[HN Gopher] Bridge Loans
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Bridge Loans
Author : imartin2k
Score : 83 points
Date : 2022-08-08 13:19 UTC (9 hours ago)
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| ajg36 wrote:
| Sometimes a tunnel loan is faster.
| StephenSmith wrote:
| Maybe you could explain what that is?
| hypertele-Xii wrote:
| Looks like a joke to me.
| lbotos wrote:
| In NYC there is a phrase "Bridge and Tunnel crowd":
|
| https://www.urbandictionary.com/define.php?term=bridge%20and.
| ..
|
| Which I suspect this is a riff on.
| asah wrote:
| The 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.
| andrewacove wrote:
| It's very difficult to get debt financing if you're running out
| of cash, and this article is focused on companies that are (at
| risk of) running out of cash.
| robocat wrote:
| > By mathematical definition, a startup cannot fund fast-enough
| growth on current profits and therefore requires financing and
| a lot of it.
|
| Untrue.
|
| Sell enough _annual_ SaaS plans and you get cash before your
| future costs - perhaps enough to self-fund growth depending on
| specifics for your SaaS. Skip to 14 minutes in of
| https://m.youtube.com/watch?v=otbnC2zE2rw for explanation.
|
| Jason's explaination for his own business: income from signups
| is structured so they get more money per month per user than
| their Customer Acquisition Cost "literally operate with an
| infinite marketing budget" - i.e. constraint isn't marketing
| growth costs but their other business constraints. See from
| 15:45 to 16:30 of the video where he is talking about some
| figures for the business he owned at the time.
| krisoft wrote:
| > Sell enough annual SaaS plans and you get cash before your
| future costs
|
| That might be true if you only need to pay for the
| operational costs, but someone has to develop that service
| first, don't they?
|
| How do you sell annual SaaS plans without spending a huge
| chunk on development first?
| robocat wrote:
| You are asking about what I would call founding/inception
| costs. I was replying to an _absolutely_ wrong comment that
| was about scaling /growth/marketing costs.
|
| From my own experience, I helped cofound a now-successful
| small business that we retain 100% ownership of. Founders
| used <1> the "sweat equity" of our own time (even with kids
| and mortgages), and <2> one person did some consultancy
| work, and <3> we had one initial large-business customer
| (although nowhere enough to pay our usual wages, it helped
| a little).
|
| There is a lot of "bootstrapping-pr0n" videos and websites
| with a variety of techniques to build a business without
| extreme inception costs (e.g. techniques to avoid requiring
| paid staff when starting - staffing being the main cost for
| most software startups). The _fabulously good_ video I
| linked alludes to some of that, and you can find other
| videos from those conferences.
|
| If you do want to get initial funding, I think that
| ycombinator is an astonishingly valuable deal. Even
| applying should get you back more value than the time it
| costs you: https://www.ycombinator.com/apply/
|
| Edit: I strongly recommend you avoid the "go big or not at
| all" culture/mentality: most founders fail and the median
| payoff for founders is quite negative. Venture capital and
| startup-pr0n encourages you to aim for billions: VCs can
| spread their bets; VCs have asymmetric information and
| payoffs; VCs only invest in less than 1% of the potential
| businesses they see; VCs get paid a base rate by their
| limited partners; VCs get preferential shares. For an
| individual it is more like a lottery because an
| individual's risk profile is _absolutely_ different from a
| VCs.
| [deleted]
| Animats wrote:
| _" 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/
| raverbashing wrote:
| Before building a bridge make sure you can see the other side of
| the river is there
|
| Building on a hunch won't cut it
| yieldcrv wrote:
| Protip: 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 wrote:
| This is te standard PE playbook.
| Quarrel wrote:
| Dodgy stock brokers the world over make lots of money doing
| exactly this.
| keithwhor wrote:
| Yikes. 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 wrote:
| prices have been going up for years. the standard is gone.
| rdli wrote:
| On 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.
| fairity wrote:
| The 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 wrote:
| I 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?
| [deleted]
| henning wrote:
| I thought to get a bridge loan, you had to find mismatched
| Indonesian sesame seed futures prices due to impending cicada
| hatchings.
| djbusby wrote:
| Oh, 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 wrote:
| I 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 wrote:
| I 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 wrote:
| > 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).
| geoduck14 wrote:
| >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
|
| While I agree that a bubble is about to pop - I disagree with
| comparisons to 2008.
|
| My personal take is that the _current_ recession and
| impending pop will be for reasons _different_ from 2008 - we
| have been making different mistakes. I also believe that 2008
| was _really_ big and I 'm not certain the impending pop will
| be _really_ big - just _kind of_ big.
| com2kid wrote:
| > You wait, this bubble is about to pop. Not a great time to
| have large financial obligations.
|
| The people buying these houses have good financial means,
| when I bought in 2021 the bank looked through all my finances
| in depth, and they were super conservative about everything.
|
| For example, I own an existing townhome, before agreeing to
| give me a new mortgage, the bank made me show a signed
| contract with a tenant for my townhome to demonstrate the
| townhome wouldn't be a financial burden.
|
| At least in the city I live in, Seattle, the housing supply
| is so obscenely constrained that only people who can go above
| and beyond to show they can pay, are even being granted
| approvals by the banks.
| Kon-Peki wrote:
| After every crash, people make fun of all the folks that
| said "this time is different". Maybe that will happen
| again. And maybe not - or maybe there is no crash at all.
|
| I, for one, am truly perplexed. Some things look awful and
| some things look great. If there is a crash, perhaps it
| will provide clarity so we can look back and say "it wasn't
| any different this time".
| com2kid wrote:
| The last bubble was obscene. 5:00 news talking about how
| many houses you should buy. This time around everyone
| who's buying is either paying cash or has had their
| income verified as being a large multiple of their loan
| amount.
|
| A lot of tech stocks had a huge explosion in value and
| I've seen a lot of people locally sell off and just pay
| the whole house off at once. They aren't cash flow rich
| but $800k down on a 1.5 million house puts their mortgage
| payments at a reasonable level for a couple earning 300k+
| a year.
|
| I live in a state with all public records and it's very
| easy to just take a look at house sales and find out who
| bought them. Basically people who work at companies that
| had large increases in stock value.
| nkozyra wrote:
| > (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 wrote:
| Gas 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 wrote:
| > 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.
| sixhobbits wrote:
| > 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 wrote:
| Given 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 wrote:
| Fred 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 wrote:
| What 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 wrote:
| dilution is good for you
| alberth wrote:
| How is being diluted good for an investor?
|
| If a VC went from owning 20% of a company to now own 10%
| - how is that good for the VC?
| browningstreet wrote:
| No VC wants to be the only investor -- more investors,
| more validation, greater valuations, bigger upside.
| mason55 wrote:
| > _If a VC went from owning 20% of a company to now own
| 10% - how is that good for the VC?_
|
| Because that's not all that happens. The company also has
| a bunch more cash which means it's worth more.
|
| You own less of a bigger pie but the actual value of your
| slice shouldn't change.
|
| If you have 10 out of 100 shares of a company and it has
| a $10m pre-money valuation, your share of the company is
| worth $1m.
|
| Now the company raises $2m. The new investors get
| somewhere between 16 and 20 (newly issued, dilutive
| shares). Now you have 10 out of 116 - 120 shares. 8.3% -
| 8.5% of a company worth $12m ($10m + the $2m in cash).
| Which puts the value of your shares right around your
| original $1m.
|
| Except now the company has all this cash as well, so
| you're probably better off.
| sbierwagen wrote:
| Fred is a VC. VCs don't want to be just a dumb pipe of money,
| competing on terms, they want to be management coaches and
| compete on unmeasurable intangibles-- in exchange for more of
| the company at a lower price.
| mandelbrotwurst wrote:
| ...and on top of that, many founders do want this for good
| reason! Even with "laser vision" with respect to the future
| of your product, it's likely that you'll benefit from advice
| from someone with decades of experience.
| icelancer wrote:
| My 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 wrote:
| Maybe 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 wrote:
| That's similar to factoring, where you're borrowing against
| your inventory. Common in apparel.
| icelancer wrote:
| We have a credit line now, but often times if you're a new-
| ish business, banks aren't too keen on giving you one
| (especially if you are cashflow negative). So sometimes you
| have to go to places like Kabbage or other pseudo-payroll
| lender type places who charge insane APRs for short-term
| bridge financing.
|
| Functions pretty similarly, except one is a reputable
| business (banks... well, kinda reputable) and the bridge loan
| shops tend to be pretty maligned (and often reasonably so).
| 1123581321 wrote:
| Bridge 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 wrote:
| Yeah, this is the main thing for sure. Not rates in my
| experience, but speed, yes.
| icedchai wrote:
| The 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 wrote:
| as 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 wrote:
| Yep 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.
| [deleted]
| jm20 wrote:
| Bridge 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).
| GRBLDeveloped wrote:
| Payday loans of the startup world
| sealeck wrote:
| Why would these be payday loans? The lenders also own a large
| percentage of the shares in the company.
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