endswapper 10y ago

Title is total click bait, it's talking about revenue based lending which happens every single day in every single industry in the world pretty much.

deleted 10y ago

[deleted]

deleted 10y ago

[deleted]

peterbsmith 10y ago

sounds good to me!

deleted 10y ago

[deleted]

JupiterMoon 10y ago

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.

propogandist 10y ago
the latter is not a business, it's an idea chasing money. Then they end up selling out to the advertising machine.
cperciva 10y ago
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.
- dilemma 10y ago
  These loans aren't taken out to cover costs but to fund investment in new lines of business, or a 10-100x expansion of an existing one. Since nobody in your industry buys millions of dollars worth of servers, you should consider doing it. You could create a new market which you own, or elevate yourself from someone who rents capacity to the company renting it out. It could be the business opportunity of your life.
  - thrkw123456789 10y ago
    Is this sarcastic? Borrowing millions of dollars at 20-30% to compete with some cash rich companies who already dominate the market seems crazy - (borrowing at 5% could be another matter).
    - wpietri 10y ago
      Depends on your target audience. I wouldn't want to compete with Amazon as a general proposition. But there may be some specific niche that isn't well served by Amazon. For example, there could be some piece of Tarsnap's infrastructure that is irritating/expensive to create but that other companies want to use. Note, for example, that Dropbox gets "substantial economic value" from running their own hardware. [1] And Tarsnap is in the position to offer a backup-specific white label service that other entrepreneurs might rather pay to use than rebuild. [1] http://www.wired.com/2016/03/epic-story-dropboxs-exodus-amazon-cloud-empire/ http://www.wired.com/2016/03/epic-story-dropboxs-exodus-amaz...
    - JDDunn9 10y ago
      Who said 30% interest rate? If banks are lending at 6%, than a 30% higher interest rate would be 7.8%.
  - rlucas 10y ago
    Hmm, maybe you mean 2x-10x expansion. The world of 10x-100x expansion is the world of venture capital. The specialty lending world of Lighter Capital is about attractive, not explosive, growth -- but at much lower risk of total failure for both entrepreneur and investor.

jbhatab 10y ago

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.

epa 10y ago
Any debt is typically done early on for seed level amounts and has convertible features - converting at the next funding round. We are seeing more leveraged buy outs recently.
wpietri 10y ago
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.

zerop 10y ago

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

antonioevans 10y ago

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

ryporter 10y ago
In some sense, but there is a key difference. "Companies can typically repay the loan as a percentage of cash flow so payments naturally adjust to revenue."
notahacker 10y ago
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.

hammock 10y ago

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

JDDunn9 10y ago

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.

gregpilling 10y ago

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 10y ago
How long did you have to pay it back?
- JorgeGT 10y ago
  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."

boulos 10y ago

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/