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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 th

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 7y ago
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 7y ago
  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 7y ago
    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 7y ago
      You need the money to scale sales operations to the level of revenue.
      - nemothekid 7y ago
        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 7y ago
        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.
ehnto 7y ago
If I were lending, there is no way I would consider recurring revenue to be a reasonable asset. Depending on the business it could go away in a heartbeat at the mention of the company going into administration/receivership. If the software is at all important to the users and it has alternatives, they will jump ship as fast as possible. My experience in software companies is that there are often a few key developers with full platform and domain knowledge, and they are your bottleneck for onboarding and they are the columns that keep your platform going. Should they leave when the business goes into receivership, and why shouldn't they, there is little guarantee the software will keep running long enough to keep users happy enough, to continue to service that debt. Not to mention a software business that runs on recurring revenue from users is likely failing because the recurring revenue isn't enough to cover costs, keep the business running and it just makes more debt. I just wouldn't consider it a reasonable assumption that recurring revenue will continue to recur. It's not even a good assumption for a well running business.
charwalker 7y ago
How do you assure that users will transition to something that will pay the lenders? If a SaaS startup goes down tomorrow and the VC backers or lenders don't own the direct competition, then when users jump ship the VC backers or lenders have nothing. The SaaS startup's cloud space can't be sold at auction, they probably rented any office space, and the employees will take their CV elsewhere. The IP might be salvageable if patented or otherwise unique but that's still a long shot given any direct competition. No where in there is a method to retain users or shift them to benefit the VC backers or lenders and recover debt. Maybe via user data that can be sold or pitched as useful to a competitor? Maybe by standing up a competitor and advocating users shift there an can migrate their accounts?

sokoloff 7y ago

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 7y ago
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 7y ago
  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 7y ago
    You need the money to scale sales operations to the level of revenue.
    - nemothekid 7y ago
      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 7y ago
        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.

ehnto 7y ago

If I were lending, there is no way I would consider recurring revenue to be a reasonable asset. Depending on the business it could go away in a heartbeat at the mention of the company going into administration/receivership. If the software is at all important to the users and it has alternatives, they will jump ship as fast as possible. My experience in software companies is that there are often a few key developers with full platform and domain knowledge, and they are your bottleneck for onboarding and they are the columns that keep your platform going. Should they leave when the business goes into receivership, and why shouldn't they, there is little guarantee the software will keep running long enough to keep users happy enough, to continue to service that debt. Not to mention a software business that runs on recurring revenue from users is likely failing because the recurring revenue isn't enough to cover costs, keep the business running and it just makes more debt. I just wouldn't consider it a reasonable assumption that recurring revenue will continue to recur. It's not even a good assumption for a well running business.

charwalker 7y ago

How do you assure that users will transition to something that will pay the lenders? If a SaaS startup goes down tomorrow and the VC backers or lenders don't own the direct competition, then when users jump ship the VC backers or lenders have nothing. The SaaS startup's cloud space can't be sold at auction, they probably rented any office space, and the employees will take their CV elsewhere. The IP might be salvageable if patented or otherwise unique but that's still a long shot given any direct competition. No where in there is a method to retain users or shift them to benefit the VC backers or lenders and recover debt. Maybe via user data that can be sold or pitched as useful to a competitor? Maybe by standing up a competitor and advocating users shift there an can migrate their accounts?