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Bridge Loans
- deleted 4y ago[deleted]
- ajg36 4y agoSometimes a tunnel loan is faster.
- StephenSmith 4y agoMaybe you could explain what that is?
- hypertele-Xii 4y agoLooks like a joke to me.
- lbotos 4y agoIn NYC there is a phrase "Bridge and Tunnel crowd": https://www.urbandictionary.com/define.php?term=bridge%20and%20tunnel%20crowd https://www.urbandictionary.com/define.php?term=bridge%20and... Which I suspect this is a riff on.
- djbusby 4y agoOh, I remember when these were popular for dot-com who just needed to get to the next round. Many did not. And a loan has baggage that equity doesn't. Edit: Bridge loans were also really popular to stretch home buying power in 2006,2007. Hmmm.
- mohaine 4y agoI think the most common usage in personal home buying is to get from closing of your new home to the closing of your existing home. Usually you want to close on your purchase of a new home a bit earlier then you close on the sale your existing home so that you (1) Have a place to live (2) can do a single move instead of a double move. The down side is that you can't transfer the equity of your current home to your new home. Bridge loans get you over this gap with small risk so the price isn't to much. You basically get a separate loan for your current house's equity that is paid off at closing. The issue would be if the sale of you current home fell through for some reason, hence the issues in 2008 when there were so many unsold homes on the market.
- djbusby 4y agoI should have been more clear. The housing bridge loans I'm talking about were for first mortgage, on SISA, and pushed by LOs. They really stretch the borrower. The case you describe also happens, I'm just talking about a different case.
- bArray 4y ago> Oh, I remember when these were popular for dot-com who just needed to get to the next round. One of the best skills to learn is when to stop throwing good resources after bad. Sure, maybe you need just a little more to get over the finish line, but more than likely you are just investing more resources into delaying failure. People often bring up Elon Musk and Tesla as a positive example of perseverance, where he was apparently sinking personal money to keep the company alive. It did pay off in retrospect, but there was a very large chance it didn't - and we're just celebrating survivor bias. > Edit: Bridge loans were also really popular to stretch home buying power in 2006,2007. Hmmm. You wait, this bubble is about to pop. Not a great time to have large financial obligations. I suspect this will make 2008 look like nothing (people weren't struggling to fuel their cars or eat then).
- nkozyra 4y ago> (people weren't struggling to fuel their cars or eat then). These are cause and effect, though. Average gas shot up to $4 in 2008, too.
- spamizbad 4y agoGas and food prices would likely drop like a stone if we are facing another 2008-like crisis. A handful of people made a big bet that during the credit crunch we’d see massive inflation and took big bets against the dollar and cheap oil and lost their shirt
- ptero 4y ago> Gas and food prices would likely drop like a stone if we are facing another 2008-like crisis. Not necessarily. For deflation to occur, especially in staple goods (for which demand is sticky) in addition to stable or contracting money supply (M2) you need significant supply side growth. Neither is certain. I personally doubt that politicians will hold the purse closed at a time when lower and middle income voters are stretched thin. Deflation-causing policies also tend to lower tax revenues. My bet instead is that crisis or not we will likely see debt deflation via below inflation interest rates. Just a personal position, I do not have a crystal ball.
- 4y ago
- GRBLDeveloped 4y agoPayday loans of the startup world
- sealeck 4y agoWhy would these be payday loans? The lenders also own a large percentage of the shares in the company.
- raverbashing 4y agoBefore building a bridge make sure you can see the other side of the river is there Building on a hunch won't cut it
- henning 4y agoI thought to get a bridge loan, you had to find mismatched Indonesian sesame seed futures prices due to impending cicada hatchings.
- jm20 4y agoBridge loans are a lot like being pot committed in poker (when the pot odds for the remainder of your chips are worse than your odds of winning that specific hand). In both situations, you have a lot more information on the immediate situation than in some indeterminate future scenario, so it can sometimes be your best option. However, there's an obvious bias there, and thinking that you're pot committed when you're not is a pretty common mistake with inexperienced poker players (and investors).
- asah 4y agoThe comments here seem to forget that financing is ESSENTIAL to startups - even profitable ones. As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it. You finance a startup with a mix of VC and debt. As the business becomes less speculative ($MMs in revenue) debt becomes more available, and is generally preferable to equity deals for a number of reasons including dilution, board control, etc. Unclear to me if VC financing availability is disconnected from debt financing, as the blog author seems to imply: when the world tightens, I think it tightens. source: 30 years of this nonsense spanning multiple booms and recessions.
- Animats 4y ago"As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it." Autodesk did. Initial investment was $60K by the founders, and the company was profitable early on.[1] No VCs were involved. There were discussions with some VCs, and they were very funny. "In addition, the overall flavour of the deal seemed to us totally inappropriate for a company which was, at the time of these negotiations, generating sales equal to the size of the deal every month and generating after-tax profits close to the size of the deal every quarter." The VCs assumed they had a stronger bargaining position than they did. The VC involved turned down a deal to invest about $500K for 10% of the company. Autodesk's market cap today is $47 billion. [1] https://www.fourmilab.ch/autofile/e5/ https://www.fourmilab.ch/autofile/e5/
- FreakLegion 4y agoPlenty of tech companies have done just fine skipping VC money, or delaying it until they had maximum leverage, like GitHub or Transmit. Autodesk isn't really interesting here, though. They IPO'd almost 40 years ago at a tiny fraction of their current value, and that tiny fraction is the only number that matters. Anyone could've jumped on at the IPO and still realized 99% of that $47 billion. The investors missed out, but it wasn't some big whiff. The IPO was mediocre by today's standards.
- yieldcrv 4y agoProtip: You don't need to be a VC to offer onerous debt financing. I know individuals that have made a killing offering loans to distressed publicly traded companies. They typically convert to MASSIVELY larger amounts of equity and dump that. Resulting in a death spiral for the company (unless the company's laughable prospects actually panned out), or result in a lien on assets that are also far greater in value than the loan, which is the same in actual bankruptcy, or they get paid back at a nice premium.
- gumby 4y agoThis is te standard PE playbook.
- yieldcrv 4y agoYep but you can do a lot with just $100k at a time at overlooked smaller companies! Despite there being a bunch of silicon valley companies afraid to go public, there are still hundreds and thousands of pink sheets and bulletin board stocks publicly traded just waiting for a boutique financier, and thats just in the US. UK has the AIM market, and other economies have stuff too.
- Quarrel 4y agoDodgy stock brokers the world over make lots of money doing exactly this.
- icelancer 4y agoMy small business (not really a startup) has used bridge loans responsibly and very effectively. One area where they're quite useful and common are when you have inventory you want to finance, often in a burst or when a sudden demand shock hits and speed is of the essence. (We currently have a large rotating LOC with a bank, but this is not always practical when you're a startup/small business getting going) Paying tons of cash out the door to buy inventory to meet demand over X days while it sits in your warehouse is very often less efficient than paying even ridiculously high APRs on bridge loans. Cash flow is a consideration just as raw ROI / profit margins are, especially for smaller businesses. Yes, many bridge loan issuers are preying on uninformed / underbanked people. I won't deny that. But in the small commercial space, bridge loans are used effectively, responsibly, and regularly without abuse - especially for those carrying hard inventory.
- alberth 4y agoMaybe I’m misunderstanding but what you’re describing sounds a lot like a “credit line” to address cash flow issues. But what Fred is describing is financing to bridge to either a liquidation event or another around of funding.
- Animats 4y agoThat's similar to factoring, where you're borrowing against your inventory. Common in apparel.
- 1123581321 4y agoBridge loans are able to be underwritten at better speed/size/rates than credit lines, all else equal. That’s not taking away from your main point about the article.
- icelancer 4y agoYeah, this is the main thing for sure. Not rates in my experience, but speed, yes.
- icelancer 4y ago
- deleted 4y ago[deleted]
- keithwhor 4y agoYikes. I feel like this is a smart way to bury the lede; > A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. […] I like somewhere between 2x and 3x depending on the circumstances. Slippery slope; Fred just gave ammunition to a whole bunch of firms to start negotiating liquidation preferences on term sheets, for which the “standard” has been 1x for years.
- smartbettor 4y agoprices have been going up for years. the standard is gone.
- fairity 4y agoThe standard is 1x for regular financings, but bridge rounds tend to be more distressed, so I wouldn’t be surprised if market is more like 2x.
- rdli 4y agoI think the standard is fully convertible (i.e., you get your liquidation preference OR you convert) — a 1x as I think about it is you get your liquidation preference before you convert (i.e., two bites of the apple). Is that what you mean?
- rdli 4y agoOn a typical convertible note, I’d expect it to convert to equity on the same liquidation preference as the next round, and I do think even in this (bear) market I still think fully convertible deals are the norm.
- hn_throwaway_99 4y agoThis isn't the same things as standard liquidation preferences. Normally, liquidation preferences limit the downside for investors, but since investors hold equity they will participate in all of the upside. For a bridge loan it's different. The 2x/3x is not a liquidation preference really, because since the loan doesn't convert to equity in a sale, that's the maximum the bridge loan creditor can receive in a sale.
- sixhobbits 4y ago> New investors strengthen the investor syndicate which makes the company more resilient. New investors bring new ideas, new experiences, and new sources of funding to the business. uh, citation needed? Investors aren't meant to be there to bring 'ideas and experiences', and adding new ones to a company that isn't doing well feels like it would just add more tension and disagreement when what is probably needed is a laser vision that hopefully the founding team should be providing..
- alberth 4y agoGiven that Fred Wilson (the blog author) is a renowned VC with 30+ years experience and dozens of famous investments … him saying it is the citation you’re looking for. It’d be like you asking for a citation when Michael Jordan makes a comment about the game of basketball :)
- jonathankoren 4y agoFred Wilson is also financially incentivized to make you believe that he has your best interests at heart. This is no different from a monorail salesman telling you need a monorail, because he sold them to Brockway, Ogdenville, and North Haverbrook, and by gum! That put them on the map! I'd rather hear from the people that took the investment, especially the ones that crashed and burned.
- alberth 4y agoWhat you're saying doesn't even make sense. Fred is explicitly stating that it's good for a business to get new investors, and to not just keep taking money from the existing investors. That's the exact opposite of what a typical VC would tell you. When new investors come into a company, the existing VC gets diluted. How is this advice not in the founders interest?
- jiveturkey 4y agodilution is good for you
- icedchai 4y agoThe last bridge loan I'm personally familiar with was a bridge to a fire sale about a year later. The company was sole for pennies on the dollar, screwing all the original preferred investors (myself include.)
- jiveturkey 4y agoas a preferred investor, how does this “screw” you? even in a situation where the debt is senior, in the VC game it’s generally better to shoot for the moon than to cut your losses. this is simply how the game is played.
- Quarrel 4y agoYep and unbridged the business presumably would have collapsed before the fire sale. It doesn't sound like the fire sale was where it went wrong.
- icedchai 4y agoit went wrong with a CEO that didn't listen to anyone.
- icedchai 4y agoThere was a major down round after the bridge loan, before the "acquisition" (fire sale.) In the end, I got nothing back. Zero.