I wish I had been a VC in the 90’s. And those people wish they had been doing LBO’s in the 80’s. And those people wish they had been doing high yield credit in the 70’s.
So I spend a lot of my time trying to figure out what people in 2040 will wish they had been doing in 2019.
What I think they’ll be wishing is that they took advantage of the following event:
Companies used to go public while they were still very risky, and were $500m in market cap. But now, companies stay private longer and companies like Stripe get to $20B+ in value without going public at all!
A major shift happened — and mostly, all anyone did — was complain about it.
But when major shifts happen… some serious opportunities become available.
It strikes me that a tiny little $400M public company can issue a bond… but Stripe or Airbnb don’t. In fact, the only unicorn companies I can think of who have are Uber, WeWork, and Tesla.
And new entrants are starting to take advantage of this:
· SecFi is helping the employees of Unicorn companies exercise their option, earn employment flexibility, and earn cap gains (instead of ordinary income) at the IPO by lending against options.
· Clearbanc is using data on CAC:LTV to finance growth spend of D2C companies.
But the list of companies/firms innovating is distressingly thin.
Technology companies have assets that no one has ever thought to finance before. The reason? Because they never existed before!
SaaS contracts have predictable value because they have a churn (their analog of a default rate) and predictability.
Spotify Playlists have value — so do Airbnb accounts. Digital real estate is real… and high yielding… and no one is thinking to finance them.
So why the aversion?
(1) It used to be that private technology companies were new and risky. That’s no longer the case. Many of them are much less new and less risky once they reach maturity in private markets. So while new, risky companies shouldn’t take on leverage — more mature companies can.
(2) Some VC’s are misaligned with the companies they back. A VC at a big fund is both a fiduciary to the company they are on the board of — and to the fund they manage. But when push comes to shove — if the company could raise cheap debt, or take more expensive equity, the VC would advocate for them to take expensive equity so he/she can participate. Especially if that VC comes from a big fund. Conflict of interest is real.
(3) Rating Agencies don’t know how to rate these unicorn companies. They rely on cash flows, credit enhancement, and traditional assets. But these companies have soft/new assets, and they don’t have cash flows. They are artificially growing, and rating agencies don’t know how to underwrite this. And without a rating, regulated buyers of debt (insurance companies, etc.) can’t own it without taking a major capital charge.
(4) There is a negative ethos between tech and wall street. Too much of the tech world thinks “all of Wall Street is bad and should get away from innovation.” But there is nothing wrong with trying to efficiently capitalize a company.
If Michael Milken was 25 today — he’d be creating a bond market for unicorn companies.
(see Michael interviewing Raj Misra — head of Vision Fund — here: https://www.youtube.com/watch?v=Fh--7RusSMk)
And if you’re spending more time complaining about the shift in the market rather than taking advantage of it — you’re hurting yourself.