3 ms·

Why don’t we see more large debt rounds, considering interest rates are so low? Are they just not publicised as much as equity, or could even the largest unpro

Why don’t we see more large debt rounds, considering interest rates are so low? Are they just not publicised as much as equity, or could even the largest unprofitable unicorn not raise and service a $5 billion debt?

rchaud 5y ago
Unicorns have something better than a bank loan; interest-free VC money that costs nothing but equity, which itself is effectively worth $0 otherwise.
- throwthere 5y ago
  That equity ends up being really expensive when unicorns ipo. Unicorns generally don’t raise non-convertible-debt because they simply can’t find lenders willing to take single digit interest rates coupled with even a small chance of failure.
  - rchaud 5y ago
    Isn't the expensive-ness an opportunity cost than a real cost? If I sell a 10% stake for $100m, my company is valued at $1bn. If I use that $100m towards growing the business, then both the 10% stake, and the remaining 90% grow in value. If a new investor wants a 10% stake, it's going to cost more than $100m. This is a very oversimplified example, so there are probably parts of the process where financial cost is incurred by the company. But I'm not sure where that happens.
    - umeshunni 5y ago
      Yes, but what if you could borrow $100M at 3% interest collateralized by $200M worth of your equity. Then, when you IPO, you just pay back the $100M * 1.03^t.
- Grustaf 5y ago
  Equity is orders of magnitude more expensive than debt.
ttul 5y ago
Many big financing rounds include debt. When you see that someone raised $500M, perhaps $100M is debt. It levers the equity investment providing an enhanced return, while reducing dilution for existing shareholders.
jollybean 5y ago
There are large debt rounds in businesses that have cash flow, assets and huge operating budgets. The nature of VC/early-stage is such that it doesn't fit the risk profile for debt. Companies have no assets to back the debt with, often no consistent revenue etc.. With the insane valuations that companies are getting these days it seems to me that debt would even be more afraid. Like Clubhouse: 15M users, no revenue, flakey product, no obvious kind of revenue model, $1B valuation. Are you going to loan them $50M at 5% interest? Consider the risk on that. So if your startup sells some funky kind of new wind turbine, and you do the deployments yourself, you might be able to raise debt to pay for the the installs themselves, because you can do the math on that out for a few years. So you could raise debt to finance your sales in a way like that. But it's about a risk profile, and how far out you can predict stable cash flows.

rchaud 5y ago

Unicorns have something better than a bank loan; interest-free VC money that costs nothing but equity, which itself is effectively worth $0 otherwise.

throwthere 5y ago
That equity ends up being really expensive when unicorns ipo. Unicorns generally don’t raise non-convertible-debt because they simply can’t find lenders willing to take single digit interest rates coupled with even a small chance of failure.
- rchaud 5y ago
  Isn't the expensive-ness an opportunity cost than a real cost? If I sell a 10% stake for $100m, my company is valued at $1bn. If I use that $100m towards growing the business, then both the 10% stake, and the remaining 90% grow in value. If a new investor wants a 10% stake, it's going to cost more than $100m. This is a very oversimplified example, so there are probably parts of the process where financial cost is incurred by the company. But I'm not sure where that happens.
  - umeshunni 5y ago
    Yes, but what if you could borrow $100M at 3% interest collateralized by $200M worth of your equity. Then, when you IPO, you just pay back the $100M * 1.03^t.
Grustaf 5y ago
Equity is orders of magnitude more expensive than debt.

ttul 5y ago

Many big financing rounds include debt. When you see that someone raised $500M, perhaps $100M is debt. It levers the equity investment providing an enhanced return, while reducing dilution for existing shareholders.

jollybean 5y ago

There are large debt rounds in businesses that have cash flow, assets and huge operating budgets. The nature of VC/early-stage is such that it doesn't fit the risk profile for debt. Companies have no assets to back the debt with, often no consistent revenue etc.. With the insane valuations that companies are getting these days it seems to me that debt would even be more afraid. Like Clubhouse: 15M users, no revenue, flakey product, no obvious kind of revenue model, $1B valuation. Are you going to loan them $50M at 5% interest? Consider the risk on that. So if your startup sells some funky kind of new wind turbine, and you do the deployments yourself, you might be able to raise debt to pay for the the installs themselves, because you can do the math on that out for a few years. So you could raise debt to finance your sales in a way like that. But it's about a risk profile, and how far out you can predict stable cash flows.