Weekly Update #153: Unicorn Debt

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Hello Investors,
 
Unicorn Debt
We've seen a number of massive private tech companies raise debt recently:

It may seem odd that companies are turning to banks to raise debt (rather than more equity), but it actually makes quite a bit of sense. Here are some reasons why large tech companies would raise debt right now:

  • Because they can (that is, there's still investor appetite, even in a loan product)
  • It minimizes dilution (compared to issuing new stock)
  • Fear of rising interest rates in the near-term
  • Potentially adding physical goods to their list of assets (consider that Uber and Didi could actually purchase a fleet of cars, and AirBnb could actually purchase a portfolio of smaller properties
  • It's a preferred alternative to tapping the public markets for an IPO (less disclosures required)

And why would banks be willing to lend? I can think of a few reasons:

  • It provides early visibility into a pre-IPO company's financials and their management team (and increases the likelihood that that bank will "win" the IPO business of the issuer)
  • They get their money back first (before any stockholders) in the event the companies go bankrupt, and are comfortable that the companies have enough assets (intellectual property, trademarks, perhaps some hard assets) to cover the principal amount of the loan

I doubt that these large loans will get issued to many more companies. There are few other unicorns out there that have intellectual property and trademarks that are valued north of $1B (perhaps SpaceX, Pinterest, Lyft, and Spotify), and banks are typically not interested in creating debt facilities (to lend to companies) if the notional amount is below $500M.

Thanks,
Phil Haslett | Founder + Head of Investments | EquityZen 
 
In other news...
 
So which is it? Is lending a good business, where moats and profit pools are durable and one can build billions in equity value … or is it an inevitable cash bonfire when the cycle turns?
 
Venture capitalist Marc Andreessen expects far more M&A than the tech industry has seen in recent years.
 
By 2018 or 2019, at the rate Uber is going, who knows how much money Uber will have raised. It may need none.
 

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