6 ms·

Are there other examples of well capitalized technology startups that have significant revenues that have also opted for significant debt financing?

by addicted 11mo ago

frankchn 11mo ago
Amazon issued $1.25 billion in convertible debt in 1999: https://www.wired.com/1999/01/an-amazonian-debt/ https://www.wired.com/1999/01/an-amazonian-debt/
- dmurray 11mo ago
  Convertible debt is very different: if you do the same (simplistic) analysis as in the article, it behaves almost like the equity example, not the debt one.
Closi 11mo ago
Amazon? https://www.seattletimes.com/business/amazon-pays-off-its-historic-debt-early/ https://www.seattletimes.com/business/amazon-pays-off-its-hi...
shmatt 11mo ago
This is literally the reason behind the collapse of Silicon Valley Bank. Debt keeps your cap table untouched, its very tempting at certain stages
neom 11mo ago
We had way more debt than venture financing in the pre-ipo days of DigitalOcean. Thanks Michael Dell!
- president_zippy 11mo ago
  As a shareholder, thanks for going the convertible debt route! I like the fact that the company became profitable but the call option component of the previous round of "senior convertible notes" expired out of the money. Comparatively speaking, I don't know why investors won't touch DOCN with a 10-foot pole, but I will gleefully reap my returns from dividends and stock buybacks when DOCN laps AWS in 20 years with better services maintained by better engineering staff.
reaperducer 11mo ago
Are there other examples of well capitalized technology startups I think we're well beyond the point where OpenAI can be called a "startup."
- epolanski 11mo ago
  Pointless argument unless you define what startup means. Different dictionaries provide different definitions. A common one is that it's small and recently started business, but it's a very vague boundary.
  - reaperducer 11mo ago
    Half a trillion dollars isn't "small" no matter how vague you want to make the boundary.
    - epolanski 11mo ago
      Neither a billion isn't small no matter how vague you want to make it, yet, we label startups with this valuation as unicorns. So where is the boundary? 10 billions? 100? 1000?
- deleted 11mo ago
  [deleted]
empath75 11mo ago
I'm going to paraphrase Matt Levine here -- the central trick of bankers is to divide debt into tranches of claims of different seniority, with different rates of return. Debt is a way to borrow money from investors where they actually have a generally low rate of return specified and have a senior claim on being paid back in the case of insolvency. Stocks are a way to borrow money for investors where they get basically _nothing_ in the case of insolvency, but they expect a higher return from either dividends or stock buy backs, or just from company growth. Different investors have different goals in terms of risk/reward for what they want out of a company they invest in, and providing investors more options unlocks more opportunities to raise money.
JumpCrisscross 11mo ago
> well capitalized technology startups that have significant revenues that have also opted for significant debt financing? Debt is almost always cheaper than equity. Particularly if you can collateralise. Well-capitalized companies rejecting debt is more of a Silicon Valley outlier in the global economy. (It likely stems from dot-com trauma.)
- terminalshort 11mo ago
  It stems from the relatively low capital requirements of tech companies relative to other industries (pre-LLM). Now that this factor has changed we see them rapidly adopting debt financing for their capital intensive LLM projects.
  - JumpCrisscross 11mo ago
    > stems from the relatively low capital requirements of tech companies relative to other industries (pre-LLM) Not really. Tech, including low fixed-cost software, has been tremendously capital intensive for decades. Early-stage start-ups lack the cash flows to fund debt. But post-Series B companies raising equity are generally doing so for idiosyncratic reasons, e.g. capital sponsors being concentrated in equity for historical reasons, valuation escalators and capital denial to competitors.
    - terminalshort 11mo ago
      I don't think you understand what capital intensive means. Many tech companies are started out of their founders apartments for essentially 0 startup cost and from here the only serious costs are salaries and AWS. There's a reason that tech founders get so much richer than founders in other industries and that reason is because the minimal capital requirements allow them to sell off so much less of the company before reaching massive scale.
      - JumpCrisscross 11mo ago
        > don't think you understand what capital intensive means I may have missed something in my career on Wall Street, as a founder and in VC. (Being wrong is fine. Being confidently wrong is dumb.) > Many tech companies are started out of their founders apartments for essentially 0 startup cost You’re mixing up fixed costs and capital. Both fixed and operating costs consume capital. (We call the latter working capital.) (You may also be mixing up PP&E and capital.) > a reason that tech founders get so much richer than founders in other industries and that reason is because the minimal capital requirements allow them to sell off so much less of the company before reaching massive scale This is wrong. Obviously wrong. Tech founders get richer because their companies get bigger. Apple, Tesla, Google and Saudi Aramco have massively different capital requirements. Their owners (and founders/founding lineages) are in the same ballpark. Similarly, most family businesses never sell equity until they sell the business. And most tech founders don’t have a majority of equity after a couple rounds.
nl 11mo ago
It's so common that mismanagement of risks associated with it led to the fall of Silicon Valley Bank. This Forbes article has a good overview: https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-valley-banks-demise-tightens-spigot-on-30-billion-of-venture-lending/ https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-v...

Are there other examples of well capitalized technology startups that have significant revenues that have also opted for significant debt financing?

frankchn 11mo ago

Amazon issued $1.25 billion in convertible debt in 1999: https://www.wired.com/1999/01/an-amazonian-debt/ https://www.wired.com/1999/01/an-amazonian-debt/

dmurray 11mo ago
Convertible debt is very different: if you do the same (simplistic) analysis as in the article, it behaves almost like the equity example, not the debt one.

Closi 11mo ago

Amazon? https://www.seattletimes.com/business/amazon-pays-off-its-historic-debt-early/ https://www.seattletimes.com/business/amazon-pays-off-its-hi...

shmatt 11mo ago

This is literally the reason behind the collapse of Silicon Valley Bank. Debt keeps your cap table untouched, its very tempting at certain stages

neom 11mo ago

We had way more debt than venture financing in the pre-ipo days of DigitalOcean. Thanks Michael Dell!

president_zippy 11mo ago
As a shareholder, thanks for going the convertible debt route! I like the fact that the company became profitable but the call option component of the previous round of "senior convertible notes" expired out of the money. Comparatively speaking, I don't know why investors won't touch DOCN with a 10-foot pole, but I will gleefully reap my returns from dividends and stock buybacks when DOCN laps AWS in 20 years with better services maintained by better engineering staff.

reaperducer 11mo ago

Are there other examples of well capitalized technology startups I think we're well beyond the point where OpenAI can be called a "startup."

epolanski 11mo ago
Pointless argument unless you define what startup means. Different dictionaries provide different definitions. A common one is that it's small and recently started business, but it's a very vague boundary.
- reaperducer 11mo ago
  Half a trillion dollars isn't "small" no matter how vague you want to make the boundary.
  - epolanski 11mo ago
    Neither a billion isn't small no matter how vague you want to make it, yet, we label startups with this valuation as unicorns. So where is the boundary? 10 billions? 100? 1000?
deleted 11mo ago
[deleted]

empath75 11mo ago

I'm going to paraphrase Matt Levine here -- the central trick of bankers is to divide debt into tranches of claims of different seniority, with different rates of return. Debt is a way to borrow money from investors where they actually have a generally low rate of return specified and have a senior claim on being paid back in the case of insolvency. Stocks are a way to borrow money for investors where they get basically _nothing_ in the case of insolvency, but they expect a higher return from either dividends or stock buy backs, or just from company growth. Different investors have different goals in terms of risk/reward for what they want out of a company they invest in, and providing investors more options unlocks more opportunities to raise money.

JumpCrisscross 11mo ago

> well capitalized technology startups that have significant revenues that have also opted for significant debt financing? Debt is almost always cheaper than equity. Particularly if you can collateralise. Well-capitalized companies rejecting debt is more of a Silicon Valley outlier in the global economy. (It likely stems from dot-com trauma.)

terminalshort 11mo ago
It stems from the relatively low capital requirements of tech companies relative to other industries (pre-LLM). Now that this factor has changed we see them rapidly adopting debt financing for their capital intensive LLM projects.
- JumpCrisscross 11mo ago
  > stems from the relatively low capital requirements of tech companies relative to other industries (pre-LLM) Not really. Tech, including low fixed-cost software, has been tremendously capital intensive for decades. Early-stage start-ups lack the cash flows to fund debt. But post-Series B companies raising equity are generally doing so for idiosyncratic reasons, e.g. capital sponsors being concentrated in equity for historical reasons, valuation escalators and capital denial to competitors.
  - terminalshort 11mo ago
    I don't think you understand what capital intensive means. Many tech companies are started out of their founders apartments for essentially 0 startup cost and from here the only serious costs are salaries and AWS. There's a reason that tech founders get so much richer than founders in other industries and that reason is because the minimal capital requirements allow them to sell off so much less of the company before reaching massive scale.
    - JumpCrisscross 11mo ago
      > don't think you understand what capital intensive means I may have missed something in my career on Wall Street, as a founder and in VC. (Being wrong is fine. Being confidently wrong is dumb.) > Many tech companies are started out of their founders apartments for essentially 0 startup cost You’re mixing up fixed costs and capital. Both fixed and operating costs consume capital. (We call the latter working capital.) (You may also be mixing up PP&E and capital.) > a reason that tech founders get so much richer than founders in other industries and that reason is because the minimal capital requirements allow them to sell off so much less of the company before reaching massive scale This is wrong. Obviously wrong. Tech founders get richer because their companies get bigger. Apple, Tesla, Google and Saudi Aramco have massively different capital requirements. Their owners (and founders/founding lineages) are in the same ballpark. Similarly, most family businesses never sell equity until they sell the business. And most tech founders don’t have a majority of equity after a couple rounds.

nl 11mo ago

It's so common that mismanagement of risks associated with it led to the fall of Silicon Valley Bank. This Forbes article has a good overview: https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-valley-banks-demise-tightens-spigot-on-30-billion-of-venture-lending/ https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-v...