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This is probably silly but I have often wondered why you don't get straightforward loans in Software. If I were to open a restaurant I would hardly go for a VC.

This is probably silly but I have often wondered why you don't get straightforward loans in Software. If I were to open a restaurant I would hardly go for a VC. Do banks have something against software businesses ? Are there software companies that have bootstrapped themselves with loans (not friend/family loans) as opposed to VC ?

kelvin0 6y ago
You can always use Indie Gogo, Kick Starter, Patreon or any other similar platform to fund your project. Banks are risk averse. Lending to a restaurant they can always recoup a lot of material and other physical assets as collateral. Not necessarily so for most software dev. That's my perspective.
samfisher83 6y ago
If your startup fails then you software is harder to value. If the bank have ovens at least they can resell them. If you have a piece of software it's much harder to value or sell.
- foobar_ 6y ago
  Interesting, in that sense software is like making an art piece where value is uncertain. That definitely opens a viable case for public funded software. Plenty of movies are produced with the help of Govt for example.
  - nickff 6y ago
    Government often supports investors making movies; likewise, governments could try to get on board with good venture capitalists in funding software, and this does happen in some places. Government panels or individuals selecting which software to fund runs into the principal agent problem, due to lack of skin in the game.
nostrademons 6y ago
The market structure is pretty different. Restaurants have geographic barriers to entry - your restaurant is probably only serving customers within a ~20 mile radius. And the economics and business model are well-known: you know exactly how much rent is going to cost, how much labor is going to cost, how much food is going to cost, and how many tables you can turn over a night, and so you can build reasonable financial models for how much you might make. Software is global, and is fundamentally an innovation business. Once you've written a piece of software that does something useful, you can sell additional copies at zero marginal cost. This tends to make software into a winner-take-all market: there is realistically only one Google, only one Facebook, only one Salesforce, one Amazon, etc. If you try to get into a known market, you are almost certain to fail, because you have to pay all the R&D costs that your competitor has already paid and they can just sell to the customers you would otherwise have gotten at close to zero cost. That means that successful software businesses are almost always doing something fundamentally new - either selling into a new market, or selling a new and different product into an existing market that has changed in some way. Banks are really bad at forecasting the success of new business models that have no financial data to go on - their whole core competency is evaluating financials, so if a company has no revenue but lots of expenses and an uncertain prospect of ever making money, it looks like a universally bad bet for a bank loan. The venture capital industry is all based around answering "How do we finance businesses where success is binary and information about whether the company will be successful is scarce?"
- tonyarkles 6y ago
  To add to this, a significant portion (I think) of opening a restaurant goes into purchasing physical assets: fridges, grills, safety equipment, tables/chairs, etc, and banks know how to liquidate those assets if your business fails. Taking a failed software company and selling off its assets is a much harder proposition.
- foobar_ 6y ago
  1. Developer Salaries 2. Marketing Costs 3. Compute Power 4. Software Pricing can all be quantifiable in numbers. Again I don't know how loans operate. To be a cynic, I think the software free lunch is over. Data will be increasingly localised. More draconian laws to come, let's hope they are stupid. Algorithms have also become "scary" for normal folks.

kelvin0 6y ago

You can always use Indie Gogo, Kick Starter, Patreon or any other similar platform to fund your project. Banks are risk averse. Lending to a restaurant they can always recoup a lot of material and other physical assets as collateral. Not necessarily so for most software dev. That's my perspective.

samfisher83 6y ago

If your startup fails then you software is harder to value. If the bank have ovens at least they can resell them. If you have a piece of software it's much harder to value or sell.

foobar_ 6y ago
Interesting, in that sense software is like making an art piece where value is uncertain. That definitely opens a viable case for public funded software. Plenty of movies are produced with the help of Govt for example.
- nickff 6y ago
  Government often supports investors making movies; likewise, governments could try to get on board with good venture capitalists in funding software, and this does happen in some places. Government panels or individuals selecting which software to fund runs into the principal agent problem, due to lack of skin in the game.

nostrademons 6y ago

The market structure is pretty different. Restaurants have geographic barriers to entry - your restaurant is probably only serving customers within a ~20 mile radius. And the economics and business model are well-known: you know exactly how much rent is going to cost, how much labor is going to cost, how much food is going to cost, and how many tables you can turn over a night, and so you can build reasonable financial models for how much you might make. Software is global, and is fundamentally an innovation business. Once you've written a piece of software that does something useful, you can sell additional copies at zero marginal cost. This tends to make software into a winner-take-all market: there is realistically only one Google, only one Facebook, only one Salesforce, one Amazon, etc. If you try to get into a known market, you are almost certain to fail, because you have to pay all the R&D costs that your competitor has already paid and they can just sell to the customers you would otherwise have gotten at close to zero cost. That means that successful software businesses are almost always doing something fundamentally new - either selling into a new market, or selling a new and different product into an existing market that has changed in some way. Banks are really bad at forecasting the success of new business models that have no financial data to go on - their whole core competency is evaluating financials, so if a company has no revenue but lots of expenses and an uncertain prospect of ever making money, it looks like a universally bad bet for a bank loan. The venture capital industry is all based around answering "How do we finance businesses where success is binary and information about whether the company will be successful is scarce?"

tonyarkles 6y ago
To add to this, a significant portion (I think) of opening a restaurant goes into purchasing physical assets: fridges, grills, safety equipment, tables/chairs, etc, and banks know how to liquidate those assets if your business fails. Taking a failed software company and selling off its assets is a much harder proposition.
foobar_ 6y ago
1. Developer Salaries 2. Marketing Costs 3. Compute Power 4. Software Pricing can all be quantifiable in numbers. Again I don't know how loans operate. To be a cynic, I think the software free lunch is over. Data will be increasingly localised. More draconian laws to come, let's hope they are stupid. Algorithms have also become "scary" for normal folks.