Is Debt Coming to Tech?

#News(Startup) [ via IoTGroup ]

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Is Debt Coming to Tech?
Ali Hamed

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If Michael Milken was 25, today — I bet he’d work at some top tier VC fund and think: why do we have so many sophisticated ways to price equity, yet debt is COMPLETELY unavailable no matter the value/merits of our portfolio companies?
(1) Debt is good to take when a borrower has some level of certainty of a future cash flow, or when it can be secured by an asset.
Produce Pay borrows money to then finance shipments of perishable produce, which are nearly certain to be realized into cash, allowing Produce Pay to pay back its own debt.
(2) Debt is bad to take when just used to finance high risk growth spend — because that high risk spend does not come with a certainty of cash flow, and therefore when the loan matures, a startup might not be able to make its obligations and go bankrupt.
“Cheap equity is essentially expensive debt.” So starting to see equity get priced closer to debt for the perceived certainty is showing markets are beginning to give technology companies “credit” for debt-like stability.
Essentially, SaaS revenues are EXACTLY this — it’s the financing of an expensive sale (like AWS), where the debt is financed through payback periods, and interest/principal is paid in the form of subscription revenues.
· A stipulation (maybe a confession of judgment) that if the corporation goes BK the contract and IP immediately transfers to an SPV, which then is owed the cash flow (this is what will make SaaS lending Asset-Based financed, and not corporate lending).
One challenge is that ratings agencies will have trouble rating bond issuances by high growth companies that are artificially losing money/not producing cash flows as a way to chase new market opportunities.
The SaaS company could get underwritten on its profitability, and the debt raised could finance the R&D of the other two businesses.
A lot of bond issuances don’t happen, in part, because debt markets don’t know how to underwrite these companies

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